CMS Expert Guide to Pensions in South Africa

There is no statutory retirement scheme in South Africa and, therefore, no legal requirement for employers to provide retirement benefits to employees. The provision of such benefits is at the employer’s discretion. Where provided, employees typically participate in either a provident fund or a pension fund. The most common type of retirement fund is a defined contribution fund, as defined benefit funds have gradually been phased out by many employers. 

The main pension arrangements are provident or pension funds operating on a defined contribution basis. While defined benefit schemes still exist, they are now uncommon. 

There is no statutory retirement scheme in South Africa; however, certain industries and employers may participate in a compulsory scheme, either for all employees or for specific categories of employees. 

There are no specific restrictions or exclusions on who can establish a retirement plan; however, all retirement funds must be approved by the registrar before registration. All funds must be registered with the Financial Sector Conduct Authority (FSCA).

The Pension Funds Act 24 of 1956 (PFA) provides that only those who have been approved by the registrar may administer a retirement fund. 

There is no mandatory level of contributions set by law (as there is no statutory requirement to provide retirement benefits); however, the rules of certain retirement schemes may prescribe a minimum contribution. 

Defined benefit funds may have a minimum contribution rate prescribed by a valuator. For defined contribution funds, the funding requirements are set out in the rules of the retirement fund.

There is no prescribed retirement age in South Africa; however, the rules of each retirement fund will specify the retirement age at which a member may no longer participate in the fund. It is common for the retirement age to be either 60 or 65.

The rules of the retirement fund determine the percentage contribution to be paid by the employer and the employee. However, the costs associated with administering the fund are borne by the fund itself – that is, covered from the contributions made.

The PFA and the Income Tax Act 58 of 1962 require all retirement funds to be registered for tax purposes, and the South African Revenue Service must approve the rules of all retirement funds.

Employer contributions to retirement funds are treated as a taxable fringe benefit. The value of the benefit is the amount contributed or paid by the employer for the benefit of an employee who is a member of the fund.

However, these contributions are tax-deductible in the employee’s hands, up to the lower of:

• R350,000 per year; or
• 27.5% of the greater of: (i) remuneration (calculated according to a prescribed formula), or (ii) taxable income (calculated according to a separate prescribed formula).

No. Returns on retirement funds are tax-exempt.

Lump sum benefits are taxed on a sliding scale (ranging from 0% to 36%), with no tax payable on the first R550,000. Monthly pensions are also subject to tax, although tax rebates may apply.

From a tax perspective, there are no additional incentives to contribute to retirement funds beyond those outlined above.

There are limits on the amount of tax-deductible contributions, as outlined above.

The FSCA is the relevant regulator and has various powers under both the PFA and the Financial Sector Conduct Authority Act 9 of 2017. Under the PFA, the FSCA is referred to as the registrar of retirement funds (“registrar”). For example, the registrar may, by directive, require that the rules of a fund be amended in certain circumstances, or may instruct that an audit or investigation be conducted into the financial position of a fund. 

There are various reporting obligations under the PFA, which require funds to report specific information to the registrar in different circumstances. For example, registered funds must appoint a valuator to investigate and report on the fund’s financial condition, and a copy of that report must be submitted to the registrar. In addition, there are various situations that require the registrar’s involvement or approval, which in turn necessitate the provision of further information to the registrar. 

The PFA grants the registrar various powers in respect of funds that are not in a sound financial position. The registrar may require a fund to submit a scheme outlining the arrangements that have been made – or will be made – to restore the fund to financial soundness. The PFA also empowers the registrar to apply for business rescue proceedings under the Companies Act 71 of 2008. Funds may be wound up voluntarily, while financially unsound funds may also be wound up by a court upon application by the registrar.

The Employment Equity Act 55 of 1998 prohibits discrimination by employers against employees in any employment policy or practice on prohibited grounds, which include – but are not limited to – sex, pregnancy, marital status, family responsibility, ethnic or social origin, colour, sexual orientation, age, disability, religion, HIV status, conscience, belief, political opinion, culture, language, birth, or any other arbitrary ground. 

The Promotion of Equality and Prevention of Unfair Discrimination Act 4 of 2000 prohibits discrimination based on race, gender, and disability by the State or any person. This also applies to pension funds and their administrators.

Recent legislative amendments have introduced the so-called “two-pot system”, under which one-third of a member’s savings are allocated to a “pot” from which withdrawals may be made before retirement. The remaining two-thirds are allocated to a separate “pot” that cannot be accessed until retirement. Previously, employees were permitted to withdraw their funds upon changing or leaving employment.

There are no specific legislative provisions prescribing union involvement in retirement funds. However, in practice, unions may engage with employers on matters affecting employees’ terms and conditions of employment, which can include issues related to pension funds and contributions. Unions are also typically involved in the establishment of pension funds where these are created through collective agreements. 

Codetermination has not meaningfully taken place in South Africa. 

Regulations under the PFA set limits on the allocation of pension fund assets to certain asset classes, including equities, property, and foreign investments.

The PFA regulates the amalgamation or transfer of the business of retirement funds and prescribes specific processes and requirements for the approval by the registrar of such amalgamations and transfers.

Specific provision is also made for the payment of a minimum amount to members in cases where there is a conversion from defined benefit funds to defined contribution funds.