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Regulatory update for retirement funds

Regulatory update for retirement funds

Two-pot system

The Revenue Laws Amendment Bill (“RLAB”) (containing the two-pot system changes to the Income Tax Act) went to the Minister of Finance for a response to the Standing Committee on Finance (“SCOF”). The Minister recommended 1 September 2024 as an implementation date and SCOF accepted this date. The RLAB must now go to the National Assembly and thereafter the National Council of Provinces for concurrence. Both the RLAB and Pension Funds Bill (containing amendments to the Pension Funds Act related to the two-pot system) will be tabled on 8 February 2024 when Parliament re-convenes.

The FSCA intends to publish a Guidance Notice (or other instrument) in December 2023 setting out the principles of what should be in the fund rules to address the two-pot system.

Conduct of Financial Institutions Bill (“COFI”)

COFI contains far-reaching changes for financial institutions, including retirement funds. National Treasury has received the final certificate to request Cabinet to approve the introduction of COFI to Parliament, however, National Treasury has yet to receive the required certification from the State Law Advisor. COFI remains a priority and National Treasury aims to introduce it to Parliament in the first quarter of 2024. The implementation of the COFI requirements will be phased-in and there will not be a big bang approach.

The Omni Conduct of Business Return

As a reminder, The FSCA issued its draft Omni Conduct of Business Return (“Omni CBR”) in June 2022. This was the first phase in a process that was designed to end in June 2026, with many financial institutions, including retirement funds, administrators and Financial Services Providers, submitting online quarterly answers (returns) to the FSCA on an extensive list of questions (risk indicators). This will be the cornerstone of the FSCA’s supervisory approach.

Recently, the FSCA published Communication 33 of 2023 ‘Update on roll-out and implementation of cross-sectoral Conduct of Business Return for financial institutions’, which provides that the FSCA will issue an updated timeline for the roll out of the Omni CBR in 2024 (with updates being provided in July 2024).

The FSCA provided times for certain actions as follows, which times may change depending on when COFI is enacted:

- continuation of industry engagements on the current version of the Omni CBR until 1 April 2024;
- publishing a revised version of the Omni CBR spreadsheet template by 1 July 2024;
- publishing an industry survey on the impact of the revised Omni CBR by 1 July 2024;
- launch of the industry pilot in the second half of 2024.

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Update: Two-pot System

Update: Two-pot System

Are we back to 1 March 2024?

What happened at the Standing Committee on Finance (SCOF) on 21 November?

It was an interesting day at the Standing Committee on Finance (SCOF) on 21 November, with SCOF not accepting Treasury’s proposal to move the two-pot implementation date from 1 March 2024 to 1 March 2025 and retaining the 1 March 2024 date.

Is this decision now final?

This decision is still not final. It will go to the Minister of Finance for 14 days for comment. The Minister of Finance does not have the power to make a different decision. Then the Bill (including the date) will go back to SCOF for a final decision. The Bill will also need to pass through the National Assembly and the National Council of Provinces.

When will the two-pot legislation be finalised?

We still do not know when we will see the final version of the two-pot legislation (Revenue Laws Amendment Bill) and we still do not know when we will see the final version of the Bill which contains the changes to the Pension Fund Act necessary to implement the two-pot system.

Legacy retirement annuity funds can be exempted

All Treasury’s other proposals (barring the date) were accepted by SCOF. We discussed these changes in a previous publication, for example:

- The cap on the 10% seeded amount proposed to be increased from R25 000 to R30 000.
- Provident fund members who were 55 or older on 1 March 2021 (and still in the same fund) proposed to be automatically out of the two-pot system and can decide to opt in.
- Proposed exemptions from the two-pot system for older members (as referred to above), legacy retirement annuity funds (as approved by the Financial Sector Conduct Authority), beneficiary funds, unclaimed benefit funds, and pensioners.

Other discussions at SCOF on 21 November, included:

- The mechanism for the taxation of savings withdrawals (which are taxed at marginal rates), including a fixed nominal rate and a tax directive process; and
- The taxation mechanism for inter and intra fund transfers between pots.

There could still be changes

The 1 March 2024 implementation date decision is not yet final. The Income Tax Act and Pension Funds Act amendments for the two-pot system have not been finalised. Uncertainty still prevails. This makes preparation for administrators, funds, and others fraught with difficulty, uncertainty, and risk. In addition, the very necessary communication required about the two-pot system cannot be finalised.

