Two-pot update
Pension Funds Amendment Bill signed into law on 21 July 2024
The Pension Funds Amendment Act provides for the following Two-Pot related changes:
Amendments to the Post and Telecommunications-related Matters Act, 1958, the Transnet Pension Fund Act, 1990 and the Government Employees Pension Law, 1996, in order for the Two-Pot dispensation to apply to retirement funds established in terms of those acts;
To insert various Two-Pot related definitions in the Pension Funds Act, which essentially refer to the relevant definitions in the Income Tax Act;
To provide for savings withdrawal benefits to be deducted from a member’s minimum individual account or minimum individual reserve under section 14B of the Pension Funds Act;
With regard to savings withdrawal benefits:
(a) To permit such withdrawals, where the employer has obtained judgment against the member or the member has in writing acknowledged liability, for damages suffered by the employer as a result of the member’s misconduct, but only if such a benefit will not cause the member’s value in the fund to be insufficient to:
repay any outstanding housing loan granted by the fund, or in respect of which the fund had furnished a guarantee; and
satisfy the employer’s claim.
(b) To permit a fund to suspend any savings withdrawal benefits:
Where an employer has a claim against the member for damages caused by the member’s misconduct, for a period of up to 12 months, if the employer has not yet obtained judgement; or
if a maintenance order against a member is pending and the maintenance officer issues such an instruction,
and where the savings withdrawal benefit will cause the member’s value in the fund to be insufficient to satisfy the pending order.
(c) To provide that a fund may not, without the consent of a member’s spouse, grant a housing loan, or guarantee in respect of a housing loan, or a savings withdrawal benefit to a member if it has received written notice that divorce proceedings had been instituted or that application has been made for a court order in respect of the division of assets of a marriage in accordance with the tenets of any religion.
(d) To provide that a fund may not permit a savings withdrawal benefit to a member, where there is a maintenance order against the fund in respect of the member, unless the fund is satisfied that the remaining value in the fund will be sufficient to satisfy the maintenance order.
FSCA Communication 21 of 2024 – Draft forms for Section 14 transfers
The FSCA has published draft forms to be prescribed under the FSRA Conduct Standard 1 of 2019 (PFA) as changes are necessary to give effect to the Two-Pot system. Interested stakeholders had until 31 July 2024 to submit comments.
The communication also provided clarity to retirement funds and administrators on how to treat transfers from one fund to another in terms of section 14 during the transition to the Two-Pot system.
The communication specifically provides clarity regarding:
(a) seed capital allocation;
(b) payment of saving withdrawal benefits; and
(c) allocation of transfer values across the various components.
Seed Capital Allocation and Payment of Saving Withdrawal Benefits
Any fund that has member assets as 1 September 2024 must calculate seed capital for all members, irrespective of the status of a section 14 transfer, although transferor funds will not in all cases have to pay out savings withdrawal benefits. Tables setting out various scenarios were provided.
Essentially, where a transfer is pending (not yet approved) on 1 September 2024, the transferor fund will have to calculate seed capital and pay savings withdrawal benefits. Where a transfer has been approved, but the assets not yet transferred, the transferor fund will have to calculate seed capital, but since the transfer has been approved, the liability to pay the savings withdrawal benefit has been transferred to the transferee fund (i.e. the transferor fund may not pay such benefits).
In the case of a section 14(8) transfer, the transferor fund must calculate seed capital and pay savings withdrawal benefits until the assets have been transferred.
Schedule of Transfer Values (Appendix 6)
The proposed Appendix 6 provides the format of the transfer schedule containing the necessary membership details. The schedule specifically makes provision for a split between a member’s vested, savings and retirement components.
FSCA Communication 25 of 2024 – Public consultation on the draft Determination of Conditions for Legacy Retirement Annuity Policies to be excluded from the Two–Component System
On 19 July 2024, the FSCA published its draft Determination for conditions for legacy retirement annuity funds to be exempt from the Two-Pot system for comment by 16 August 2024.
