Glossary

A

Active Management: An investment strategy where a portfolio manager makes specific investments with the goal of outperforming an investment benchmark index.

Actuary: A professional who analyzes financial risks using mathematics, statistics, and financial theory, often involved in the pension fund sector to determine funding levels and liability management.

Asset Allocation: The process of distributing investments among various asset categories, such as stocks, bonds, real estate, and cash, to achieve a desired risk-return profile.

Asset-Liability Matching (ALM): A strategy in pension fund management that seeks to ensure that assets are invested in a way that matches the timing and amount of liabilities.

B

Benchmark: A standard against which the performance of a security, mutual fund, or investment manager can be measured. Common benchmarks include the S&P 500 and the MSCI World Index.

Bond: A fixed-income security that represents a loan made by an investor to a borrower, typically corporate or governmental, with periodic interest payments and return of principal at maturity.

C

Capital Markets: Financial markets where long-term debt or equity-backed securities are bought and sold, such as the stock market and bond market.

Consulting Agreement: A contract between a pension fund and an asset consultant outlining the services to be provided, including investment advice, performance analysis, and asset allocation strategies.

Custodian: A financial institution that holds securities and other assets in electronic or physical form for safekeeping on behalf of the pension fund.

D

Defined Benefit (DB) Plan: A pension plan where the benefits are calculated based on factors such as salary history and duration of employment. The employer typically bears the investment risk.

Defined Contribution (DC) Plan: A pension plan where the contributions are defined, but the future benefits depend on investment performance. The employee typically bears the investment risk.

Diversification: A risk management strategy that involves mixing a wide variety of investments within a portfolio to reduce risk.

E

Endowment: A financial asset, in the form of a donation made to a non-profit group or institution, consisting of investment funds and other property.

Equity: The value of shares issued by a company, representing ownership interest in the corporation.

F

Fiduciary Duty: The legal obligation of one party to act in the best interest of another. In the context of pension funds, trustees and asset consultants owe fiduciary duties to the plan participants.

Fixed Income: Investments that provide a return in the form of fixed periodic interest payments and the return of principal at maturity. Examples include bonds and certificates of deposit.

G

Governance: The system of rules, practices, and processes by which a pension fund is directed and controlled. This includes the roles and responsibilities of the board of trustees and other stakeholders.

I

Investment Policy Statement (IPS): A document that outlines the principles and guidelines for managing the investment portfolio of a pension fund, including asset allocation, risk tolerance, and performance benchmarks.

Index Fund: A type of mutual fund or ETF with a portfolio constructed to match or track the components of a financial market index, such as the S&P 500.

L

Liability-Driven Investment (LDI): An investment strategy that focuses on matching the investment strategy to the pension fund’s liabilities in order to minimize the risk of underfunding.

Liquidity: The ease with which an asset can be converted into cash without significantly affecting its price.

M

Manager Selection: The process of evaluating and choosing investment managers for the pension fund, based on factors such as performance, strategy, and fees.

Market Value: The current price at which an asset can be bought or sold in the market.

P

Portfolio Management: The art and science of making decisions about investment mix and policy, matching investments to objectives, and balancing risk against performance.

Private Equity: Equity capital that is not listed on a public exchange, typically involving investment in private companies or buyouts of public companies.

Pension Fund: A fund established by an employer to facilitate and organize the investment of employees’ retirement funds.

R

Real Assets: Physical assets that have intrinsic value, such as real estate, commodities, and infrastructure.

Risk Management: The process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions.

S

Strategic Asset Allocation: A long-term approach to asset allocation that sets target allocations for various asset classes based on the pension fund’s investment objectives and risk tolerance.

Sustainable and Responsible Investing (SRI): An investment strategy that considers environmental, social, and governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.

T

Tactical Asset Allocation: A dynamic strategy that actively adjusts asset allocation to take advantage of market opportunities and manage risk.

Trustee: An individual or organization that holds and manages assets for the benefit of another. In the context of pension funds, trustees are responsible for managing the fund in the best interests of the beneficiaries.

V

Valuation: The process of determining the current worth of an asset or a company.

