TWO-POT SYSTEM

1. PRESENTED BY: TWO-POT SYSTEM Christopher Axelson Acting DDG: TFSP PENSION LAWS AMENDMENT BILL Date: 26 March 2024 Select Committee on Finance

2. 2 Purpose & Process of the PLA Bill • To brief the Select Committee on Finance on the Pension Laws Amendment Bill (PLA Bill), 2024 • The Revenue Administration and Pension Laws Amendment Bill, then referred to as Pension Funds Amendment Bill (PFA Bill) , was first published for comments on 9 June 2023 and it was referred to the Standing Committee on Finance (SCoF) for consideration with other tax and revenue laws amendment Bills for 2023. • NT briefed SCoF on the Bill and it was then published for comments by SCoF and oral presentations were made by different stakeholders during the public hearings by SCoF which were held on 19 September 2023. • The Bill was revised, incorporating public comments and NT briefed SCoF on the responses to the Bill on 25 October 2023. • The draft Bill was subsequently withdrawn to obtain Cabinet’s approval and certification by the Office of the Chief State Law Adviser – these processes were finalised and the Bill was introduced in the National Assembly on 30 January 2024. • The SCoF has adopted the Bill on 22 March 2024, which is now called the Pension Laws Amendment Bill, 2024 as it includes pension fund laws: o Clauses 1 to 6: Pension Funds Act, 1956 o Clauses 7 to 10: Post and Telecommunications Related Matters Act, 1958 o Clauses 11 to 20: Transnet Pension Fund Act, 1990 o Clauses 21 to 24: Government Employees Pension Law, 1996

3. 3 “Two-pot” retirement system: Policy background • There are two primary concerns regarding the current design of the retirement system. • The first concern is the lack of preservation before retirement. • For pension funds and provident funds, this access is dependent on an employee terminating employment. • Individuals can then access their funds, in full, when changing or leaving a job. • The second concern is the lack of access even in cases of emergency by some households that are in financial distress that have assets within their retirement funds. • In an attempt to address the above-mentioned concerns, Government therefore proposed a further reform to the retirement saving regime. • This reform will see the introduction of the so-called “two-pot” retirement system. • The two-pot system will introduce preservation of retirement savings when members change jobs. • And further allow limited access to retirement savings before retirement without resignation.

4. 4 “Two-pot” retirement system: Policy background • It is proposed that the regime makes provision for the creation of seed capital. • This will make provision for immediate access to the allowable balance in the retirement fund from implementation date of the “two-pot” retirement system. • Seed capital refers to the starting balance in the “savings component” on implementation date, which should be available to the member of the retirement fund for withdrawal on or after implementation date of the “two-pot” retirement system. • This starting balance is to be provided in the “savings component” after reallocation from the “vested component”. • In order to limit the adverse impact on liquidity, it is proposed that seed capital should be calculated as the lesser of ten per cent of the “vested component” and R30 000. Seeding will not be repeated. • This is intended to not erode the retirement benefit but at the same time enable pre-retirement access to the benefits.

5. 5 “Two-pot” retirement system: Savings component • In accordance with this new regime, retirement funds will on or after implementation date, be required to create a component known as the “savings component”, which will be housed within the current retirement fund. • Individuals will be required to contribute an amount of one-third of the total individual retirement fund contributions to the “savings component”. • The assets in the “savings component” will be available for withdrawal before retirement. • Amounts from the “savings component” will be accessible without the member having to cease employment or having to resign or retire from their respective fund. • A member will be allowed to make a single withdrawal within a year of tax assessment. • The minimum withdrawal amount is R2 000.

6. 6 “Two-pot” retirement system: Savings component • In the event that a member resigns from employment and such member has already made use of their single withdrawal during that tax year, an additional withdrawal will be allowed provided the member’s gross interest in their “savings component” is less than R2 000. • The ability to withdraw from the “savings component” will be applicable on a per fund or per contract basis. • Withdrawals from the “savings component” will be added to the individual’s taxable income and will be taxed at their marginal tax rates.

7. 7 “Two-pot” retirement system: Retirement component • Retirement funds will on or after implementation date, be required to create another component known as the “retirement component”, which will be housed within the current retirement fund. • Individuals will be required to contribute an amount of two-thirds of the total individual retirement fund contributions to the “retirement component”. • The assets in the “retirement component” will be required to be preserved until retirement (i.e. withdrawals from this component can only be accessed by the member upon retirement). • Once a member has reached retirement age and retires, the “retirement component” is to be paid in the form of an annuity (including a living annuity) subject to the annuitisation threshold of R165 000.

