The Evolution of Pension Funds Law in South Africa

The journey of pension funds law in South Africa is a reflection of our country’s broader social, economic, and political changes over the years. When the Pension Funds Act was first introduced in 1956, it set the foundation for the industry, but like many things during that era, it was limited in scope. At that time, only certain sectors of the population were truly able to benefit, while many of our people — particularly those in informal or low-income jobs — were excluded from the safety net that a pension fund could provide.

After apartheid ended, the new democratic South Africa needed a system that worked for everyone. That’s when we started to see reforms aimed at making pension funds more inclusive. Amendments to the Pension Funds Act in the late 1990s and early 2000s were geared towards fairness, transparency, and better governance. One of the most significant changes was the introduction of “surplus apportionment” in 2001. This ensured that any extra funds were fairly distributed, rather than staying solely with employers. It was a crucial step towards equity, making sure that members and pensioners — the people who really needed the money — also benefited.

Over the last decade, we’ve seen even more changes aimed at protecting members and improving their outcomes. The Default Regulations that came into effect in 2019 were a game changer. By requiring funds to offer default investment, preservation, and annuity options, these regulations made it easier for members to secure better retirement outcomes without getting lost in the complexity of investment choices.

The Two-Pot System and the Early Aftermath

A major shift occurred with the implementation of the Two-Pot System on 1 September 2024. This reform brought compulsory preservation into the spotlight, addressing the common issue of members cashing out their retirement savings prematurely. The two-pot system splits contributions into two pots: one for immediate access during emergencies and the other preserved for retirement. The aim was to strike a balance between immediate financial relief and long-term security.

However, the aftermath has already proven challenging for funds and administrators. As shared by fund administrators during a recent webinar, millions of applications for Savings Withdrawal Benefits (SWBs) were processed within the first two months. SARS has been overwhelmed, receiving over 1.2 million tax directive applications and withholding R7.2 billion in taxes from withdrawals by early October. Issues have surfaced, including discrepancies in salary reporting, so-called “tax evasion” attempts, and members misunderstanding the tax implications of early withdrawals.

The Impact of COFI

Looking forward, the forthcoming Conduct of Financial Institutions (COFI) Bill is set to reshape the retirement fund industry. Once enacted, COFI is expected to create a unified regulatory framework for all financial institutions, including pension funds, to ensure consistent standards of conduct across the sector. This change is crucial for enhancing customer protection, promoting transparency, and driving fair outcomes.

COFI will also introduce stricter governance requirements, emphasizing ethical behaviour and fiduciary duties of trustees and administrators. Funds will be required to obtain specific licenses, aligning with the new regulations to enhance accountability. The focus on delivering fair customer outcomes will push funds to ensure that their products truly meet members’ needs. Additionally, COFI’s integration with existing laws, such as the Pension Funds Act, aims to create a cohesive regulatory environment, which will require pension funds to adapt their compliance processes while continuing to meet current obligations.

Looking Forward

As we move forward, several key trends are likely to shape the pension landscape:

• Expanding retirement coverage to informal and gig workers will be essential to ensure everyone has access to a secure retirement.
• More funds are looking to invest in ways that align with Environmental, Social, and Governance (ESG) principles — not just to generate returns, but to make a positive impact on our country and planet.
• As funds go digital, we need to be vigilant about cybersecurity and protecting members’ data.
• With people living longer, we have to rethink how we support retirees during the retirement income phase, ensuring their savings last throughout their retirement years. This requires innovative strategies to manage drawdowns and provide sustainable income, helping retirees maintain their quality of life while avoiding the risk of outliving their savings.
• As the legal landscape continues to evolve, we must invest in trustee training to ensure they can make informed decisions that protect members’ interests.

Reflecting on these changes, it’s clear that pension fund law in South Africa has come a long way. But there’s still much to be done. As someone who has spent time working in this field, I believe that the future of our pension industry is about finding the right balance — meeting the immediate needs of our people while also ensuring they can retire with dignity.

Let’s keep pushing forward, together.