National Treasury has invited comments on a set of four draft Tax Bills, which give effect to the 2022 Budget tax proposals, including the 2022 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, the 2022 Draft Revenue Laws Amendment Bill, the 2022 Draft Taxation Laws Amendment Bill and the 2022 Draft Tax Administration Laws Amendment Bill.

Specifically, the 2022 Draft Revenue Laws Amendment Bill contains key amendments on retirement reform to move towards a “two-pot” retirement system.

"The proposal is for retirement funds to direct one-third of their retirement contributions to a savings pot [while] two-thirds [will be] preserved in a retirement pot. Pre-implementation date vested rights will be preserved. Offering of the savings pot will be subject to fund rules, meaning it will not be compulsory and a member may opt out of the savings pot.

"A minimum of R2 000 may be withdrawn in a 12-month cycle, with no conditions attached to withdrawals from the savings pot, subject to fund charges and tax. No pre-retirement withdrawals will be permissible from the retirement pot. Transfers of the savings and retirement pots between funds is allowed," the Treasury said.

The amendments will enable South Africans to also save for non-retirement purposes, such as emergencies, using their retirement funds, while preserving more of their savings for retirement.

"These amendments aim to encourage members to preserve their retirement savings by making it more flexible to accommodate unforeseen pressures that members face during the span of their working life.

“It makes it possible for workers not to resign from their employment merely to access their retirement funds and would have assisted members during a crisis like the Covid-19 pandemic, when many employees faced reduced salaries or were not paid at all during that time," the Treasury stated.

"Government is of the view that the two-pot system option will present a better balance between ensuring preservation of retirement savings and allowing some withdrawals through a savings vehicle incorporated into the retirement funds. The December 2021 paper 'Encouraging South African households to save more for retirement' includes other options considered to assist fund members in the state of emergency."

The proposed 2023 implementation date is optimistic, because fund rules need to be changed, there will be systems changes within retirement funds to enable the two-pot system and the South African Revenue Service also needs to create capacity to cater for the new pots and track withdrawals.

Further, retirement funds must train employees and educate fund members about the reform and its implication.

Meanwhile, Finance Minister Enoch Godongwana also confirmed the intention of further retirement reforms related to auto-enrolment, or mandatory, and greater consolidation of retirement funds. Consultations for these reforms will continue over the next year, and legislative proposals finalised in 2023 for tabling in Parliament.

Treasury is also exploring complementary measures to better incentivise long-term savings alongside better financial planning and advice to promote higher levels of saving and preservation, including progressively increasing the percentage saved, for example from 12% to 15% of income, Treasury said.

RATIONALE
The amendments in the draft Bill seek to implement the remaining pre-retirement preservation proposal, as part of the longer-term retirement reform project.

There are two primary concerns with the current design of the retirement system. The first is the lack of preservation before retirement, which has been highlighted in previous discussion papers. Individuals can access their pension funds and provident funds, in full, when changing or leaving a job. In some cases, it can create an incentive to leave employment to gain access to those funds in the short-term, putting their long-term retirement savings, and eventual ability to maintain their standard of living at retirement at risk.

"The second issue is that some households in financial distress have assets within their retirement funds that are not accessible, even in case of emergencies. This issue has become more prominent since the Covid-19 pandemic, with numerous calls for financially distressed individuals to be given some level of access to their retirement funds to alleviate financial hardship," Treasury pointed out.

On December 15, 2021, government published a discussion document entitled 'Encouraging South Africans to save more for retirement', which proposed a new retirement fund regime that aims to address both concerns. This would be in the form of a “two-pot” system for retirement savings. Individuals can contribute to a one-third “savings pot”, which is accessible without changing their employment status, and a two-third “retirement pot” which must be preserved until retirement.

"The aim is to have a system that will allow resources to be available when needed, but that will also increase the overall level of savings that are dedicated to retirement.

"Government has consulted widely with labour unions, fund administrators, industry, and other experts, before finalising the draft legislative proposals. It is recognised that in allowing for a withdrawal option, many funds may face liquidity risks on implementation," Treasury said.

It is also recognised that any new system would take time to implement, as they require changes to systems and fund rules, and will also mean that funds will face new and higher costs.

Many workers have low levels of savings, as they have accessed all their previous savings when they changed jobs or resigned from their jobs. For example, according to Association for Savings and Investment South Africa, about 61% of fund members had an average of R37 000 or less in total retirement savings in July 2020.

The proposal does not include allowing immediate access to retirement funds, but rather moves to a system that can more adequately cater for emergencies in the future but should also increase preservation to improve retirement outcomes.

The key risks that counteract allowing immediate withdrawals include risks of members drawing down a substantial part of their retirement saving, leaving them more vulnerable when they retire, and risks of lower investment returns for members as more funds are withdrawn and less of their savings are invested.

Additionally, key risks that counteract retirement savings growth include risks to financial viability of specific funds and fund types that were not designed to accommodate such a withdrawal, and risks of liquidity runs on some funds alongside a negative shock on asset prices on the implementation date or soon after.