Old Mutual said on Wednesday that they welcomed further clarity announced by National Treasury regarding the proposed new two-pot pension system- entailing the establishment of an accessible portion of retirement savings – and the speed at which the government is moving on the issue.
This is according to Blessing Utete, Managing Executive of Old Mutual Corporate Consultants, who was responding to National Treasury’s draft response on the 2022 Draft Revenue Laws Amendment Bill, which was presented to Parliament on Tuesday, 20 September.
“We are happy to see that National Treasury has seriously considered the commentary submitted by all stakeholders through the process to date. In particular, the timeliness and seriousness with which the regulations are being processed indicate that we are moving in the right direction,” said Utete.
Utete reiterated that the new system is a monumental shift for the retirement sector. “We remain confident that the proposal if correctly implemented, will improve the long-term retirement outcomes for all South Africans while providing flexibility to deal with unforeseen events before retirement.”
New date for implementation
He agreed that it was a good decision to push back the introduction of the new two-pot pension system, which will now take effect from 1 March 2024, as opposed to 1 March 2023. The move was not a surprise.
There was no way the retirement industry would be ready to implement Treasury’s proposed two-pot system for retirement by the envisaged 2023 date.
Some administrators had indicated that it would take at least 18 months from the date of gazetting of the final legislation for the industry to get systems in place to implement the proposed retirement plan.
He cautioned that despite the extension provided in the recent update, the new deadline of 2024 is going to be tight, considering how many aspects National Treasury will still need to clarify.
One third contribution is confirmed
Utete notes that Old Mutual is also pleased that National Treasury has provided clarity in that one third of savings will be placed in the savings pot, instead of the initial proposal indicating that up to a third could be saved. They have also confirmed that all contributions, whether above the tax cap or not, will be split, 1/3rd to the savings pot and 2/3rds to the retirement pot.
Government has confirmed that the new Two-Pot system will be compulsory in all funds, and there is no opt-out. The only exception to this is the fact that discussions will still be held on the ability for legacy funds to be exempted.
Old Mutual also appreciated that National Treasury has moved away from its proposal that in the two-pot system once you have reached R350,000 or 27,5% upper limit anything over your tax-free deductible amount, will have to go 100% into the retirement pot.
“There would be no way for a fund to know if this limit had been reached and we are glad that this no longer applies. The administrators are now just expected to split the contributions regardless of the quantum into the two-pots and the excess contributions will be dealt with as they have been by the SA Revenue services,” said Utete.
One of several new elements introduced this week was the clarification on the use of the concept of pots. National Treasury has now acknowledged that what is referred to as “pots” in the 2022 draft Revenue Laws Amendment Bill are components within the respective retirement funds and will consider an adjustment in the names to reflect the component nature of the pots. In particular that the pots are not separatable and are considered one account in the member's name. When fund members resign or move their account, they cannot separate the pots and will have to move their entire account to the new fund.
Need for further engagement with the industry
In addition to the clarification provided, Blessing also noted that several aspects still remained unclear and would require further information for Old Mutual to understand them and their implications fully. These include the following:
Implications for those over 55 years old
Provident fund members over 55 years old will now have the option to stay and continue contributing to their current provident fund or move into the new two-pot regime and out of their current vested pot.
Members who opt for the new regime will lose the ability to access 100% of their future accumulated funds in cash when they retire, but will still enjoy full access to their current savings accumulated for the new regime takes effect. In the two-pot regime members will be able to access funds in the savings pot. This option will be a once-only decision and irreversible once the change has been made.
“We believe this will be a complex decision for members to make. They will need to fully understand the impact of their decision to make an informed choice. We would like further clarity on how this will work to educate our members on the proposal,” Utete said.
Old Mutual noted the seeding had been put back onto the table. This aspect meant that a portion of current savings could be used to seed the accessible savings pot up to a regulated cap. It is comforting to note that whilst Government is open to allowing once-off seeding capital, this will be considered as long as it does not have adverse implications on liquidity, and the costs of such withdrawal is not imposed on members choosing not to withdraw.
However, details were still not fully ventilated, and Old Mutual would continue to engage with all stakeholders to understand how these aspects would work.
Retrenchment benefit proposal
Utete said Old Mutual also noted that retrenchment benefit had been proposed in the latest update from National Treasury. Retrenchment benefit should be balanced with the importance of preservation and practical, cost-effective administration and must ensure there are no loopholes.
“We understand and acknowledge the hardship and challenges that come with retrenchment and the need to access substantial savings in times of need. At the same time, we have to be cognisant of the importance of full preservation in assisting with improving retirement outcomes, and administration practicalities. We therefore require further engagement on the issues before we could understand the implication on the industry and financial stability,” said Utete.
Old Mutual notes that other elements that needed clarification included how National Treasury would deal with the aspects of defined benefit, public sector, and legacy funds. Utete said Treasury had indicated that a consultative process would be undertaken with relevant defined-benefit funds and stakeholders to consider the options available as relates to public sector funds.
We welcome that a protective mechanisms will be explored, including increasing future contributions when a member withdraws funds before retirement. The outcome of the consultative process will then inform any required legislative amendments.
Next update expected around the mid-term budget speech
Whilst Government has applied their minds to the numerous comments received to the proposals and is approaching the changes in a somewhat collaborative manner, there is still significant granular detail that will be required to implement the two-pot system. Old Mutual looks forward to the mid-term budget when National treasury is expected to provide more clarity.