Old Mutual Corporate Consultants has welcomed further clarity from National Treasury about the proposed two-pot retirement system and the speed at which the government is moving on the issue.
Treasury responded to comments on the 2022 Draft Revenue Laws Amendment Bill at a meeting of the National Assembly’s Standing Committee on Finance on 20 September.
Read: Treasury agrees to three of Cosatu’s responses to the proposed two-pot system
Old Mutual was happy that National Treasury has seriously considered the commentary submitted by all stakeholders through the process to date. In particular, the timeliness and seriousness with which the regulations are being processed indicate that we are moving in the right direction.
The new system is a monumental shift for the retirement sector. Old Mutual remained confident that the proposal, if correctly implemented, will improve the long-term retirement outcomes for all South Africans while providing flexibility to deal with unforeseen events before retirement.
New date for implementation
It was a good decision to push back the introduction of the new two-pot system, which will now take effect from 1 March 2024, as opposed to 1 March 2023. The move was not a surprise.
There was no way the retirement industry would be ready to implement Treasury’s proposed two-pot system by the envisaged 2023 date. Some administrators have indicated that it would take at least 18 months from the date of gazetting of the final legislation for the industry to get systems in place to implement the proposed retirement plan.
Despite the extension provided in the recent update, the new deadline of 2024 will be tight, considering how many aspects National Treasury will still have to clarify.
Read: New deadline for two-pot retirement system is still a big ask, says Asisa
One–third contribution confirmed
Old Mutual was also pleased that Treasury has provided clarity that one-third of savings will be placed in the savings pot, instead of the initial proposal indicating that up to a third could be saved. Treasury has also confirmed that all contributions, whether or not above the tax cap, will be split, one-third to the savings pot and two-thirds to the retirement pot.
The government has confirmed that the two-pot system will be compulsory in all funds; there is no opt-out. The only exception to this is the fact that discussions will still be held on the ability for legacy funds to be exempted.
Old Mutual also appreciated that Treasury has moved away from its proposal that once fund members’ annual contributions have reached 27.5% of the greater of their taxable income or remuneration (capped at R350 000), contributions that exceed the tax-free deductible amount will have to go into the retirement pot.
There would be no way for a fund to know if this limit had been reached, and we are glad that this no longer applies. The administrators are now just expected to split the contributions regardless of the quantum into the two pots, and the excess contributions will be dealt with as they have been by the South African Revenue Service.
Read: Other concessions by Treasury on potentially ambiguous two-pot provisions
Naming conventions
One of several new elements was the clarification on the use of the concept of “pots”. National Treasury has now acknowledged that what are referred to as “pots” in the 2022 Draft Revenue Laws Amendment Bill are components within the respective retirement funds.
It will consider an adjustment in the names to reflect the component nature of the pots – in particular, that the pots are not separatable and are considered one account in the member’s name. When fund members resign or move their account, they cannot separate the pots and will have to move their entire account to the new fund.
Need for further engagement with the industry
In addition to the clarification provided, several aspects remained unclear and would require further information for Old Mutual to understand them and their implications fully. These include:
Implications for those over 55 years old
Provident fund members over 55 will now have the option to stay and continue contributing to their current provident fund or move into the two-pot regime and out of their current vested pot.
Members who opt for the new regime will lose the ability to access 100% of their future accumulated funds in cash when they retire but will still enjoy full access to their current savings accumulated for the new regime takes effect. In the two-pot regime, members will be able to access funds in the savings pot. This option will be a once-only decision and irreversible once the change has been made.
We believe this will be a complex decision for members to make. They will need to fully understand the impact of their decision to make an informed choice. We would like further clarity on how this will work to educate our members on the proposal.
Seeding
Old Mutual noted that seeding had been put back onto the table. This aspect meant that a portion of current savings could be used to seed the accessible savings pot up to a regulated cap.
It was comforting that although the government is open to allowing once-off seeding capital, this will be considered as long as it does not have adverse implications on liquidity, and the costs of such withdrawal is not imposed on members choosing not to withdraw.
However, details were still not fully ventilated, and Old Mutual would continue to engage with all stakeholders to understand how these aspects would work.
Retrenchment benefit proposal
Old Mutual also noted that a retrenchment benefit had been proposed in the latest update from National Treasury. The retrenchment benefit should be balanced with the importance of preservation and practical, cost-effective administration and must ensure there are no loopholes.
We understand and acknowledge the hardship and challenges that come with retrenchment and the need to access substantial savings in times of need. At the same time, we have to be cognisant of the importance of full preservation in assisting with improving retirement outcomes, and administration practicalities. We therefore require further engagement on the issues before we could understand the implication on the industry and financial stability.
DB, public sector and legacy funds
Other elements that require clarification were how National Treasury would deal with the aspects of defined-benefit (DB), public sector and legacy funds. Treasury indicated that a consultative process would be undertaken with relevant DB funds and stakeholders to consider the options available relating to public sector funds.
Old Mutual welcomed that protective mechanisms will be explored, including increasing future contributions when a member withdraws funds before retirement. The outcome of the consultative process will inform any required legislative amendments.
Next update expected in the MTBPS
Although the government has applied its mind to the numerous comments received to the proposals and is approaching the changes in a somewhat collaborative manner, there is still significant granular detail that will be required to implement the two-pot system. Old Mutual looks forward to the Medium-Term Budget Policy Statement when Treasury is expected to provide more clarity.
Blessing Utete is the managing executive of Old Mutual Corporate Consultants.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