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Update: Regulatory issues for retirement funds

Update: Regulatory issues for retirement funds

Two-pot system
Conduct of Financial Institutions Bill
Draft Interpretation Ruling
Omni Conduct of Business Return
Quarterly unclaimed benefit returns to the Financial Sector Conduct Authority
Treating Customers Fairly (TCF) Questionnaire

1. Two-pot system update

Treasury has presented its updated proposals on the two-pot system to the Standing Committee on Finance. On 1 November 2023, Treasury released the next version of the Revenue Laws Amendment Bill (RLAB), which is the draft Bill that contains the two-pot system legislation.

The RLAB will go to the Select Committee on Finance on 21 November 2023. It is at this stage that there could be some important decisions made as to whether to accept Treasury’s two-pot proposals. Recently, Treasury stated in an industry meeting that the RLAB would only be gazetted in 2024.

Part of Treasury’s proposals is to move the implementation date of the two-pot system from 1 March 2024 to 1 March 2025 and this date is included throughout the revised RLAB. However, that date is not yet a done deal. It seems extremely unlikely, however, for Government to continue with a 1 March 2024 implementation date if the final legislation is only gazetted next year.

Proposed changes to the two-pot system

The following proposed changes to the two-pot system, among others, have been included in the latest draft of the RLAB:

Seeding

The seeded amount is a once -off event and it is 10% of the vested pot on 28 February 2025, capped at R30 000 (previously R25 000). Treasury stated that it amended the cap as an inflationary adjustment to the R25 000 originally proposed.

It is important for the fund to know whether the seeded amount reduces the compulsory annuitisation non-vested or vested portion of the vested pot. This has been clarified as follows:

For members of provident funds and preservation provident funds under 55 on 1 March 2021:

What is “seeding”?

Seeding is the amount of the vested pot (everything built-up in the fund by a member up to 28 February 2025) that transfers into the savings pot on 1 March 2025 and that a member can immediately access in cash, without leaving employment or the fund.

the seeded amount will come out of the annuitisation vested and non-vested parts of the vested pot proportionately.

For members of provident funds 55 and over on 1 March 2021 (and still members of the same provident fund): these members only have vested amounts in their vested pot, so seeded amounts come out of their vested amounts.

Opt in or opt out?

Members of provident funds who were 55 and older on 1 March 2021 (and still members of the same provident fund) [1] will now be able to opt into the two-pot system as opposed to opting out of the two-pot system. So, the default is that these members are out of the two-pot system. This is a reversal of the previous position.

Opting in appears to be a once-off option, but the option does not need to be made by these members on or before 1 March 2025. It could be made at any time. If a decision is made to opt in after 1 March 2025, the seeded amount is still calculated as of 1 March 2025.

[1] There is inconsistency in the wording of the Bill across provisions about including the requirement for such older members to still be members of the same provident fund. This may be a drafting issue.

Who could be exempted from the two-pot system?

The following entities or persons may be exempted from the two-pot system: a “legacy retirement annuity policy’’ (in a Retirement Annuity Fund) approved for exemption by the Financial Sector Conduct Authority (FSCA), a beneficiary fund, an unclaimed benefit fund and a fund pensioner.

The tax mechanism for savings withdrawals from the savings pot

The RLAB now contains provisions for the South African Revenue Service (SARS) to issue the fund’s administrator with a fixed rate to tax the savings withdrawal. SARS will need to provide more information to the industry as to how this will work in practice.

Savings withdrawals from the savings pot are taxable at the member’s marginal rate. This has not changed.

More flexibility for defined benefit funds

More flexibility has been drafted into the RLAB for calculating the one-third/ two third split when contributions are paid into a defined benefit fund. If a defined benefit fund can’t do the split based on pensionable service, the RLAB allows for the fund to allocate contributions utilising a reasonable method of allocation, as approved by the FSCA.

How does the two-pot system apply on death?

Treasury’s intention is to maintain the status quo in relation to death benefits. So, after the two-pot system is implemented, beneficiaries would still be able to decide to take their whole death benefit allocation either as an annuity or as a cash lump sum.

Section 37D deductions

Deductions related to housing loans/ guarantees, maintenance orders, divorce orders and theft/fraud/dishonesty against the employer can now be made proportionately from all three pots, including the savings pot (previously deductions were only permissible from the retirement pot and vested pot).

A non-member spouse’s pension interest

When a non-member spouse decides to transfer their pension interest to another fund (after a divorce), it is transferred from the same pot in the transferring fund to the same pot in the receiving fund, or from the vested or savings pot in the transferring fund to the retirement pot in the receiving fund (as decided by the non-member spouse).

2. Conduct of Financial Institutions Bill (COFI)

The State Law Advisors have substantive queries on COFI, necessitating further work. Thus, COFI will not be tabled in 2023.

