Page 148 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 8

ILLAs and Preservation Funds
A retirement annuity (or RA) is a tax-deductible retirement funding vehicle (ie, a savings
plan towards retirement). A preservation fund is an approved vehicle for holding the
proceeds of a pension or provident fund until retirement (eg, when changing jobs). An ILLA
is an investment-linked living annuity which may be established at retirement age. Unlike a traditional
life annuity, which pays a fixed monthly amount during retirement, an ILLA allows the investor to
draw against income and/or capital in a flexible way. ILLAs are attractive because the capital amount
forms part of an investor’s estate, whereas the rights to a life annuity die with the investor (or the
second of joint annuitants). A major problem with ILLAs, however, is capital erosion where the
retirement lump sum is too small to produce sufficient income to satisfy the retiree’s monthly needs.
Most LISPs offer RAs, ILLAs and preservation fund products which allow investors to select
underlying unit trusts provided that in the case of RAs and preservation funds, the aggregate
exposure by asset class conforms to Regulation 28.

Income Funds
The Income funds sector, previously found under the then Fixed Interest category (now
Interest Bearing), contains funds that seek to maximise income yield while at least preserving
capital. These funds invest predominantly in government bonds, fixed-deposits and other high
income-earning securities, although under the 2013 classification revision they are allowed to hold
equities and listed property shares as well. This is the reason that some varied specialist income
funds were moved from the Fixed Interest category to the Multi Asset category.
In contrast to the rules governing funds in the Interest Bearing sectors, funds in the Multi Asset
Income sector have few restrictions on the type of income yield assets in which they can invest. These
portfolios are allowed a maximum effective equity exposure (including international equities) of 10%
and maximum listed property exposure of 25% (again, including international holdings).
There is no official benchmark for the Income funds sector. Benchmarks vary, with the STeFI
being the most popular (periods used differ). The All Bond index (Albi) is used as a benchmark by
several funds.

Interest Bearing Funds
Funds in the Interest Bearing sector (previously known as Fixed Interest) invest exclusively in
bond, money market investments and other interest-earning securities. These portfolios may not
include equities, listed real estate shares or cumulative preference shares.
This sector originally had four sub-secotrs: Money Market Funds, Income Funds, Bond Funds
and Varied Specialist Funds.
In 2013 funds in the Varied Specialist sector which held shares and listed property were moved
to the Multi-Asset tier and renamed Multi-Asset Income Funds.
That year, The Bond Funds were renamed Variable Term Funds and the Income Funds were
renamed Short Term Funds to better reflect their risk and return characteristics.

What is the STeFI?
The STeFI, the industry benchmark for cash-equivalent investments and for South African
Interest Bearing Short-Term funds, is a set of proprietary indices designed by Alexander
Forbes to reflect average short term interest rates. They are calculated and published daily
by the South African Futures Exchange division of the JSE. The STeFI composite index is
calculated from four narrower indices as follows:
• 15% of the STeFI Call Deposit Index, which is based on an Interbank call rate (SARB-SABOR)
• 30% of the STeFI 3 month NCD Index (3 month NCD instruments measured at SAFEX rates)
• 35% of the STeFI 6 month NCD Index (6 month NCD instruments measured at SAFEX rates)
• 20% of the STeFI 12 month NCD Index (12 month NCD instruments measured at SAFEX rates)
Alexander Forbes also produces a Money Market Index (AFMMI).

146 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts