Members of provident funds aged 55 years or older on 1 March 2021 should be excluded from the two-pot retirement system unless they explicitly decide to opt in, say the Association for Savings and Investment South Africa (Asisa) and the Institute of Retirement Funds Africa (Irfa).
What the two organisations are proposing is a reversal of the default position in the draft two-pot legislation, which is that provident fund members who were 55 or older on 1 March 2021 (the so-called “T-Day”) are automatically included the two-pot system, unless they choose to opt out.
Asisa and Irfa made presentations to the National Assembly’s Standing Committee on Finance on Tuesday in response to the enabling legislation for the two-pot system: the 2023 Draft Revenue Laws Amendment Bill and the 2023 Draft Revenue Administration and Pension Laws Amendment Bill.
Adri Messerschmidt, Asisa’s senior policy adviser: regulatory affairs, said it is impossible for the retirement fund industry to communicate with the affected provident fund members to explain the implications of their choice and ask for their election by 1 March 2024.
Fund administrators must allocate contributions and seed capital to members’ savings component by 1 March next year, when the two-pot system is scheduled to take effect.
The draft legislation does not provide for provident fund members aged 55 or older on T-day to opt out of having their savings pots seeded. So, if they do opt out of two-pot system, they will have to pay tax at their marginal rate to withdraw the money in the savings pot, she said.
Irfa executive board member Nancy Andrews said her organisation agrees with Asisa, adding the opt-in requirement should also apply to members of provident preservation funds aged 55 or older on T-Day, paid-up members, members whose section 14 transfers were still in progress, and members of preservation funds who have not made a once-off pre-retirement withdrawal.
The reason members should have to opt in, instead of out, is that experience has taught the industry that members who are called upon to make a choice often fail to do so – they tend to accept the default option. The industry is concerned that members will lose their vested rights if they do not choose to opt out of the two-pot system timeously.
Messerschmidt said provident fund members who were 55 or older in 2021 are either close to retirement or in retirement, and therefore it is not appropriate to compel them to contribute to all three components: the savings, retirement, and vested pots.
The other issues raised by Asisa and Irfa during their presentations are summarised below.
‘No’ to intra-fund transfers
Asisa is also opposed to allowing members to transfer savings between pots in the same fund.
The draft proposals allow members to transfer money from the savings pot to the retirement pot, or from the vested pot to the retirement pot, in the same fund.
Asisa said these intra-fund transfers should not be allowed because:
- There is no benefit to the member in transferring from, for example, the savings pot to the retirement pot while still a member of the fund. This can be done at retirement.
- Members may not understand that these pre-retirement transfers cannot be reversed. Once money has been transferred to the retirement pot, it cannot be accessed at all until retirement.
- They will add an unnecessary level of complexity and costs to fund administration.
‘Deal with PFA amendments separately’
Asisa and Irfa said the draft legislation should exclude amendments to the Pension Funds Act (PFA) that are not required for the two-pot system. These include new definitions of “pension interest” for divorce orders and proposals for maintenance payments.
Asisa said these amendments require separate consideration and consultation, including possible concurrent amendments to the Divorce Act and the Maintenance Act.
“To avoid holding up the implementation of the two-pot system, the only legislative amendments to the PFA at this stage should be those required for two pots. Implementing the two-pot system will be complex. Adding unrelated items that will require simultaneous implementation is unreasonable,” Messerschmidt said.
The organisations favour the PFA amendments being dealt with in the Conduct of Financial Institutions Bill.
Authority for legacy RA fund exemptions?
The draft legislation provides for “legacy” retirement annuity funds that meet certain criteria to apply for an exemption from the two-pot system.
Asisa said the draft Explanatory Memorandum to the 2023 Draft Revenue Laws Amendment Bill provides for the FSCA to grant exemptions from the two-pot system. But there is nothing in the draft bill (or current legislation) that allows the FSCA to grant exemptions from the provisions of the Income Tax Act (ITA).
It said there are no proposed amendments to the PFA that will provide the FSCA with grounds for requiring or making a declaration as envisaged in the draft Explanatory Memorandum.
Amendments to the ITA and the PFA were required to facilitate the exemption of the affected RA fund members, Asisa said.
Asisa and Irfa said the exemption from the two-pot system should be extended to include, for example, funds in liquidation, beneficiary funds, funds that have only pensioners as members, and dormant/or closing funds, as well as to certain categories of members, such as pensioners, because they do not contribute.
‘Burdensome’ tax directives
The requirement for fund administrators to obtain a tax directive from the South African Revenue Service (Sars) for intra-fund transfers and withdrawals from the savings pot was “highly problematic”. Asisa said.
It said the use of the word “transfer” was incorrect. While an individual remains a member of the same fund, it would simply be a re-allocation from one notional account to another. There is no movement of funds.
“To require a tax directive in this event is an unnecessary and unreasonable increase in administration and cost.”
Members will be allowed to make one withdrawal from their savings pots each tax year, and it is likely that most members will avail themselves of this opportunity.
“To require retirement fund administrators to apply for tax directives on each and every savings component withdrawal request will present administrative issues for fund administrators and probably also Sars,” Asisa said.
It said an alternative needs to be found in consultation with administrators and Sars.
Clarity on section 37D deductions
There were several areas where the drafting of the proposed amendments needs to be improved and clarified, Messerschmidt said.
Asisa is particularly concerned about the non-alignment of certain provisions of the PFA and the ITA. For example, the amendments to the ITA propose that deductions permitted in terms of section 37D of the PFA are made from the retirement and the vested pots, whereas the draft amendments to the PFA propose the deductions are from all three pots (savings, retirement, and vested).
One of the drafts must be incorrect and needs to be corrected.
Asisa and Irfa said their members favour the deductions being made from all three pots.
