The South Africa government has proposed that changes to the two-pot retirement system, which gives workers access to pension funds before retirement, be delayed by a year.

Employer Action Code: Act

Draft legislation to amend South Africa’s Income Tax Act and the Pension Funds Act would allow members of occupational retirement plans to access part of their future retirement accruals during employment, with the remainder accessible only upon retirement or death (known as the “two-pot” system). Existing payout rules would still apply to pre-reform accruals (with some exceptions), so in practice it would be a “three-pot” system. The targeted implementation date is March 1, 2024. (However, on October 25, 2023, the government proposed a one-year implementation delay to Parliament’s Finance Committee. While the pensions industry strongly supports the delay, labor and some members of Parliament oppose it. If the delay occurs, references to 2024 below would change to 2025.)

Defined contribution (DC) plans

• One-third of contributions (and investment earnings) made after March 1, 2024, would be allocated to a “savings component” (the first pot), from which members could make cash withdrawals (once per tax year) while employed. The other two-thirds of future contributions (and earnings) would go to a “retirement component” (the second pot), which could only be used to purchase an annuity at retirement or death.
• The savings component would be funded at the outset by a “seed capital” transfer from the member’s March 1, 2024 account balance. Treasury is currently proposing that the seed capital be calculated as the lesser of 10% of this balance and 30,000 South African rands (initial proposal was 25,000 rands). Labor is lobbying to have at least the rand amount increased further, possibly to 50,000 rands.
• The March 1, 2024 account balance less the seed capital is the “vested component” (the third pot), which would continue to be subject to current payout rules; for example, it may be taken in cash when changing jobs, and pension fund members may take up to one-third in cash when retiring with the balance used to provide an annuity (more complicated rules apply to provident fund members).
• Members would be allowed to transfer portions of their vested and savings components to their retirement component at any time (up to and including at retirement), but such transfers would be irreversible.

Defined benefit (DB) plans

• In principle, the same three-pot (and seed capital) approach as described above would apply. The draft legislation does not provide much detail on how the component amounts would be calculated (and provides none for hybrid DB/DC plans). For the savings component, the proposal states that “the total value attributed to this component on or after March 1, 2024, is to be determined with reference to one-third of the member’s “pensionable service” as contemplated in the rules of that fund on or after March 1, 2024″, but no clear guidance is given as to how this “value attributed” should be calculated.
• The government has indicated that some flexibility will be allowed to DB and hybrid plans (e.g., if they have difficulty in applying these principles by adjusting members’ service records), subject to approval by the pension regulator (Financial Sector Conduct Authority) to ensure that the plan’s proposed approach is both equitable and financially sound.

Employer implications

The administration of the proposed new components, as well as communications to plan members and amendments to plan rules (which must be approved by the regulator), will be challenging to say the least. Though the proposed provisions may yet change before being finalized, companies with active retirement plans should engage with their plan administrator and advisors to ensure readiness.

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