Proposals Affecting the Retirement Fund Industry
Regulation 28
Regulation 28 of the Pension Funds Act (1956) provides maximum investment limits for retirement funds. The Minister of Finance initiated a process to amend this regulation to enable greater infrastructure investment by retirement funds and improve data reporting on such investment by the funds. The amendments have been through two rounds of public consultations and will be gazetted into law by March 2022.
Comment: This is to be welcomed as it makes it easier for retirement funds to invest in infrastructure projects, without the regulation being prescriptive in this regard.
Capital flows management framework – Institutional investors
The offshore limit for all insurance, retirement and savings funds is harmonised at 45% inclusive of the 10% African allowance. The previous maximum limits were set at 30% or 40% for different investors.
Comment: Since the late 1990s, there has been a gradual increase in foreign exposure limits which allows for greater flexibility and is to be welcomed.
Two‐pot retirement system
The discussion paper entitled Encouraging South African Households to Save More for Retirement was published in December 2021. It outlines a set of reforms to enable pre‐retirement access to a portion of a member’s retirement savings while ensuring that the remainder is preserved for retirement. Public comments on the tax treatment of contributions to the two-pots are being reviewed in preparation for public workshops, to be followed by legislative amendments, which will be published for comment in the middle of the year.
Part of this proposal includes the possibility of short-term access, which would be dependent on the approval by trustees of each fund.
Comment: The two-pot system has been welcomed by the industry as it will lead to increased preservation of retirement savings which will ultimately lead to better retirement outcomes.
Governance of Umbrella Funds
National Treasury in December 2021 issued a discussion paper titled Governance of Umbrella Funds, which seeks to improve the governance of retirement funds, particularly for commercial umbrella funds. The minister said that work on the above will continue during 2022.
Comment: The focus on umbrella funds illustrates their growing importance in the retirement fund industry.
Reviewing the transfer of total interest in a retirement annuity fund
The Income Tax Act allows members of retirement funds to transfer their retirement interest from one retirement fund to another. This provision is subject to certain conditions, for example, if the individual is transferring to a similar type of retirement fund or from a less restrictive to a more restrictive retirement fund and – in the case of retirement annuity funds – if the total interest in the transferor fund is transferred.
These conditions result in retirement annuity fund members with more than one contract in a particular fund being restricted from transferring one or more contracts from one retirement annuity fund to another. However, members of a preservation fund are not restricted on the proportion of their retirement interest that can be transferred into another fund. To address this anomaly, government proposes changing the legislation to allow fund members to transfer one or more contracts in a particular retirement annuity fund, subject to certain conditions to ensure that the current minimum thresholds are not contravened.
Comment: This proposal supports portability of retirement fund benefits, which is welcomed by the retirement fund industry. Furthermore, from a retirement planning perspective, this change is welcomed because there may be sound reasons for the member to only transfer one of his/her contracts in the retirement annuity fund to another retirement annuity fund.
Clarifying the compulsory annuitisation and protection of vested rights when transferring to a public‐sector fund
The T-day (compulsory annuitisation) amendments came into effect on 1 March 2021, subject to the protection of vested rights. As a result, historical vested rights (those that arose before 1 March 2021) were segregated from new rights (those arising after 1 March 2021). Historical vested rights may be transferred into another retirement fund without forfeiting their vested rights protection (irrespective of the number of transfers effected). It has come to government’s attention that the unintended consequence of the current provisions is that the protection of historical vested rights would be forfeited if a transfer is made into a public‐sector fund. This is because the pension fund and provident fund definitions do not make any reference to the protection of vested rights for individuals who were members of a provident or provident preservation fund as at 1 March 2021.
To address this anomaly, Government proposes amending the pension and provident fund definitions to ensure that historical vested rights remain protected even if they are transferred to a public‐sector fund.
Comment: Addressing this anomaly is welcomed.
Clarifying paragraph (eA) of gross income regarding public‐sector funds
In 2021, the retirement reforms that require mandatory annuities for provident funds came into effect. These reforms included amendments that cater for public‐sector pension funds that operate like provident funds. As such, with effect from 1 March 2021, members of provident funds (including public‐sector pension funds that operate like provident funds) are required to receive their benefits as annuities on retirement. At issue is the fact that, despite the above‐mentioned changes regarding the annuitisation of public‐sector funds, paragraph (eA) of the definition of gross income in section 1 does not mention public‐sector funds that fall within paragraph (a) of the definition of provident fund. Government proposes that paragraph (eA) be clarified to ensure that gross income includes all public‐sector funds.
These amendments will take effect from 1 March 2022.
Comment: This clarifies that the intention is for annuitisation to also apply to public sector funds. However, the proposed amendment would in our view not resolve the current uncertainty in this regard. Furthermore, any correction in this regard should be made retrospectively, with effect from 1 March 2021 and not 1 March 2022 as mentioned above.
Retirement of a provident fund member on grounds other than ill health
In 2021, the retirement reforms that require mandatory annuities for provident funds came into effect. As a result, it is no longer necessary to differentiate between a pension and provident fund for retirement purposes, as these funds now operate in the same way. Paragraph 4(3) of the Second Schedule to the Income Tax Act treats pension and provident funds differently. According to this paragraph, if a member of a provident fund who is younger than 55 retires from that fund for reasons other than ill health, any lump sum received shall be taxed as a withdrawal benefit rather than a retirement benefit. This does not apply to members of pension or retirement annuity funds. To address this anomaly, government proposes to delete paragraph 4(3) of the Second Schedule to the Act.
Comment: This proposal is in line with the general harmonisation of retirement funds.
Clarifying the applicability of tax‐neutral transfers from a pension to a provident fund
Before the mandatory annuitisation of provident funds came into effect in 2021, transfers to a provident or provident preservation fund would be taxable if the transfer was made from a fund that had mandatory annuitisation requirements. From 1 March 2021, and in accordance with paragraph 6(1)(a) of the Second Schedule to the Income Tax Act, transfers to a provident or provident preservation fund would be tax‐neutral irrespective of the type of retirement fund from which the retirement interests were transferred. Both before and after 1 March 2021, the policy intent is for these transfers to be tax neutral.
It has come to government’s attention that the current provisions of paragraph 6(1)(a) create an anomaly: transfers from a pension fund to a provident fund related to contributions made before 1 March 2021 are not tax neutral. Government proposes that contributions to a pension fund before 1 March 2021 also receive tax‐neutral transfer status.
Cross‐border tax treatment of retirement funds
Consultation on last year’s proposal regarding the tax treatment of retirement interest when changing tax residence showed that multiple tax treaties need to be revised to ensure South Africa retains taxing rights on payments from local retirement funds. Government intends to initiate these negotiations this year.
Comment: We foresee that this proposal will not be easy to implement given the fact that there are numerous tax treaties that will have to be renegotiated with various countries.