A legacy retirement annuity policy is defined in the Income Tax Act as “any policy held by a retirement annuity fund entered before 1 September 2024 with a pre-universal life or universal life construct, subject to such conditions that the Financial Sector Conduct Authority may determine”.
The proposed conditions under which a retirement annuity fund that holds legacy retirement annuity policies may be exempt from the Two-Pot dispensation are the following:
1. The policy must have been issued before 1 September 2024 and such policies must be closed to new members;
2. The policy must be a binding contract that cannot be changed by the fund, the insurer or the member, without the agreement of the other parties
3. The benefit offered by the retirement annuity fund, and insured by the fund with the insurer through the retirement annuity policy, must either be:
a. A sum insured at death or retirement, increased with bonuses declared on a regular basis through the lifetime of the policy, with no cash benefit available on early withdrawal; or
b. A benefit on death that relates to the accumulation of contributions towards retirement, subject to a minimum of a sum insured, chosen by the member, structured in such a way that the premiums for the amount by which the insured sum exceed the retirement contributions sum are deducted from regular contributions as well as from the previously accumulated contributions to retirement over time, depending on the experience of the policy with regard to contributions and investment returns, without the need to remove or reprice the risk over time
4. In addition, the retirement annuity fund must:
a. be able to provide evidence that the application of the two-pot system will result in a significant negative impact on the fair value of certain of the members’ retirement benefits in the fund by –
i. potentially attracting early termination charges, or
ii. policy guarantees being compromised, or
iii. any risk cover that may form part of the policies being compromised;
b. be able to provide evidence that all members are afforded the option to transfer to a different product in the same retirement annuity fund that is subject to the two-component system or to a different retirement annuity fund;
c. ensure that elements of the two-component system do not apply only to a limited group of members of the fund;
d. ensure that the fund rules have been amended accordingly;
e. develop a comprehensive communication strategy with clear communication to all affected members explaining why the fund is acting in the best interest of the members in relying on these conditions;
f. hold a certification from the Head of Actuarial Function of the Insurer that the relevant policies meet the conditions of the definition as set out in this schedule; and
g. be able to provide evidence that the board of the fund has certified that these policies of the fund comply with these conditions.
FSCA’S 3-Year regulation plan
Following a review of its 2023/2024 Regulation Plan, the FSCA published its updated three-year Regulation Plan for the period 1 April 2024 to 31 March 2027 in July.
The revised plan includes:
- Revised timelines on certain projects;
- New deliverables and timelines for the period 1 April 2026 – 31 March 2027;
- Removal of projects that were finalised during the reporting period;
- The addition of new projects of strategic importance;
- The addition of new focus areas. These entail very strategic focus areas where the nature and timing of specific regulatory framework interventions are not quite clear (e.g. because policy work is still underway), but it is very likely that there will be a regulatory framework intervention within the course of the next three years;
- The addition of a discussion on Interpretation Rulings and Guidance Notices.
Key strategic factors driving the development of the Regulation Plan are the following
1. Alignment of regulatory framework with international standards
2. Harmonisation and consolidation of laws governing cross cutting themes and transforming the legislative landscape to one that is more outcomes- and principles-based.
3. Topical and emerging risks, for example, artificial intelligence, crypto assets, sustainable finance, culture and governance, open finance, IT risk, cyber risk and resilience, a focus on vulnerable consumers, Diversity, Equity and Inclusion.
4. Sector specific risks
Primary legislation: COFI Bill
The development of a holistic, cross-sector, robust and customer-focused regulatory framework under the COFI Bill, remains a top priority for the FSCA. The initial high level design of the new framework has been finalised – although it has been noted that this will evolve and be refined over time. Consultation on the themed frameworks will start in the second half of 2024.
Work on transitioning the existing sectoral laws to the COFI Bill will continue through 2024 with the intention of starting engagements with the COFI Bill Transition Working Group during the course of 2025.