Over the last few years, the South African government has prioritised retirement reform. The ultimate goal of retirement reform is to improve financial outcomes for members of retirement funds. The goal of the government is to encourage South African households to save more for retirement and to protect their retirement funds. Unions have made things difficult, but progress has been made, and some of the recommendations have already been implemented. 

Withdrawals from a retirement fund while employed are not permitted under current legislation. Only when a member’s employment with their employer comes to an end may they access their funds (resignation, dismissal, retrenchment, etc.). This causes employees to leave their jobs solely to gain access to their retirement funds, defeating the objective of saving for retirement.

Another issue is that members do not keep their retirement funds when they change employment, resulting in insufficient retirement savings.

The goal of the two-pot method for retirement savings is to solve the difficulties raised above while also providing alternatives.

What is the two-pot system?

National Treasury has produced a discussion paper. This discussion paper proposes a two-pot retirement savings system, which would reorganise retirement savings to allow for limited pre-retirement withdrawals and introduce the government’s long-standing retirement reform proposal on preservation. The article proposes a system in which a person’s retirement assets will be divided into two pots in the future:

Accessible pot

One-third of a member’s retirement contributions will be invested in this pot. This pot will give retirement fund members access to their funds not only at retirement but also at any time before retirement.

Retirement pot

The other two-thirds will be invested in this pot. These funds are only available at retirement and must be used to buy a monthly pension or living annuity.

Vested rights

Vested rights will be safeguarded. This means that any savings you have before the implementation date (perhaps in 2023) will be subject to current legislation. As a result, your retirement funds before this date will be unaffected.

It’s critical to make an educated choice when it comes to retirement fund withdrawals. The proposed legislation offers relief to retirement fund members, but it also runs the risk of leaving them with insufficient resources and finances when they retire.

What is the impact of the “two-pot” system on business processes?

Businesses and payroll managers need to understand the various fund rules i.e. penalties for early withdrawal and how the overall asset value is impacted. These rules need to be understood and documented by the business. Furthermore, employers need to engage and discuss the fund with their employees. The business must implement a policy (i.e., who, when, how, much, etc.) and a procedure.

Section 28 regulations:

Regulation 28 is part of the Pension Funds Act, and its purpose is to protect investors against poorly diversified investment portfolios. Its main aim is to ensure that investors’ money is invested sensibly without too much exposure to risky assets. Regulation 28 applies to pension, provident, and retirement annuity funds and essentially limits asset managers’ allocations of retirement savings to certain asset classes, including equities, property, and foreign assets.

As it currently stands, the regulation currently limits equity exposure in retirement funds to 75%, whether local or offshore. Further, exposure to local or international property is limited to 25%, while foreign investment exposure is limited to 30%.

There is a proposal to have a uniform offshore limit of 35% across the board, plus an additional 10% for African investments.

What is the impact of the “two-pot” system on Payroll and HR Systems?

• Online vs in-house – tables/rules etc. may need to be updated by your internal payroll team. Most online systems will do all of this automatically but do take the time to check with your payroll solutions provider.
• These updates must be done as soon as possible in the new tax year as incorrect calculations could result in tax issues on assessment, especially auto assessments.
• Some payroll systems allow for a bit of leeway so that they can smooth out any problems over the remainder of the tax year.