President Cyril Ramaphosa signed the Revenue Laws Amendment Bill into law on 1 June, which means the two-pot retirement system will be rolled out as proposed on 1 September.
This legislative action signifies the final step towards the implementation of the new retirement system and means there is no turning back, said Guy Chennells, the chief commercial officer of Discovery Corporate and Employee Benefits.
“With the new system officially coming into effect on 1 September 2024, retirement fund administrators in particular only have a few months left to organise their affairs, particularly regarding pending legal matters, if they want to pay out their clients’ withdrawal claims promptly post 1 September,” he said.
On 30 April, the FSCA published a communication setting out the revised requirements for amendments to the rules of retirement funds. Communication 16 of 2024 (RF) replaced Communication 3 of 2024 (RF) issued in February.
The Authority said funds and administrators may submit rule amendments required to give effect to the two-pot system from 2 May to 15 July. It said rule amendment submissions will be processed on a “first come, first served” basis, and any submissions made after 15 July will be processed once the first batch has been completed.
Chennells said retirement funds that submit rule amendments after 15 of July stand the risk of their amendments not being registered in time, which will delay implementing the two-pot system and paying out withdrawal claims from the savings component (pot).
The failure to register rule amendments with the FSCA by 1 September will mean no savings withdrawal claims can be paid from the fund. This could also impact the tax approval status of retirement funds when the South African Revenue Service (SARS) conducts its annual tax assessments. If retirement funds lose their tax approval status, contributions to retirement funds will not be tax-deductible and employers could have “an industrial relations disaster on their hands”, Chennells said.
The next important consideration is whether the provider can process claims on what is called a “straight-through process”. Straight-through is an automated electronic payment process that does not need manual intervention.
“This is because the volumes are expected to be unprecedented,” Chennells said. The Minister of Finance in his 2024 Budget Speech said he is anticipating a R5-billion revenue windfall from taxing two-pot withdrawals in the next financial year. This indicates that the government expects hundreds of thousands of South Africans to access money from their savings component as soon as the two-pot system becomes effective.
“One could easily see claims volumes in September 50 to 80 times higher than a normal month of exit claims. It would not be possible to increase staffing adequately for this. And so, without the straight-through process for payments, providers could have very long payment turnaround times before savings withdrawal claims can be paid,” he said.
Many, if not most, employees will be making a withdrawal. If they have problems accessing their money, they will look to their employers for answers. This could result in difficult labour relations issues for employers, Chennells said.
Check list for employers
He said employers also need to “tick a couple of boxes” to prepare for the two-pot system and ensure their employees’ withdrawal claims are paid out.
Chennells provided the following high-level list of what employers need to be doing already, or start doing right now:
Tax compliance
Employers need to ensure their employees have tax numbers, which are included in the data they have shared with their retirement fund administrator.
“Employees will need to be registered for tax to make a withdrawal, even if they are below the tax thresholds. This is because SARS has confirmed that every withdrawal from the savings component will need a tax directive, and administrators will withhold marginal tax on each transaction,” Chennells said.
Collect identity and cellphone numbers
Employers must make sure they regularly update their employees’ cellphone numbers and send these revised details to their retirement fund administrator every month. They should also collect every employee’s identity number. For foreigners, they must collect new passport numbers when old ones expire.
Chennells said this is because administrators will need to verify who is asking for a withdrawal.
If an employer has the incorrect identity or passport numbers, the process will stop, and the employer will have to update those details through the next month’s contribution schedule, leading to serious delays.
Phone numbers are equally important because they are the tool to deliver one-time passwords for members to confirm they are the ones requesting a withdrawal, he said.
The identity or passport numbers shared with the administrator must be the same ones used to register for a tax reference number. If they do not match, SARS will decline the directive application.
Drive digital adoption
Employers can play a pivotal role in ensuring that retirement fund members know how to log in to their administrator’s digital platforms.
“We are expecting that members would need to use these digital platforms to request withdrawals,” Chennells said. “Logging in for the first time can sometimes be a challenge – for example, if ID or passport and cellphone numbers are not up to date. So, it will be better to resolve this now than all at once come September.”
In the first month of the two-pot system’s implementation, volumes of withdrawals could be 50 to 80 times higher than current exiting member withdrawals. It will be impossible to manage these volumes manually without wait times of months for withdrawals. Administrators will have to develop digital straight-through processes if they hope to deliver on member expectations.
Is your provider up to the job?
Whether you are an employer or an individual, if you have any doubt in your retirement fund administrator’s ability to get through the legal hoops and deliver straight-through claims processes, you still have time to move in an orderly way to a more digitally and operationally capable provider, Chennells said.
“Waiting until September to find out that you (or your employees in the case of employer-sponsored umbrella funds) are unable to get access to your money would be extremely frustrating. You would need to make a move in a hurry and once the trust damage has already been done,” he said.
The next question to ask is what happens if a section 14 transfer is still in progress by 1 September.
A section 14 transfer is the legal process that must be followed to move money from one retirement fund to another, ensuring that no mistakes are made along the way. It can take months to complete.
According to the FSCA, for section 14 transfers that straddle the implementation date or are still being considered for approval on 1 September, the transferor fund that has member assets on 31 August must calculate the seed capital for all members, irrespective of the status of the transfer, and must pay out savings withdrawal claims where it can. It may be a concern that the transferor fund may not want to pay out these claims, particularly because the assets are moving off its platform, and this could prejudice members.
It is important to understand the capability and intention of the transferor fund and approach the FSCA for an expedited section 14 process if the transferor fund will not be able to or will not be prepared to pay withdrawal claims within a reasonable time, Chennells said.
“Of course, if a fund is not able to pay claims for schemes awaiting transfer, they are likely to have heavy delays in paying withdrawal claims for active members too. Employers currently contributing to such a fund should consider moving sooner rather than later to at least give members some new contributions in the new fund from which to withdraw, and to have got the ball rolling to get members savings into a fund from which they can access the seed capital in a reasonable time,” he said.
Communicate and educate
Employers should be routinely communicating about the implementation of the two-pot system and educating their employees about the basics of the new system. The most important message is to affirm that individuals will not lose their vested lump-sum rights.
“Retirement fund members may have heard a lot about 1 March 2024 and then March 2025 as implementation day in previous communications because the proposed implementation date changed a couple of times,” Chennells said.
Now that the president has signed the Revenue Laws Amendment Bill into law – and the Pension Funds Amendment Bill is expected to be signed soon – people need to know that 1 September is “D-day”. They need to get their affairs in order if they would like to withdraw from their retirement funds, he said.
I would like to register for the withdrawal of the two pot system