Two component checklist for retirement funds

by Johan Gouws | 29,May,2024 | Q2 2024, Sasfin, Special Feature

Herman van Papendorp

With both the Pension Funds Amendment Bill and the Revenue Laws Amendment Bill having been passed by the National Treasury, the President must sign the bills into law. However, a few steps remain in finalising the implementation of the Two Component system, which includes legislative changes to the Income Tax Act (1962) and Government Employees Pension Law. Considering these changes, the systems and process development required by administrators and the looming national elections on 29 May, the real possibility exists that the intended implementation on 1 September 2024 may not materialise.

However, sufficient details are now available for boards of trustees and management committees of retirement funds to apply their minds to what the introduction of the Two Component system means for them. The following are a few key aspects that need to be considered in ensuring a smooth transition that will serve the best interests of fund members.

Alignment of all stakeholders

A retirement fund has various stakeholders and with the material changes to be implemented through the adoption of the Two Component system, all stakeholders must be aligned in what, when and how the necessary changes will be implemented. The board of trustees or management committee, the employee benefits consultant, human resources, the investment consultant or advisor, and the retirement fund benefit administrator should work in cohesion to achieve a satisfactory outcome for members. This will require agreement on the role each party has to play and clear communication regarding what needs to be achieved and the progress on each deliverable. Where necessary, some adjustments may be required to the service level agreements between the fund and the service providers to ensure that all future service requirements of the fund are covered. This could also result in negotiations and adjustments to the fees charged by the various service providers to the fund.


Fund rule amendments

An application needs to be made by each retirement fund for amending the fund rules to accommodate the necessary changes required for the implementation of the Two Component system. The Financial Sector Conduct Authority (FSCA) published a set of requirements regarding the retirement fund rule amendments (Communication 3 of 2024) and how applications will be dealt with. Funds need to ensure that their rules are amended and timeously approved by the FSCA by making their submission sooner rather than later. The rule amendment application window is open until 1 September 2024 and the employee benefit consultant will be able to guide the board or management committee on the necessary changes required as well as the application process. When it comes to defined benefit funds the input of the actuary will be critical in terms of any changes required to the fund rules.

 Member communication and education

Even though the intended Two Component implementation date of 1 September 2024 is still months away, it is important to educate and manage the expectations of all fund members. Many members are already enquiring about gaining access to their savings component as a result of their personal financial circumstances. How much they will be able to access and what the application process for withdrawals entails needs to be clearly explained in easy and accessible ways using a multi-pronged communication strategy consisting of workshops, posters, videos and electronic communications. It will be critical to create a clear understanding with members about the seeding amount that will be allocated to their savings component on day 1, the withdrawals that can be made and how often, as well as any potential tax deductions on withdrawal.

 Members should not expect any withdrawal benefits to be paid on Day 1 as the member withdrawal applications will have to be processed, tax directives obtained from SARS, unit sale instructions processed by the fund administrator and asset managers before payment can be made into the member’s bank account. The withdrawal implications and long term impact on a member’s net replacement ratio as a measure of their readiness for retirement and the reduction in the tax free benefits at retirement also need to be emphasised from the start. Fund member communication templates will also have to be updated for new and existing retirement fund members.

Investment strategy changes

The investment objectives and default investment strategy of retirement funds should not require any change. This should avoid adding additional complexity to the administrative challenges that 13B fund administrators will face. A possible change that retirement funds may consider is adding an option for members to opt out of the default investment strategy on the savings component of their benefits where members are looking to make regular withdrawals. This will require a change in the investment strategy by passing a resolution and amending the fund’s investment policy statement. The investment consultant will be able to guide retirement fund trustees and committees member in this regard.

 The redesign of investment option forms may be required to cater for withdrawal instructions and member choice portfolios on the savings component before implementation of the Two Component system. An engagement with the retirement fund benefit administrator will be required to confirm if the administrator has the necessary administrative capabilities to accommodate the fund’s default investment strategy across the various components and any changes required to the strategy.


Trustees and management committees should make sure that they, together with the employer’s human resource support function, are well informed on what the Two Component system changes entail. This includes changes from a fund rules and benefits, taxation, investment strategy, administrative, operational and communication policy perspective. The EB consultant, investment consultant, human resource department and retirement fund benefit administrator should all be approached to contribute to compiling the necessary training material.

 Day 1 requirements

Day one of the Two Component system is still some way off, but thought should be given to the practical implications of the changes to be implemented. On implementation date several events will have to be catered for and planning for these events will be important to make the transition as seamless as possible. New fund rules will take effect, seeding capital will be transferred from the vested to the savings component and members will be allowed to make their first withdrawal from their savings component. Retirement funds will need some indication of how much seeding money will be allocated to the savings component and how much of this might be withdrawn by fund members on Day 1. The retirement fund benefit administrator will be able to provide information at fund and member level to ascertain, with some degree of certainty, the value of the benefits that will flow upon implementation.

 The board or management committee needs to have a view of the number of members who will be capped at the R30 000 maximum based on their total benefit value and how many members could be expected to possibly make a withdrawal based on the average remuneration levels. With a rush of withdrawals expected from many of the six million members of retirement funds in South Africa, a once off relaxation of service level timing standards might have to be negotiated by retirement fund benefit administrators. Asset managers may have to manage challenges in liquidating sufficient investments to meet the withdrawal payments to fund members without negatively impacting remaining investors.

 Collective effort required

Preparing for the implementation of the Two Component system goes beyond just the board of trustees and management committees of retirement funds. All retirement fund industry service providers and stakeholders, including the Regulator and SARS, will have to make sure they are ready to meet any challenges the new system may pose. This collective effort is vital for maintaining the trust of fund members and achieving the dual objectives of the Two Component retirement system: enhancing preservation and providing assistance to members facing economic hardships.

Johan Gouws
Head of Advice at Sasfin Wealth | + posts