Y

Yield: The income return on an investment, such as the interest or dividends received from holding a particular security, usually expressed annually as a percentage based on the investment’s cost, current market value, or face value.

A

Asset: Any resource owned by an individual or entity that is expected to provide future economic benefits. Examples include stocks, bonds, real estate, and cash.

Appreciation: An increase in the value of an asset over time.

Arbitrage: The simultaneous purchase and sale of an asset to profit from a difference in the price.

Average Hourly Earnings: A measure of the average amount of income workers earn per hour in a given period, often used as an indicator of wage inflation.

B

Balance of Payments (BOP): A comprehensive record of a country’s economic transactions with the rest of the world, including trade, investment, and transfer payments.

Balance Sheet: A financial statement that summarizes an entity’s assets, liabilities, and shareholders’ equity at a specific point in time.

Bear Market: A market condition where prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining.

Bonds: Debt securities issued by corporations, governments, or other entities to raise capital, promising to pay back with interest.

Budget Deficit: Occurs when a government’s expenditures exceed its revenues, leading to borrowing and debt accumulation.

Bull Market: A market condition where prices of securities are incressing, and widespread optimism causes the positive sentiment to be self-sustaining.

C

Capital: Financial assets or the financial value of assets, such as cash and investments, used by a business to produce goods or services.

Capital Gains: The profit earned from the sale of an asset, where the selling price exceeds the purchase price.

Commodities: Basic goods used in commerce that are interchangeable with other goods of the same type, such as oil, gold, and wheat.

Consumer Confidence Index (CCI): A survey that measures how optimistic or pessimistic consumers are regarding their expected financial situation, affecting their spending behavior.

Consumer Price Index (CPI): An index that measures the average change in prices paid by consumers for a market basket of goods and services over time, used as a key indicator of inflation.

Capacity Utilization Rate: The percentage of an economy’s total production capacity that is actually being used over a specific period, indicating economic health and potential inflationary pressures.

D

Deflation: A decrease in the general price level of goods and services over a period, often associated with a reduction in the supply of money or credit.

Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.

Dividend: A distribution of a portion of a company’s earnings to its shareholders, usually in the form of cash or additional stock.

Disposable Income: The amount of money households have available for spending and saving after income taxes have been accounted for, influencing consumer spending.

Durable Goods Orders: A measure of new orders placed with manufacturers for long-lasting goods, such as appliances and vehicles, indicating future manufacturing activity.

E

Equity: The value of an ownership interest in an asset or business, calculated as the difference between the asset’s value and any debts owed on it.

Exchange Rate: The value of one currency for the purpose of conversion to another.

Expansion: The phase of the economic cycle where the economy is growing and moving from a trough to a peak.

Exports: Goods and services produced in one country and sold to other countries, contributing to a nation’s GDP and trade balance.

F

Factory Orders: A monthly measure of the value of new orders for both durable and non-durable goods, providing insight into future manufacturing activity.

Fiscal Policy: Government policies regarding taxation and spending to influence the economy. Forex (Foreign Exchange Market): The global marketplace for buying and selling national currencies.

G

Gross Domestic Product (GDP): The total monetary value of all goods and services produced within a country’s borders in a specific time period, a primary indicator of economic health.

Gross National Product (GNP): The total monetary value of all goods and services produced by the residents of a country, including income from abroad, reflecting the economic strength of a nation.

H

Hedge: An investment made to reduce the risk of adverse price movements in an asset, typically through derivatives such as options and futures.

Hyperinflation: Extremely high and typically accelerating inflation, often exceeding 50% per month.

Housing Starts: The number of new residential construction projects begun during a specific period, indicating the health of the housing market and overall economic activity.

Household Debt: The total amount of debt, including mortgages, credit cards, and loans, owed by households, impacting consumer spending and financial stability.

I

Inflation Rate: The percentage increase in the general price level of goods and services over a period, reflecting the cost of living and purchasing power.

Industrial Production Index (IPI): A measure of the output of the industrial sector, including manufacturing, mining, and utilities, indicating the level of industrial activity.

Interest Rate: The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal.

