There are three pension funds in the country, including South Africa’s largest fund, that are not governed by the Pension Funds Act, and National Treasury needs to deal with these separately in implementing its famous two-pot retirement system.

I refer to three government pension funds, in particular the Government Employees Pension Fund (GEPF), which holds more than R2.3 trillion in assets and has almost 1.3 million active members and another 475 000 pensioners and beneficiaries. This fund is constituted under its own law, the Government Employees Pension Law (Proclamation 21 of 1996).

The other two funds are the Post Office Retirement Fund (PORF), governed by the Post and Telecommunications-related Matters Act (previously the Post Office Act) of 1958 and the Transnet Retirement Fund (TRF), governed by the Transnet Pension Fund Act of 1990.

The GEPF and TRF are defined benefit funds (see below), whereas the PORF is a defined contribution fund, having converted from a defined benefit fund in 2005.

Last week, the Treasury published proposed amendments to the pieces of legislation governing the above-mentioned funds that are necessary to effectively implement its two-pot retirement system across the retirement industry – public and private sector – scheduled for September 1 this year.

In a release, the Treasury said: “The proposed amendments insert certain definitions to provide for the introduction of the savings withdrawal benefit; to provide for the appropriate account of a member’s interest in the savings, retirement, and vested components and to provide for deductions that may be made by the funds. These amendments seek to align pension laws across all sectors to ensure that pension funds can amend the fund rules and implement the two-pot retirement system on the effective date of September 1, 2024.

“The amendments to the public sector pension laws will be proposed for inclusion in the Pension Funds Amendment Bill, which is currently under consideration of the Standing Committee on Finance.”

Two-pot headache for defined benefit funds

Defined benefit funds, of which there are very few left in South Africa, pay out a guaranteed benefit (an ongoing pension or lump sum) on retirement, resignation or death, calculated on a member’s salary and years of service. Defined contribution funds, on the other hand, pay out a lump-sum benefit according to total contributions made plus accumulated, compounded returns. There is no obligation on the fund to pay out more to a member than what the member and his or her employer have invested in the fund over the member’s years of service.

The two-pot system is essentially designed for defined contribution funds, because at a glance one can tell how much a member has accumulated, and that amount can be neatly divided into the not two, but three pots the system requires: the vested pot (all savings accumulated until August 30, 2024), the savings pot (the accessible one-third of contributions, boosted by seed capital of up to R25 000 from the vested pot) and the retirement pot (the inaccessible two-thirds of contributions, released only on retirement).

For defined benefit funds, the situation is more complex. Dudley Moloi, writing in “The Public Servant”, the official publication of the Department of Public Service and Administration, in December last year, explains: “The calculation method will differ due to the unique nature of defined benefit funds. The allocation of contributions to the vested, savings and retirement pots will be based on the member’s pensionable service.

“On resignation, members will be entitled to the vested pot and the savings pot balances. The retirement pot will be preserved and only accessible on retirement or death. The treatment of the retirement pot on retrenchment is still under consideration,” Moloi says.

He says that, in the case of divorce, the ex-spouse will be entitled to a portion of the member’s “pension interest”, as determined by the divorce order. The pension interest comprises the balances in the vested, savings, and retirement pots.