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LEGAL NOTE: JULY 2024 FSCA COMMUNICATION 21 OF 2024

On 5 August 2019, the FSCA published FSRA Conduct Standard 1 of 2019 (PFA) - Conditions for amalgamations and transfers in terms of section 14 of the Pension Funds Act (S14 Conduct Standard). The S14 Conduct Standard prescribes conditions for amalgamations and transfers, as well as the various forms that pension funds must complete when applying, in terms of section 14.


The Minister of Finance is in the process of finalising amendments to Regulations under the PFA to give effect to the so-called Two-Pot system. These amendments will result in misalignment between the current prescribed section 14 application forms and the Two Pot Regulations, as the current section 14 application forms do not provide allowance for the transfer value in relation to the two-pot system. The section 14 application forms only allow for a single transfer value, whereas the implementation of the Two Pot Regulations will require the transfer value to be differentiated in two parts in the forms. As such the section 14 application forms will have to be revised.


This prompted the FSCA to on 8 May 2024 publish draft amendments to FSRA Conduct Standard 1 of 2019 (PFA) – Conditions for amalgamations and transfers in terms of section 14 of the Pension Funds Act, 1956 (Act No. 24 of 1956) (Draft Amendments) for public comment, with comments due on 19 June 2024.


The Draft Amendments propose to:


a)      Remove the Section 14 application forms from the S14 Conduct Standard itself.

b)     Enable the FSCA to determine the manner of submission, content and format of the section 14 application forms (in line with section 108(2) of the FSR Act).


The intention is to, once the Draft Amendments to the S14 Conduct Standard take effect, determine the section 14 application forms separately by notice on the FSCA’s website. As explained in paragraph 3.4 of FSCA Communication 18 of 2024(RF)2, the amendments to the revised section 14 application forms will be consulted on separately to the necessary legislative amendment and as a parallel process, to avoid any delays in consultation on the proposed legislative change. Consultation with stakeholders on the proposed changes to the section 14 application forms is in process. 


In support of the proposed Draft Amendments which includes enabling the FSCA to determine the manner of submission, content and format of the section 14 application forms, the FSCA proposes to amend the forms that were previously prescribed through S14 Conduct Standard. As such the FSCA has invited industry bodies to submit their comments and suggestions.


CLARIFICATION ON THE TREATMENT OF SECTION 14 TRANSFERS WITH THE IMPLEMENTATION OF THE TWO-POT SYSTEM


With the implementation of the Two-Pot system, as of 1 September 2024 the members of funds retirement savings will comprise of three components, that is, a ‘vested component’, a ‘savings component’ and the ‘retirement component’. Effectively the vested component will contain the members’ current savings (as at 31 August 2024). Future contributions after that date will be split between the other two components. The contributions to the retirement component will be kept until retirement, and the savings and vested components will be accessible before retirement (subject to certain limitations), while allowing the members to gain limited access to future savings while still employed.


The issue for clarity is how Funds and Administrators must treat section 14 transfers over the period of transitioning to the Two-Pot system in instances where a transfer is still in process on 1 September 2024, and for new transfers as of 1 September 2024. In particular clarification is required in relation to:


a)      seed capital allocation.

b)     payment of savings withdrawal benefits; and

c)      allocation of transfer values across the various components.


The relevant changes are important to understand so as to ensure consistent treatment across the retirement fund industry while ensuring clear communication to members to manage their expectations.


Any fund that has member assets as 1 September 2024 must calculate the seed capital for all members, irrespective of the status of the transfer (The transfer value must be split across all the 3 components. 10% of the vested component as at 31 August 2024 must be the opening balance known as “seed capital” but may not be more than R30 000. One-third (1/3) of the members contributions from 1 September 2024 must be allocated to the savings pot), the transferor fund will not in all circumstances have to pay savings withdrawal benefits.  However, the membership schedules provided to the transferee fund on transfer of the assets must show the value in the transferor fund as at 1 September 2024 and the calculation of the seed capital. 


To ensure consistency across funds and administrators and in order to streamline the application process, the format of the transfer schedule containing the necessary membership details in a standardised format will be determined.


Further details will be published, once the industry bodies have submitted their comments to the FSCA.

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