8. 8 “Two-pot” retirement system: Vested component • Retirement funds will on or after implementation date, be required to create another component known as the “vested component”. • Retirement funds will be required to value a member’s retirement interest on the date immediately prior to the implementation date, as these amounts will be subject to the current retirement regime (i.e., vested and non-vested rights arising as a result of the annuitisation reform which came into effect from 1 March 2021 will be retained). • Amounts contained in the “vested component” will be subject to the current retirement regime. • This includes, inter alia, the ability to make once-off withdrawals from preservation funds, the ability to access pension and provident funds upon resignation, the continued protection of vested rights arising as a result of the annuitisation reform, and the mandatory annuitisation of two-thirds of a members retirement interest with effect from 1 March 2021. • Withdrawals from the “vested component” are accessible as a lump sum when an individual emigrates from South Africa and ceases to be a tax resident. • The payment of the said lump sums is, however, subject to the 3-year rule that under the current regime applies to members of a retirement annuity fund, pension preservation fundor provident preservation fund.

9. 9 “Two-pot” retirement system: Vested component • Once the regime comes into effect, members will no longer be able to make contributions to their “vested component”. • This will however not apply to members of a provident fund who were 55 years or older on 1 March 2021. • These members have the ability to continue making contributions into their “vested component” and this will apply until they either retire from or leave the fund they were a member of on 1 March 2021. • Should they choose to keep contributing to their “vested component” their full contribution will be allocated to the “vested component”. • Continued contribution to their “vested component” means they will not be able to contribute to the “savings component” and “retirement component”. • Provident fund members who were 55 years and older on 1 March 2021 are however not precluded from participation in the “two-pot” regime, should they elect to participate in the new regime they will no longer be able to continue contributing to their “vested component” (i.e. their contributions will be split between the “savings component” and “retirement component” as is applicable to other retirement fund members).

10. 10 Object of PLA Amendment bill • The Revenue Laws Amendment Bill, 2023, (RLAB) provides for the amendments to the Income Tax Act, 1962 (“the ITA”), which gives effect to the policy objectives on the two-pot system. • The PLA Bill provides for certain amendments to the Pension Funds Act, 1956 (Act No. 24 of 1956) (“the PFA”), ”), the Post and Telecommunications - Related Matters Act, 1958 (Act No. 44 of 1958) (“the PTRMA”), the Transnet Pension Fund Act, 1990 (Act No. 62 of 1990) (“the TPF Act”) and the Government Employees Pension Law, 1996 (Proclamation No. 21 of 1996) (“the GEP Law”) which are necessary to enable retirement funds to be able to appropriately implement the two-pot system related amendments to the ITA which are contained in the RLAB.

11. 11 Content of the Bill - PFA Clause 1: proposes an insertion of new definitions to assist in the interpretation of the Bill and includes the introduction of the definition of "pension interest" to: • Recognise marriages according to the tenets of a religion • Allocate divorce order settlements from all 3 components • Apply clean break principle on the date of the court order • The definition of pension fund organisation is proposed to be expanded to allow beneficiary funds to administer and pay arrear and future maintenance orders. Clause 2: proposes an insertion in the PFA of a trumping provision in an event of a conflict between the PFA and the Divorce Act in respect of pension interest upon divorce or dissolution of a marriage.

12. 12 Content of the Bill - PFA Clause 3: provides for amendments to section 14B of the PFA, to amend the definition of “OC” in subsection (1), and to insert a new subsection (2)(a)(iii) to align section 14B with the provisions of and the requirements contained in the RLAB. “OC” represents any other amounts lawfully permitted, credited to or debited from the member’s individual account. Clause 4: amends section 19(5) of the PFA, which deals with loans and guarantees to members of retirement funds by retirement funds. oThe amendments propose a cap on the amount of a loan or guarantee provided by the fund for purposes of financing immovable property, to a maximum of 65% of the member’s benefit. oThis change aligns section 19(5) to a policy decision taken and already included in the amended Regulation 28 exposure to loans and guarantees. to reduce pension benefit

13. 13 Content of the Bill - PFA Clause 5: proposes an amendment to section 37A of the PFA to provide for the application of the provisions of the Tax Administration Act, 2011 (Act No. 28 of 2011). Clause 6: proposes the substitution of section 37D of the PFA, to enable retirement funds to effect deductions from retirement fund benefits in accordance with the provisions and requirements of the RLAB (i.e. deduct proportionally across all components). Deductions include: • any amount due by a member to his/her employer • any amount payable in terms of a maintenance order • any portion of the pension interest assigned to a non-member spouse in the court order • any other allowable deductions in accordance with the ITA and the Tax Administration Act, 2011 (Act No. 28 of 2011) • Permission for member may not take a savings withdrawal benefit if the withdrawal will result in insufficient remaining funds to settle any order against the member • A fund may not, if it is aware of an order against the member, grant a loan or guarantee or permit withdrawal without consent from a non-member spouse

14. 14 Non-PFA funds • After the tabling of the Pension Funds Amendment Bill in the National Assembly on 30 January 2024, NT was advised that, not only the Rules under the Government Employees Pension Law, but also the Law itself will require amendments to introduce the two-pot retirement system for the Government Employees Pension Fund. • NT requested SCOF to approve the scope of the Pension Funds Amendment Bill to be expanded to include the amendments to the Government Employees Pension Law and other non-PFA administered funds, namely pension funds established in terms of the Post & Telecommunications Related Matters Act and Transnet Pension Fund Act. • The request was approved, and the subsequent draft of the Bill now includes changes to the mentioned public sector laws.

