The Two-Pot System: Are Your Retirement Fund Rules Ready?

The two-pot system is transforming South Africa's retirement landscape. As many institutions adjust systems and procedures to accommodate this change, Public Officers and Trustees of retirement funds should be aware that their fund rules also require amendments.?

The Financial Sector Conduct Authority (FSCA) issued a communication in February 2024 outlining the necessary changes to fund rules for a smooth transition to the two-pot system.??

To help retirement funds ensure their rules comply with the two-pot system, we've compiled a checklist. This checklist addresses various aspects of the new system, including:?

• Fund Contribution Allocation?
• Seed Capital??
• Savings Component?
• Retirement Component?
• Transfers?
• Deductions?
• Defined Benefit Funds?

By using this checklist as a guide, Public Officers and Trustees can systematically review their fund rules and identify areas requiring adjustments to comply with the two-pot system. Remember, ensuring your fund rules adhere to these changes is crucial for a smooth transition and continued member satisfaction.?

Fund Rules Amendments?

Contributions?

• Do the fund rules clearly state that all contributions made after September 1st, 2024, will be automatically divided into two separate parts??
• Of the contributions made after September 1st, 2024, do the fund rules specify that one-third will be allocated to a savings component accessible for member withdrawals??
• Do the fund rules specify that the remaining two-thirds of contributions after September 1st, 2024, will be allocated to a retirement component that is preserved until retirement??
• Do the fund rules grant members the right to access their savings component benefits according to the fund's established withdrawal rules (e.g., frequency, minimum amount)??

Seed Capital?

• Do the fund rules define a "seed capital amount" as 10% of a member's share in the retirement fund as of August 31st, 2024, capped at a maximum of R30,000??
• Do the fund rules clearly state that the seed capital provision does not apply to the following member categories:?

-Unclaimed benefit fund members?

-Pensioners?

-Beneficiary fund members?

-Members who exited service and completed an election form by August 31st, 2024?

-Non-contributing members of terminating funds and funds in liquidation?

Savings component?

• Do the fund rules establish a dedicated "savings component" that accumulates one-third of all contributions made from September 1st, 2024, onwards, plus any investment returns generated by the component??
• Do the fund rules allow members to withdraw a minimum of R2,000 annually from their savings component??
• Do the fund rules clearly state that any withdrawals made from the savings component before retirement will be subject to tax deductions according to the PAYE tables??
• Do the fund rules specify that if a member chooses to withdraw their savings component in cash upon retirement, the withdrawal will be taxed according to the retirement tax table??

Retirement Component?

• Do the fund rules establish a separate "retirement component" that will only receive contributions and investment returns starting from September 1st, 2024 (no pre-existing funds allocated)??
• Do the fund rules specify that the retirement component consists of two-thirds of all contributions made after September 1st, 2024, along with any investment returns generated by the component??
• Do the fund rules clearly state that members cannot access funds from the retirement component through cash withdrawals, even upon resignation from employment??
• Do the fund rules explicitly prohibit claiming the retirement component as a cash benefit??
• Do the fund rules require that the retirement component be used to purchase an annuity upon retirement, subject to the de minimis amount (minimum retirement income)??
• Do the fund rules specify that any annuity payments received from the retirement component will be taxed as income when distributed to the member??

Transfer of components?

• Do the fund rules allow members to transfer funds from their savings component to the retirement component??
• Do the fund rules prohibit any transfers into the savings component, except for the initial seed capital amount??
• Do the fund rules permit transfers of both the savings component and the retirement component to another fund, but only if transferred together as a single unit??
• Do the fund rules clarify that transfers of vested components (pre-September 1st, 2024, contributions) will follow existing fund rules??
• Do the fund rules acknowledge that transfers between components within the same fund will be considered tax-neutral, requiring no additional tax considerations under the Income Tax Act??

Deductions in terms of Section 37D?

• Do the fund rules specify that any deductions made under Section 37D of the Pension Funds Act (PFA) will be applied proportionally across all three components (savings, seed capital, and retirement)??

Defines Benefit Funds?

• Do the fund rules maintain the existing requirement where the fund pays a pension on retirement based on a pre-defined formula in the rules, independent of member or employer contributions??
• Do the fund rules include a seed capital provision offering members a starting balance in the savings component, as suggested: 10% of the member's pre-September 1st, 2024, share value, capped at R30,000??
• Do the fund rules clearly state that if a member withdraws part of the seed capital (savings component) before retirement, their pensionable service will be reduced to ensure financial neutrality for the fund??
• Do the fund rules outline the process for calculating the service reduction upon early withdrawal from savings? This should involve a pre-September 1st service value (10%) and a post-September 1st service value (one-third), adjusted for any prior withdrawals.?
• Do the fund rules specify that upon member selection of a withdrawal amount, the valuator will calculate the service reduction and the resulting lower pension benefit at retirement??
• Do the fund rules define "pensionable service" to account for potential service reductions due to early withdrawals from savings??

Written by: Hayden Naidoo

The Benefit Counsellor

This article is based on FSCA Communication 3 of 2024 (RF), 16 February 2024.

It's important to note that this checklist is for informational purposes only and doesn't constitute legal advice. We recommend consulting with a qualified legal professional to ensure your fund rules fully comply with the two-pot system regulations.?