Reconsideration of the postponement of the effective date of the two-pot (component) retirement system

The National Assembly’s Standing Committee on Finance has rejected the proposal to move the implementation date of the two-pot retirement system to the 1^st March 2025, and has insisted on an implementation date of the 1^st March this year. When the committee met on the 25^th October last year, National Treasury proposed moving the implementation date out by a year following calls from the retirement industry that it needed more time to put revised systems in place for the new legislation.

Treasury has repeated the reasons for moving the date. These include the extensive work required by the industry to establish and test the systems and procedures required to implement the two-pot system, which will enable fund members to make one withdrawal annually from their retirement pots. Working based on draft legislation is risky as amendments could be made at any time and that would require more costly system changes. Companies dare not sit back and wait for legislative certainty though, as that would mean scrambling to be ready for the original March 2024 date. Another factor is that the rules of the various funds need to be amended and sent to the Financial Sector Conduct Authority for review and approval. This process is going to take time due to the volume of changes that will need to be submitted.

The South African Revenue Services also needs time to put systems in place for the two-pot system. If SARS cannot process the transactions effectively it will cause a logjam in the whole system.

Treasury believes the initial timeline is overly ambitious and a rushed implementation could result in challenges that would be detrimental to members.

The proposed change did not go down well with the majority of MPs and the general consensus was that the implementation date must remain the 1^st  March 2024. On the 4^th December though, Treasury and Parliament’s Standing Committee on Finance reached a compromise, with a new proposed starting date of the 1^st  September 2024. Finance Minister, Enoch Godongwana proposed this date as a compromise as it will allow for the retirement industry to be better prepared to manage the new system.

It was not surprising to note that MPs accepted National Treasury’s proposal to raise the cap on the seeding amount by R5 000 to R30 000. This means that each retirement fund must transfer 10%, but no more than R30 000, of the value of a member’s savings on the 29^th  February 2024 (will this now become the 31^st August 2024 one wonders?) from their vested component to their savings component. The purpose of seeding is so that members will have money in their savings pot that can be withdrawn immediately when the system is implemented.

It is also important to note that National Treasury has accepted the industry’s proposal that provident fund members who were 55 years and older on the 1^st  March 2021 will, by default, be excluded from the two-pot regime, and must explicitly choose to opt in. This is a reversal of the position in the draft legislation, which is that provident fund members who were 55 or older on the 1^st  March 2021 are automatically included in the two-pot system, unless they choose to opt out.

While MPs are pushing for retirement fund members to have access to this savings pot component, it is important to understand the impact that such withdrawals will have on the investment value of the fund at retirement.

Accessing a savings withdrawal benefit at any time prior to retirement may have a far bigger impact than the member realises. Younger employees often think they can easily catch up on the amount withdrawn, but do not realise that preserving the investment means that they benefit from the power of compounding. Compounding is essentially earning returns on previous returns, over and above the amounts that the member contributes.

It is important though to not lose sight of the fact that this legislation is being proposed so that members can access the savings component in cases where they do not have an emergency fund. The important concept that members will need to get their heads around is the term ‘emergency funds’. Is accessing these emergency funds of such critical importance that the member is willing to forgo the benefits of retaining previously invested funds and enjoying the benefits of compound growth?

Before making such a decision members should consider the following questions:

1. Does the member really need the withdrawal amount to pay for something important? If yes, do they need the full amount or could they reduce it?
2. What is the marginal tax rate of the member likely to be in the year of the withdrawal and how might the withdrawal impact the member’s overall tax liability?
3. How much tax is the member likely to pay on the withdrawal itself?
4. How is the withdrawal likely to impact the member’s long-term savings to retirement?

There is a general concern that members of funds will be accessing these savings to fund general day to day living expenses, and not treating it as an emergency source of funds as was originally intended. Staying the course and not accessing these funds will have a significant impact on the amount of money that the member will have to provide as an income on retirement. Whether members will apply their minds to these factors when deciding on a course of action is a concern at this point.

We will keep you updated on the latest developments regarding the two-pot system roll-out.