3. Draft Interpretation Ruling

As dealt with in a previous edition, the FSCA issued FSCA Communication 20 OF 2023 (RF) and a draft Interpretation Ruling intended to replace the current Interpretation Ruling 1 of 2020. This current Interpretation Ruling, which took effect on 25 March 2020, is an interpretation of section 37C of the Act affecting paid-up members, unclaimed benefit members and deferred retirees. The FSCA believes that it made an error in its interpretation of section 37C about unclaimed benefits and wants to replace the existing Interpretation Ruling with a revised version.

The FSCA is currently reviewing the submissions received from the industry. The FSCA mentioned that the existing Interpretation Ruling might be withdrawn and replaced in the first half of December 2023.

4. Omni Conduct of Business Return

The Omni CBR has been delayed and timelines for implementation will be extended.

The FSCA is considering whether to have a different version of the Omni Conduct of Business Return for retirement funds and benefit administrators, as compared to other types of financial institutions.

5. Quarterly unclaimed benefit returns to the FSCA

The FSCA:

- Encourages all funds to ensure they submit their quarterly unclaimed benefits information on time, every time, and accurately;
- Is considering issuing penalties against funds that do not do so; and
- Reminds funds to ensure they update the quarterly return for claims that have been paid.

6. Treating Customers Fairly (TCF) Questionnaire

Many funds have received, from the FSCA, a TCF questionnaire to complete, sometimes as part of a desktop review. The FSCA has stated that it will forward a TCF Questionnaire to all funds that have not yet completed one. It will issue a general communication on the results in March/April 2024.

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Treasury: Two-pot System

Treasury: Two-pot System

Treasury proposes changes to the two-pot system

On 25 October 2023, the National Treasury and SARS presented to the Standing Committee on Finance (ScoF) the Tax Bills, including on the draft legislation that incorporates the two-pot system legislation.

The presentation included a Draft Response Document containing a summary of draft responses from the National Treasury and SARS to public comments received during consultation.

Once the responses have been considered by SCoF, they will be presented to the Minister of Finance for approval, including to approve consequential amendments to the 2023 Draft Tax Bills before formal tabling in Parliament.

We may see some announcements about the two-pot system made in the Medium-Term Budget Policy Statement on 1 November 2023. We may also see the revised Revenue Laws Amendment Bill early in November 2023.

The changes are proposed and not final.

The main proposed changes

Postponing the effective date from

1 March 2024 to
1 March 2025

The cap on the selected amount proposed to be increased from

R25 000 to R30 000

Provident fund members who were 55 or over on 1 March 2021 and who are still members of the same provident fund: to be automatically opted out of the two-pot system but can choose to opt in

Other proposed changes

- It is proposed that the seed capital will be taken proportionately from the annuitisation vested and non-vested benefits in the vested pot when it is moved to the savings pot.
- Lump sum death benefits to remain as they are. Beneficiaries can still choose to take a lump sum or an annuity, as they currently can (their choice).
- No staggering allowed for payment of savings withdrawals from savings pots.
- Exemptions from the two-pot system proposed to be permitted for: funds with no active participating members, funds in liquidation, beneficiary funds, closed funds, and dormant funds as well as pensioners.
- All amounts credited or allocated to the member’s account in the fund after implementation date will be split one-third to the savings pot and two-thirds to the retirement pot.
- Taxation of savings withdrawals from the savings pot is proposed to remain taxable at the member’s marginal rate. SARS will look at a method of notifying a tax rate to funds.
- When a member ceases tax residence in South Africa, it is proposed for pension and provident funds that:
  - The vested pot can be withdrawn (subject to taxation regarding the lump sum withdrawal tax tables).
  - The savings pot can be taken on exit and will be taxed at marginal rates (subject to treaty provisions); and
  - The retirement pot can only be taken by the member after three years and will be taxed according to the relevant lump sum tax table (subject to treaty provisions).
- The member has three options for any amounts remaining in the savings pot on retirement:
  - Take the savings pot in cash (taxed according to the retirement lump sum benefits table).
  - Transfer all or some of the savings pot to the retirement component and annuitise it; and
  - After taking some in cash or transferring some to the retirement pot, the member can choose to leave some amount in the savings pot and take withdrawals from it after retirement. These will, be taxed at marginal rates.
- Section 37D deductions for housing loans/ guarantees, maintenance orders, divorce orders, and misconduct at the employer will be made proportionately across the savings pot, vested pot, and retirement pot.

More information awaited

The longer period proposed will aid effective implementation and member communication. We will have to wait and see what the final version of the legislation holds for us.

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FSCA UPDATES: Training Toolkit & Section 37C & arrears

FSCA Training Toolkit | Section 37C | arrears contributions