Lize de la Harpe – Senior Legal Advisor at Sanlam
FSCA COMMUNICATION 3 OF 2024 (RF) – REQUIREMENTS FOR RULE AMENDMENTS TO GIVE EFFECT TO THE 2 POT SYSTEM
The Financial Sector Conduct Authority (“FSCA”) earlier today published a set of requirements regarding rule amendments to give effect to the two-pot system. The Communication also sets out the approach that the FSCA will be taking to applications for such amendments.
The two-pot system
In terms of the two-pot system retirement fund members will have access to a portion of their retirement savings before termination of their fund membership. As of 1 September 2024, three new components will be created within a retirement fund, namely:
- a vested component;
- a retirement component and
- a savings component.
The vested component will consist of the member’s fund value before 1 September 2024, and the current retirement fund regime will remain applicable to this component. One third of contributions post 1 September 2024 will go to the savings component, and two thirds to the retirement component. All other credits and allocations to the member’s account, including group life and disability benefits, must be allocated in the same manner as contributions, in other words one third to the savings component and two thirds to the retirement component.
Withdrawals from the savings component can be made once during a tax year (subject to a minimum withdrawal amount of R2 000).
Amounts contributed to the retirement component cannot be accessed before retirement. At retirement date, the total value in the retirement component must be paid in the form of an annuity, except if the member’s interest in the retirement component, calculated together with two thirds of the T-day non-vested portion in the vested component, does not exceed R165 000. In the case of a provident fund member younger than 55 on 1 March 2021, the T-day non-vested portion is his/her contributions, plus fund return on such contributions, from 1 September 2021 onwards.
The two-pot system will mainly be brought about by amendments set out in the Revenue Laws Amendment Bill, read together with the Pension Funds Amendment Bill.
Required rule amendments
The Revenue Laws Amendment Bill makes provision for the following:
- Seeding capital, as a part of the savings component, consisting of 10% of the vested component of the member’s fund value, up to a maximum of R30 000;
- Application to all funds including defined benefit funds (also public sector funds);
- Exemption for Legacy Retirement Annuity Funds upon application; and
- Deductions in terms of Section 37D of the Pension Funds Act, 1956 are provided for across all three components.
The two-pot system will require the rules of retirement funds to make the following distinctions:
Vested and Non-Vested portions in Provident Funds (01 March 2021)
Provident Fund members who were 55 years or older on 1 March 2021 and who remained members of that provident fund or provident preservation fund until 1 September 2024 may opt-in to participate in the two-pot system. If they do not opt in, they are excluded from the two-pot system. The current regime in effect before 1 September 2024 will thus continue to apply (i.e.: these members will still be allowed to receive the vested benefit in cash on termination of employment before retirement).
Components as of 1 September 2024
From 1 September 2024, one third of contributions will go to the savings component, and two thirds to the retirement component. Fund rules will need to specifically cater for this and permit members to have access to their benefits.
The following must be made clear in the fund rules:
(a) Seed Capital Amount
The rules must provide for 10% of the value of the vested component immediately before 1 September 2024, up to a maximum of R30 000, to be allocated to the savings component as so-called seed capital. This requirement will not be applicable to:
- Unclaimed benefit fund members;
- Pensioners;
- Beneficiary fund members;
- Members who, on or before 31 August 2024, had exited service and completed and submitted an election form; and
- Non-contributing members of terminating funds and funds in liquidation.
(b) Savings Component
The rules must provide for a savings component to be made up of one-third of all contributions for the period commencing 1 September 2024, together with any investment returns. The rules must allow one withdrawal per tax year, subject to a minimum of R2 000.
The rules must also stipulate that any withdrawals from the savings component before retirement will be taxed in terms of the PAYE tables and will be taxed in accordance with the retirement tax table if accessed in cash on retirement.
(c) Retirement Component
The fund rules must provide for a retirement component that will not have any funds allocated to it prior to 1 September 2024 and will consist of two-thirds of contributions, together with investment returns thereon, accruing from 1 September 2024.
The rules will be required to stipulate that the funds in the retirement component cannot be accessed by members for cash withdrawals or upon resignation from employment and cannot be claimed as a cash benefit. It will need to stipulate that the amount must be used to provide an annuity subject to the de minimis amount and that the annuity will be taxed as and when it is paid to the pensioner.
(d) Requirements for Defined Benefit Funds
The rules of Defined Benefit Funds will be required to provide for the following:
- The existing requirement in terms of which the fund pays a pension on a member’s retirement, determined according to a defined formula stipulated in the registered rules without referring to contributions by either the employer or member.
- a seed capital amount, suggested to be 10% of the value of the member’s share in a retirement fund immediately before 1 September 2024, subject to a maximum of R30 000.
- a clear indication that if a part of the savings component relating to the seed capital is paid to the member prior to retirement, the pensionable service of the member would need to be reduced to make this payment financially neutral to the fund at the time of payment. In this case, the valuator will be required to calculate the capital equivalent of the 10% of pensionable service prior to 1 September 2024 and one third of pensionable service after 1 September 2024, adjusted for any prior cash payments already made from the savings pot. This will be the value of the savings pot at the intended cash payment date.
- Once the member has decided on the amount to be paid, the valuator will be required to calculate the service given up by the member representing the value of the cash payment made and the reduced pensionable service that will be available at retirement in calculating the pension. The definition of pensionable service in the rules will also require amendment to allow for this.
- In respect of members of defined benefit funds withdrawing from their savings component prior to retirement, the appropriate reduction of the period of service would have to be made.
Should the fund wish to adopt a different methodology, this must be approved by the FSCA in advance, whereafter this must be clearly set out in the registered rules to give effect thereto.
(e) Transfers of components
The rules will further need to contain requirements relating to transfers. In particular, the following needs to be provided for:
- The transfer from the savings component to the retirement component;
- A prohibition on transfers into the savings component, other than the seeding capital amount;
- Transfers of the savings components and retirement components across funds but the rules must stipulate that they must be transferred together; and
- The transfer of vested components subject to current rules.
Benefit statements will need to be adjusted to reflect the applicable transactions.
(f) Deductions in terms of Section 37D of the PFA
The rules will need to provide that deductions in terms of section 37D will be effected proportionately across the three components.
Member communication
Retirements funds must communicate the proposed legislative changes to members in a manner which is simple, clear, and comprehensive and such communication must be timely and on-going as may be required.
This communication must alert members to the impact that any withdrawal from the savings component will have on the value of the member’s benefit.
The FSCA has requested, in the interest of considering rule amendment applications expeditiously, that all rule amendments in respect of the two-component system should be limited to the rule amendments delineated above (no other rule changes are to form part of such rule amendment submissions).
Where applicable, funds may apply for an extension of time in terms of section 279 of the Financial Sector Regulation Act, 2017. Any such application must be made in writing to the FSCA.
ENDS
