Defined benefit funds guarantee you a pension at retirement that is based on a formula and paid for the rest of your life.
This formula is typically a percentage of your final salary multiplied by the number of years for which you contributed to the fund (your pensionable service). For example, if the percentage is 2% for each year and you have worked and contributed for 35 years, you will get a pension of 70% (2% x 35) of your final salary.
The two-pot retirement system provides for your retirement savings to be split from 1 September 2024 between the two new pots, using your years of pensionable service.
One third of each year for which you are a member of a defined benefit fund after 1 September 2024 will be allocated to your savings pot and two thirds of each year to the retirement pot. If you take retirement savings out of your savings pot, this will reduce your years of service.
The savings you made before the new system is implemented on September 1 2024 will be known as your vested component and will be based on your years of service up to that date.
Treasury has agreed that exceptions can be made for defined benefit funds that cannot use this methodology but this is subject to approval by the Financial Sector Conduct Authority (FSCA).
How the new two-pot system will work in a defined benefit fund is best understood using an example.
Lets take the example of Sam, a 41-year-old defined benefit member.
Sam earns R36 000 a month (R432 000 a year).
Sam’s employer and Sam together contribute 12.5% of Sam's income to the defined benefit fund each month.
Sam’s benefit statement reflects that the value of the benefit held in the fund on 31 August 2024 – known as the actuarial value – is R507 000.
Sam has 10 years of service (120 months) with his employer and membership of the retirement fund.
On 1 September 2024, Sam’s savings pot will be kickstarted with a once-off transfer from Sam's fund value.
The amount transferred will be calculated using the fund formula and 10 percent of Sam’s period of service – that is 12 months (10 percent of 120 months).
But in Sam's case the fund’s actuaries have calculated that the value of this benefit amounts to more than the maximum of R30 000 that can be used to kickstart or seed the savings pot. The amount transferred therefore is capped at R30 000, which is the equivalent of 7.1 months of service.
Sam's savings pot will therefore reflect a benefit calculated at 7.1 months of service.
Sam's vested pot (savings before 1 September 2024 will reflect a benefit of 112.9 months (120 months minus the 7.1 months transferred to the savings pot).
In a year’s time, Sam will have accumulated another 12 months’ of service. Four months of that will be transferred to the savings pot and eight months to the retirement pot.
The savings pot will then hold 11.1 months of benefits (7.1 plus four months).
Sam’s salary has increased with inflation to R37 800 a month (R453 600 a year). The fund’s actuaries use this salary and 11.1 months of service to calculate that the value of the benefit held in the savings pot is now worth R51 209.
Sam then decides to withdraw the 11 months of service from the savings pot. The fund’s actuaries use the salary and the formula to calculate that this amounts to R50 743 and the years of service in the savings pot are reduced by 11 months to 0.1 month, then worth R466.
 HOW THE TWO-POT SYSTEM WILL WORK IN A DEFINED BENEFIT FUND |
||||||
| Date | Annual salary | Vested pot | Savings pot | Retirement pot | Pensionable service total | Actuarial value (resignation benefit) |
| 31 Aug 2024 | R432 000 | 120 | 120 | R507 000 | ||
|
1 Sep 2024 |
R432 000 |
Seeding >> 112,9 |
7,1
|
0 |
120 |
R507 000 |
| 1 Sep 2025 |
R453 600 |
112,9 | 11,1 | 8 | 132 | R608 938 |
|
|
|
|
Withdrawal
|
8 |
121 |
-R50 743 =R558 195 |
| 1 Sep 2026 |
R476 280
|
112,9
|
4,1
|
16
|
133
|
R669 922 |
| Source: Smart About Money with calculations by Natasha Huggett-Henchie | ||||||
