The Association for Savings and Investment South Africa (Asisa) says retirement funds and administrators would like at least 18 months from the date on which the final legislation is gazetted in which to implement the two-pot retirement system.
Addressing the National Assembly’s Standing Committee on Finance on Tuesday, Asisa senior policy adviser Rosemary Lightbody said the proposed implementation date of 1 March next year was not feasible, not least because there were many issues with the draft legislation that must be resolved.
Asisa’s presentation touched on some of these issues, including the tax treatment of retirement fund contributions that exceed the tax-deduction threshold and how defined-benefit (DB) funds will function within the two-pot system (see below).
The committee heard presentations from stakeholders on the draft 2022 Rates and Monetary Amounts and Amendment of Revenue Laws Bill and the 2022 Draft Revenue Laws Amendment Bill, which amends the Income Tax Act to create the two-pot system.
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Asisa reiterated its support for the principles and aims of the two-pot system, which it believed would make a significant difference to fund members’ outcomes at retirement.
Lightbody said Asisa’s members were as anxious as National Treasury to have the system in place.
However, before the system could be implemented, amendments to legislation, including the Pension Funds Act, would have to be consulted on, drafted and go through the parliamentary process.
Administrators could not change their systems or develop business rules based on draft legislation. Furthermore, systems not only had to be built; there had to be sufficient time for them to be tested.
Even seemingly small changes to legislation could have a big impact, so administrators could make changes only once the final legislation was in place, Lightbody said.
She drew attention to the other changes that would have to be effected to implement the two-pot system, including:
- The South Africa Revenue Service (Sars) has to redesign its systems;
- Every retirement fund has to draft amendments to its rules, which will have to be approved by the FSCA;
- Forms have to be designed for withdrawals from the savings pot;
- Online tools for members have to be updated;
- Staff and intermediaries have to be trained and educated; and
- There has to be effective disclosure and communication to fund members.
Lightbody said a rushed implementation posed the risk of creating errors, confusion and unfair outcomes for members, who need to understand what is going on, so they can make informed decisions about their retirement plans and savings.
Change to dealing with excess contributions ‘not possible’
Asisa was “particularly concerned” about how the bill envisages the tax treatment of contributions that exceed the tax-deduction limit.
Currently, the Income Tax Act states that members are entitled to claim, each tax year, up to 27.5% of the greater of their taxable income or remuneration, with a cap of R350 000. Amounts that exceed this limit are rolled over and can be claimed as a deduction in the following tax year. If the excess contributions are not claimed as a deduction before retirement, they can be taken tax-free at retirement.
According to Asisa, it seems the bill will change this: all excess contributions will have to be credited to the retirement pot. Members will not be permitted to make any pre-retirement withdrawals from the retirement pot. If these contributions are not claimed prior to retirement, they will be available only as a deduction against the annuity taken at retirement.
Lightbody said it will not be possible to administer this provision, because to do so, a member’s taxable income will have to be known when the contributions are received, to enable a proper division between the savings pot and the retirement pot.
The administrator of a particular fund will not know whether a member has contributed more than the maximum, because the member could belong to another fund or other funds.
To take account of the R350 000 cap, the administrator would have to know the total amount that a member contributed to all his or her funds.
Taxable income includes taxable gains, rental income and investment income, and takes into account exemptions and deductions. An administrator does not know any of this information; it is known only by the individual member and by Sars at the end of the tax year.
“Is it expected that, on Sars’s assessment and notification, administrators must retrospectively reallocate contributions across savings and retirement pots? It’s not practical to do that; you can’t unscramble that. If you’ve already invested into the various pots, you can’t now pull out of one and transfer to another. It simply isn’t practical. It’s not reasonable. It’s not possible,” Lightbody said.
Annual withdrawals pose a risk to DB funds
Another of Asisa’s concerns was that the bill in its current form “cannot accommodate DB funds”.
Lightbody said it is relatively simple to implement the two-pot system for defined-contribution funds, where, at any point in time, a member’s benefit was the member’s contribution, plus investment growth, less fees.
With DB funds, on the other hand, a member’s benefit does not depend directly on the contributions received but on the promised retirement benefit, as contained in the fund’s rules. This promised benefit was based on the member’s years of service and salary at retirement.
The valuator of a DB fund must ensure that the total contributions will be sufficient to meet the promised benefit. If they are not, the employer might have to pay extra into the fund.
Lightbody said a DB fund cannot simply reallocate contributions so that members can access up to one-third of their savings each year (via the savings pot), because this could seriously jeopardise the financial soundness of the fund.
Careful consideration needs to be given to how DB funds, such as the Government Employees Benefit Fund, can deal effectively with the two-pot system.
She said the legislation could focus on one-third of the benefit constituting the savings pot. “But we need to be very careful in looking at proposals for drafting around DB funds, to make sure that they get it right and that there are no unintended consequences.”
Current wording is sending ‘the wrong message’
Asisa said it seemed that the wording of the legislation has created confusion about the two-pot system.
The draft legislation creates the impression that the various pots are distinct and “hard-coded”, whereas the pots are simply descriptions of notional portions of a member’s total retirement provision in a fund. Asisa believed the terminology used in the legislation should reflect this, Lightbody said.
Administrators would not have to manage distinct pots, although this was an option, and it was therefore unnecessary to make laws and rules about how each pot must invest its contributions, for example.
Although it might seem like semantics, it was important for the terminology to communicate the correct message, and for the law to make it clear that an individual cannot, for example, remain a member of a fund and transfer one of the pots to another fund.
“The pots cannot be split up; they are simply components of one retirement account within a fund.”
Lightbody said Asisa does not believe the legislation makes this clear. In its current form, it seems to suggest that the pots can be split up.
Asisa also believed that the two-pot system should not be “unnecessarily complex”, to avoid complications for Sars and additional costs for administrators, which would be passed on to funds and their members.
Complexity also had to be avoided because it would create confusion among members, which would breed mistrust of the system, Lightbody said.
