Author: Gareth Stokes, Stokes Media
Source: FAnews (https://www.fanews.co.za/)
The 1 September 2024 implementation of the two-pot retirement system put the South African retirement funding industry through one of its toughest tests to date; it stretched the administrative capabilities of asset managers, retirement funds and tax authorities while exposing some alarming regulatory violations.
The ‘savings pot’ free-for-all
As expected, millions of hard-pressed consumers queued up to withdraw all or part of the balances on the ‘savings pots’ created by the new legislation. By the 22nd November 2024, the South African Revenue Services (SARS) confirmed it had received 2.153 million tax directives or requests for withdrawal and issued 1.914 million approvals involving a gross value of just over R35 billion.
The growing number of withdrawal-related interactions between retirement fund members and their funds shone a fresh light on a systemic weakness in the domestic savings landscape, namely the failure of many employers to pay over their employees’ retirement fund contributions. Commenting on statistics up-to-date end-December 2023, the Financial Sector Conduct Authority (FSCA) said it was tracking around R5.2 billion in arrear contributions.
Unpacking the statistics further, you will learn of as many as 7,770 employers being ‘flagged’ for potential contraventions of Section 13A of the Pension Funds Act (PFA), affecting approximately 310,000 retirement and provident fund members. Section 13A prescribes how the payment of employer retirement fund contributions (and other benefits) should be made to a retirement fund.
Alarming private security sector stats
In a roundtable to update the media on the two-pot system’s progress, Keabetswe Tsuene, Senior Analyst: Retirement Funds Conduct Supervision at the FSCA, said that most contraventions occurred in the private security sector (36.2%) followed by beauty and skincare (12.37%), building (8.57%), metal (7.79%), transport (7.65%), cleaning (7.2%) and electrical (6.8%).
What are the regulators doing to tackle the problem? In FSCA Communication 41 of 2024, the Regulator named 2,330 of the 7,770 employers that had reportedly contravened Section 13A. Some 2,003 of these employers had outstanding contributions exceeding R50 000 in arrears for five months or longer. “The failure of employers to pay retirement fund contributions has severe consequences for members, affect-ing their withdrawal benefits, as we have seen with the introduction of the two-pot system, investment returns and applicable risk benefits,” they wrote.
Withholding contributions after deducting them from employees’ salaries is a serious offence, but the FSCA is limited in its response because the employers in question are not considered regulated entities under either the PFA or the Financial Sector Regulation Act. So, the FSCA has to defer to other enforcement authorities. Case in point, they welcomed the arrests of some of the officials involved in the non-payment of contributions in the Kai! Garib, Renosterberg and Kamiesberg municipalities.
COFI to cure all ills
The oversight shortcoming will be addressed in the pending Conduct of Financial Institutions (COFI) Bill. Once enacted, the FSCA will have grounds to intervene when employers mess up. Until such time, it is up to the retirement funds to seek other channels such as legal action, bargaining council enforcement processes, lodging complaints with the Office of the Pension Funds Adjudicator (OPFA) and/or reporting contraventions to the South African Police Service.
“The FSCA will continue engaging with the National Prosecution Authority and the Directorate for Priority Crime Investigate to ensure that responsible parties are brought to book,” Commissioner Unathi Kamlana said. He encouraged retirement fund members affected by employer non-compliance to engage with their employers and retirement funds directly, and failing that, to lodge complaints with the OPFA.
No overnight fixes
As with many issues facing South Africa’s financial services sector, the solution appears distant. In his comments to the aforementioned media roundtable, the Commissioner concludes that “the two-pot limitations and arrear contributions challenges are going to be with us for a while; the FSCA is busy with various interventions and strategies to deal with developments as they arise.”
Should you have any questions regarding the two-pot system, email one of our retirement experts on [email protected].