National Treasury's Response to 2024 Pension Funds Amendment Bill

1. RESPONSE TO SECOF 2024 PENSION FUNDS AMENDMENT BILL [B3B-2024] PRESENTED BY: National Treasury Date: 16 April 2024

2. 2 Two-Pot Retirement System (2024 Pension Funds Amendment Bill) National Treasury’s response to the Select Committee on Finance (SeCoF) regarding the 2024 Pension Funds Amendment Bill. This response covers submissions by: • ASISA • GEPF • COSATU • Jo-anne Snyders

3. 3 Comment: Request is made that for consistency, the phrases “benefit” and “member’s share” in the Bill should be amended to refer to “minimum individual reserve or member’s individual account”. Response: Not accepted. ‘Benefit’ as defined in the Act refers to an amount payable to a member or beneficiary. A blanket replacement of the term as proposed might not be appropriate. Comment: Clarity is requested on the omission in Section 37D of housing loans by the employer. Response: Section 19(5) empowers funds, not employers, to grant loans or guarantees for acquisition of immovable property. Given the absence of an empowering provision in section 19(5) for employer loans, a correction was therefore made in section 37D to remove reference to housing loans granted by the employer as per section 19(5).

4. 4 Comment: Request that National Treasury together with SARS start engagements on matters related to access to the retirement component in instances of retrenchments, dismissals and resignations, including affordable home and educational loans by members from their pension funds for implementation on 1 March 2025. Response: Noted. National Treasury is willing to start discussions on potential options to allow members access to the retirement component in instances of severe financial distress. However, these discussions are unlikely to be concluded by November 2024 to come into effect in March 2025. Tax changes follow a legislative process that requires changes to first be included in Annexure C of the Budget, after approval then included in the Tax Laws for public consultation and legislative processing in Parliament. Comment: Concerns that the Bill allows for access to pension benefits by multiple parties, thus risking the safety of members’ retirement savings to unscrupulous use. Response: Noted. Retirement fund savings belong to members and beneficiaries. It is important to note that these savings are not held or managed by the government, but by boards of trustees of these funds. Government is, therefore, not in a position to access or utilise retirement fund savings. The amendments also do not permit access to pension funds by multiple parties.

5. 5 Comment: Clarity is requested on the taxation of pension fund pay-outs as members are already required to pay tax while working. Response: Noted. Retirement savings are based on an Exempt-Exempt Taxed (EET) model, meaning that both the contributions to the retirement fund and the returns (growth on investment) are exempt from tax, whereas retirement benefits are subject to tax upon withdrawal. Members are therefore not taxed when contributing to their fund and on the growth of their retirement contributions. Upon withdrawal, special tax rates beneficial to retirement fund members apply on retirement. Comment: Concern that giving people access to pension funds does not solve financial problems but adds towards poverty. Response: Noted. The National Treasury has been inundated with several requests for early access to retirement benefits, from both individuals and organisations, as a relief measure for those financially distressed by the pandemic. Such requests date before the Covid pandemic, hence the proposal to restructure the retirement savings to allow limited withdrawals with most of the savings preserved until retirement. This does not affect retirees. The new system will also increase the preservation of retirement funds, since retirement fund members will not be able to access their retirement fund benefits when resigning.

6. 6 Comment: Request that pension fund members be allowed to make withdrawals to purchase a home and therefore, eliminate the 20 - 30 years of debt that most people are faced with at retirement and have use their pension payout to settle their bonds. Response: Not accepted. Provision of loans and guarantees for acquisition of immovable property is already permissible in terms of section 19 of the Pension Funds Act. However, not all pension funds offer such a facility. Comment: Request for clarity and confirmation on the treatment of fund transfers post-implementation of the two- pot system, whether such transfers should be component-specific. Response Agreed. Funds transfers are dealt with in paragraph 6B to Second Schedule of the Revenue Laws Amendment Bill (RLAB), which states that all components must be transferred together ‘as is’ to the new fund, i.e., savings, retirement and vested components cannot be separated when making a transfer to another fund.

7. 7 Comment: Request for clarity on the treatment of the retirement component in cases of divorce proceedings. Confirmation should be provided on whether the ex-spouse would be entitled to a lump sum from their ex-partner's retirement component or if the amount must be transferred into a retirement component of another fund. Response: Noted. In terms of the PFA Bill (inclusive of the public sector laws) read with the Income Tax Act/RLAB, funds should allocate all permissible deductions proportionally across all components that a member has. The PFA Bill (inclusive of amendments to public sector laws) does not change the status quo on the way amounts deducted to settle divorce orders should be paid to a non-member spouse. Meaning that the request/election will be made by the non-member spouse if the amount to be deducted must be paid directly to the non-member spouse (cash lump sum subject to tax) or if it must be transferred to a fund on the non-member spouse’s behalf. Comment: Clarity is requested on the treatment of retrenchment benefits, i.e., if members would have access to all components as a cash benefit. Response: Noted. The two-pot system introduces preservation of the retirement component until retirement, meaning that no withdrawals or cash payments can be made from the retirement component prior to retirement, unless in cases of death or emigration. Legislative amendments dealing with withdrawals from the retirement component if a member is under severe financial distress will be considered in the second phase of the implementation of the two-pot retirement system.

8. 8 Comment: Clarity is requested on whether the retirement component preserved in-fund can be withdrawn from age 55 similar to treatment by preservation funds or only becomes payable when a member retires. Response: Noted. The law does not permit withdrawals from the retirement component as this pot should be preserved until retirement. Meaning that the retirement component can only be payable when the member retires. Comment: Concern is raised that the retirement component introduces complexities if a member without dependents, dies shortly after retirement. Response: The Bill does not make any changes to the way funds handle death benefit payments. Comment: Concern is raised that the de minimus amount (R165 000) applicable to the purchasing of an annuity from the retirement component is too low and there is a request for it to be increased. Response: Noted. The de minimus threshold has recently been increased. This is a general policy concern, and not specific to the two-pot reform.

9. 9 Comment: Request for clarity on the treatment and allocation of the purchase of service periods in terms of the two-pot system for defined benefit funds. Response: Where years of service are purchased comparable to an additional contribution in defined contribution schemes, it must also be allocated proportionally to the two components. The exact mechanism would be reliant on the funds’ rules. From a tax perspective, such additional contributions or purchasing of service is only deductible if within the allowable deduction rates, i.e., the lesser of 27.5% of gross remuneration or R350,000 per year. Comment: Concern is raised about the practicality of the implementation date of September 2024. Response: Noted. Proposal to change the implementation date from March 2025 to September 2024 was made and adopted by Parliament.

10. 10 THANK YOU!