The FSCA has encouraged retirement fund administrators to submit the draft rule amendments required to align a fund’s rules with the “two-pot” retirement system, although the enabling legislation is yet not law.
The new retirement regime is scheduled to “go live” on 1 September.
In Communication 3 of 2024 (RF), issued on 16 February, the Authority set out its requirements for the rule amendments and its approach to administrator’s applications for such amendments.
Click here to download Communication 3 of 2024 (RF).
The legislation for the two-pot system, the Revenue Laws Amendment Bill (RLAB) and Pension Funds Amendment Bill (PFAB), has not been signed into law.
The principle enabling legislation, the RLAB, is essentially “done and dusted”. It was passed by the National Assembly in February and is currently awaiting concurrence by the National Council of Provinces.
The PFAB, which amends the Pension Funds Act (PFA), is still being processed by the National Assembly’s Standing Committee on Finance. The committee will hear public submissions on the Bill on 12 March.
Read: Two-pot legislation speed bump – the Amendment Bill must be amended to include public sector funds
I asked the FSCA whether retirement funds must submit their rule amendments even though the legislation has not been enacted.
The Authority said it was cognisant that the legislation has not yet been enacted. However, administrators are encouraged to submit (by email) draft rule amendments for in-principle approval, because the FSCA anticipates that rule amendment submissions will be voluminous. Therefore, the FSCA would like to have “prior sight of the proposed amendments that will be used across funds beforehand”.
“Should we wait for the enactment of the legislation, it may not afford us sufficient time to properly consider rule amendments before the proposed effective date.”
The communication does not provide a deadline for submitting the rule amendments, although paragraph 6 states that, “where applicable, funds may apply for an extension of time” in terms of section 279 of the Financial Sector Regulation Act.
In response to my query, the FSCA confirmed the absence of a deadline. However, it said, once the legislation has been enacted, the rule amendments should be submitted before 1 September 2024 to give effect to them on 1 September.
Determining the de minimis amount
Paragraph 3.8(c) of the communication is about the retirement component. Among other things, it states the rules must “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”.
If the benefit is below the de minimis, which is currently R165 000, a member can choose to withdraw the entire amount in cash. The R165 000 de minimis threshold is applied with reference to the cumulative amount in the retirement component and the vested component.
I asked the FSCA whether the rules must state how the fund will determine whether the member’s benefit is above or below the di minimis amount. The Authority said the rules should provide this detail, to avoid leaving room “for various interpretations”.
Section 37D deductions
Regarding deductions in terms of section 37D of the PFA, the communication states only: “The rules will need to provide that deductions in terms of section 37D will be effected proportionately across the three components.”
I asked whether effecting the deductions proportionately across the components is the only aspect of section 37D deductions that must be addressed in the rule amendments.
The FSCA responded: “All the changes required by [the] RLAB and PFAB must be in the rules.”
Communication of changes to members
Paragraph 4.1 of the communication says all retirement funds – except those listed in paragraph 3.8(a) – must communicate the proposed legislative changes to members simply, clearly, and comprehensively, and the communication must be “timely and on-going as may be required”.
Paragraph 3.8(a) concerns the seed capital amount. It says the rules need to provide for a seed capital amount or starting (opening) balance of 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. This requirement will not apply to the following types of members:
- members of unclaimed benefit funds;
- pensioners;
- members of beneficiary funds;
- 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.
“Legacy” RA funds are not listed among the exclusions in paragraph 3.8(a). I asked the FSCA whether this meant legacy RA funds must communicate the changes to members unless or until the FSCA grants their application to be excluded from the two-pot system. The Authority said my understanding was “correct”.
I also asked why the exclusions listed in paragraph 3.8(a) refer to the seed capital specifically, whereas the listed non-contributory members (or funds) are, to my knowledge, excluded from the two-pot system.
The FSCA confirmed that the listed members are excluded from the two-pot system in its entirety.
