Here is the new retirement system planned for South Africa

National Treasury acting director-general Ismail Momoniat has provided a breakdown of the government’s plans for a new two-pot retirement system, governance of umbrella funds and changes to existing regulations.
As part of his presentation, Momoniat focused on five main areas, including the new retirement system for South Africa and the government’s plans to address flaws in the current system. Legal firm Webber Wentzel provided a further breakdown of each section below.

Two-pot system proposal
On the two-pot system proposal, which entails creating a savings portion and a preservation portion in each retirement “pot”, Momoniat highlighted this was necessary to prevent employees from resigning in order to gain access to their retirement savings to pay off debt.
The proposal is to split contributions into two pots for all retirement funds:

1/3 accessible savings pot
2/3 retirement pot subject to full preservation until retirement

In practice, a member could withdraw once a year from their savings pot, subject to a minimum, but will incur the cost of withdrawal and a tax liability. Vested rights accumulated prior to implementation of the two-pot system will remain subject to the current rules.
A draft bill on the two-pot system proposal is expected to be published in July when the annual tax amendment bills are circulated for comment. Treasury initially proposed that the two-pot system would be implemented by 1 March 2023.
However, this is likely to be delayed. A more realistic time horizon is probably 3 to 5 years, as systems will need to be changed and liquidity in the funds addressed.
Creating a more sustainable retirement regime will not occur overnight, and widespread consultation is taking place to understand the effect of the proposed changes, Momoniat said.

Governance of umbrella funds
As it is uneconomical for smaller employers to maintain a retirement fund for their employees, they often join a multi-employer retirement fund, or umbrella fund.
Momoniat said some of the governance issues that have arisen with umbrella funds include employers not paying contributions, the inability of employers to switch between umbrella funds, costs, over-dependence on service providers for advice and the appointment of board members who are also consultants/service providers to the same fund.
Proposed solutions include requiring that board members cannot belong to more than three boards in a year, prescribing an ongoing value-for-money evaluation of the umbrella fund, and a disclosure-based initiative requiring funds to provide information on their cost structures.
There should also be standardised provision of information to enable employers to make comparisons and promote competition among umbrella funds.
Momoniat said South Africa could implement elements of the UK Master Trust Scheme and the Chilean Pension auction system to enable stand-alone funds to select and appoint default “consolidation” or auto-enrolment funds when they need them. These elements would be regulated under the auspices of the Financial Sector Conduct Authority (FSCA).

Phased-in auto-enrolment to address lack of retirement savings
Many South Africans (such as contract or “gig” workers) are not currently members of occupational schemes since many retirement systems are based on regular income.
Momoniat said the government is considering phasing in auto-enrolment, starting with formal salaried workers, or introducing mandatory retirement provisions for all formally employed workers.
This would compel employers to deduct contributions to an occupational fund for all their employees. Employers need not establish new funds, and there could be a default fund for employers who do not have one.

CoFI Bill
The Conduct of Financial Institutions (CoFI) Bill will be tabled in parliament later this year. The Financial Sector Regulation Act (FSRA) gives customers and financial institutions an indication of what to expect from financial sector regulators, while the CoFI Bill outlines what customers and industry stakeholders can expect from financial institutions.
The Pension Funds Act (PFA) is being amended to align with the CoFI Bill and the overall framework in terms of the FSRA. The PFA will be renamed the “Retirement Funds Act”, to better reflect the types of funds which are provided for and regulated by this statute.
References to “pension fund organisation” and “fund” are being amended to refer to “retirement fund”. Umbrella funds and employers as supervised entities will be recognised.
Momoniat said that all public sector retirement funds, including the Government Employees Pension Fund (GEPF) will be subject to the same legislative and regulatory requirements, to ensure that members of all retirement funds enjoy similar protections and rights.
He said that the unique features of the GEPF, such as its size, potential impact in complying with asset limits under Regulation 28 and the impact on bond and equity markets, may necessitate exempting it from certain PFA requirements, either for a specified period or permanently.

Regulation 28
The main purpose of Regulation 28 is to protect retirement funds and their members from the effects of poorly diversified investment portfolios. This is done by limiting the fund’s maximum exposure to more aggressive asset classes.
Momoniat said final amendments to Regulation 28 include prohibiting investments in crypto assets until their regulation is formalised and broadening the definition of “infrastructure” to include both public and private infrastructure.
In line with the increase in allowable overall private equity exposure from 10% to 15%, the limit to the aggregate private equity exposure is being increased from 15% to 20%.
One of the proposed amendments to Regulation 28 is that the housing loans limit be reduced to 65% (from the current 95%) in line with the government’s stance on discouraging housing loans through retirement funds.
National Treasury believes this mechanism has been abused, and the first step to address this is to reduce the allowable loan percentage. In the long term, Treasury believes this mechanism should no longer be allowed in line with the availability of the savings pot
Analysis by Joon Chong (partner) and Raeesah Shaik (candidate attorney) at Webber Wentzel.

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