15. 15 Content of the Bill – Post and Telecommunications Related Matters Act Clause 7: proposes an insertion of new definitions in the PTRMA to assist in the interpretation of the Bill and includes the introduction of the definition of "pension interest" which is important for the implementation of deductions in terms of section 10B and 10F, in alignment with the approach set out in the RLAB. Clause 8: proposes an insertion of section 1A to the PTRMA to provide for the trumping provision in an event of a conflict between the PTRMA and the Divorce Act in respect of pension interest upon divorce or dissolution of a marriage.

16. 16 Content of the Bill - PTRMA Clause 9: proposes the substitution of sections 10B and 10F of the PTRMA, to enable retirement funds to effect withdrawals and deductions from member’s pension benefits: Pension benefits cannot be ceded or attached except in terms of a court order: maintenance or divorce or debt owed to employer • Member may not be permitted to take a savings withdrawal benefit if the withdrawal will result in insufficient remaining funds to settle any order against the member

17. 17 Content of the Bill - PTRMA Clause related to payment of pension interest upon divorce or dissolution of marriage according to tenets of religion • proposes that a fund may not grant a loan or guarantee or permit withdrawal without consent from a non-member spouse if notified by the non-member spouse that a divorce has been instituted, if the withdrawal will result in there being insufficient funds remaining to comply with pending order 10: provides for deductions

18. 18 Content of the Bill – Transnet Pension Fund Act Clause 11: proposes an insertion of new definitions and substitution of existing definitions in the TPF Act to assist in the interpretation of the Bill and includes the introduction of the definition of "pension interest" which is important for the implementation of deductions in terms of sections 7 and 7A in alignment with the approach set out in the RLAB. Clause 12: proposes an insertion of section 1A to the TPF Act to provide for the trumping provision in an event of a conflict between the TPF Act and the Divorce Act in respect of pension interest upon divorce or dissolution of a marriage.

19. 19 Content of the Bill – TPF Act Clause 13: proposes a substitution of the words the “Registrar of Pension Funds contemplated in section 3 of the Pension Funds Act, 1956” with the words “Financial Sector Conduct Authority” Clause 14: proposes the substitution of section 7 of the TPF Act, to enable retirement funds to effect deductions from retirement fund benefits in accordance with the provisions and requirements of the RLAB: • The deduction of any amount due by a member to the member's employer on the date on which the member's employment with a participating employer is terminated • Permission for a member to take a savings withdrawal benefit where a loan or guarantee has been furnished or a judgment in favour of the employer is yet to be executed provided that the withdrawal does not result in insufficient remaining funds to repay the loan or guarantee or comply with the judgment

20. 20 Content of the Bill – TPF Act Clause 15: deals with the payment of pension interest upon divorce or dissolution of marriage according to tenets of religion • proposes that a fund may or permit withdrawal without consent from a non-member spouse if notified by the non-member spouse that a divorce has been instituted and if the withdrawal will result in there being insufficient funds remaining to comply with pending order not grant a loan or guarantee Clause 16: proposes that a fund may recover certain debts owing to the employer from benefits payable to members on their dismissal or retirement and in certain other circumstances.

21. 21 Content of Bill - TPF Act Clause 17: proposes that a fund may provide housing loan schemes involving financial support to members for purposes of acquiring, improving or refinancing residential immovable property. Clause 18: proposes that a fund may recover other amounts due by a member of a fund. Clause 19: proposes an amendment to section 13 to extend the application of the new sections proposed in this Bill. Clause 20: proposes an amendment to section 14A to provide for the application of this Act to the ITA and extends the application of new proposed sections proposed in this Bill.

22. 22 Content of the Bill – GEP Law Clause 21: proposes an insertion of new definitions in the GEP Law to assist in the interpretation of the Bill and includes the introduction of the definition of "pension interest" which is important for the implementation of deductions in terms of sections 21 and 24A, in alignment with the approach set out in the RLAB. Clause 22: proposes an insertion of section 1A to the GEP Law to provide for the trumping provision in an event of a conflict between the GEP Law and the Divorce Act in respect of pension interest upon divorce or dissolution of a marriage.

23. 23 Content of Bill – GEP Law Clause 23: proposes the substitution of section 21 of the GEP Law, to enable the fund to effect deductions from retirement fund benefits in accordance with the provisions and requirements of the RLAB: • The deduction of any amount due by a member to the member's employer should be made on the date on which the member's employment with a participating employer is terminated • Member may only be permitted to take a savings withdrawal benefit where a judgment in favour of the employer is yet to be executed provided that the withdrawal does not result in insufficient remaining funds to comply with the judgment

24. 24 Content of Bill – GEP Law Clause 24: deals with the payment of pension interest upon divorce or dissolution of marriage according to tenets of religion • proposes that the fund may not, without consent from a non-member spouse permit a withdrawal if the fund is notified that a divorce has been instituted or that a maintenance order against the member is pending if withdrawal will result in there being insufficient funds remaining to comply with a pending order.

25. 25 THANK YOU