L

Labor Force Participation Rate: The percentage of the working-age population that is either employed or actively seeking employment, indicating the active portion of the labor market.

Leading Economic Index (LEI): A composite index of several economic indicators that tend to change before the overall economy, used to predict future economic activity.

Liquidity: The ease with which an asset can be converted into cash without affecting its market price.

Liability: A company’s legal debts or obligations that arise during the course of business operations.

M

Market Capitalization: The total market value of a company’s outstanding shares of stock, calculated by multiplying the share price by the number of shares.

Monetary Policy: The process by which a central bank, currency board, or other regulatory authority controls the supply of money, interest rates, and inflation.

Money Supply (M1, M2): The total amount of money in circulation or in existence in an economy.

M1 includes physical currency and demand deposits, while M2 includes M1 plus savings deposits, small-denomination time deposits, and retail money market mutual funds.

N

Net Income: A company’s total earnings, calculated as revenue minus expenses, taxes, and costs.

Nominal Value: The stated value of an asset, without adjustment for inflation or other factors.

O

Option: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). It offers the buyer the right, but not the obligation, to buy or sell a security at an agreed-upon price within a certain period.

P

Personal Consumption Expenditures (PCE): A measure of consumer spending on goods and services, indicating the economic activity and inflationary pressures.

Portfolio: A range of investments held by an individual or institution.

Prime Interest Rate: The prime interest rate in South Africa is the benchmark interest rate that commercial banks charge their most creditworthy customers, typically large corporations. It is the rate at which banks lend to their preferred clients and serves as a base rate for other interest rates, such as those on mortgages, personal loans, and business loans.

Private Equity: Capital investment made into companies that are not publicly traded.

Producer Price Index (PPI): A measure of the average change over time in the selling prices received by domestic producers for their output, indicating inflation at the wholesale level.

R

Real GDP: GDP adjusted for inflation, providing a more accurate representation of an economy’s true growth rate.

Repo Rate: The repo rate (repurchase rate) is the interest rate at which the South African Reserve Bank (SARB) lends money to commercial banks. It is a key monetary policy tool used by the SARB to control inflation, manage economic growth, and stabilize the national currency.

Retail Sales: A measure of the total receipts of retail stores, indicating consumer spending trends and economic health.

Recession: A significant decline in economic activity across the economy, lasting longer than a few months, typically visible in GDP, real income, employment, industrial production, and wholesale-retail sales.

Return on Investment (ROI): A measure of the profitability of an investment, calculated as the net profit divided by the initial cost of the investment.

S

Securities: Tradable financial assets such as stocks, bonds, and options.

Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.

T

Trade Balance: The difference between a country’s exports and imports of goods and services, indicating the economic relationship with the rest of the world.

Treasury Yield Curve: A graph showing the yields on U.S. Treasury securities at different maturities, indicating expectations for interest rates and economic activity.

Tariff: A tax imposed on imported goods and services.

Treasury Bonds: Long-term government debt securities with a maturity of more than 10 years.

U

Unemployment Rate: The percentage of the total labor force that is unemployed and actively seeking employment, indicating labor market health.

Underwriting: The process by which an underwriter brings a new security issue to the public, involving the determination of the offering price, the purchase of the securities from the issuer, and the sale of the securities to investors.

V

Volatility: A statistical measure of the dispersion of returns for a given security or market index, often associated with the level of risk.

Venture Capital: Financing provided to startups and small businesses with high growth potential in exchange for equity or partial ownership.

W

Wealth Management: A comprehensive service that includes financial and investment advice, accounting and tax services, and estate planning for affluent clients.

Wholesale Price Index (WPI): A measure of the average change in prices of goods at the wholesale level, used to assess inflationary trends before they reach consumers.

Y

Yield: The income return on an investment, such as the interest or dividends received from holding a particular security.

Yield Curve: A line that plots interest rates of bonds having equal credit quality but differing maturity dates, typically showing the relationship between short-term and long-term interest rates.

V

Zero-Coupon Bond: A bond that is issued at a deep discount to its face value but pays no interest. Instead, it provides a profit at maturity when the bond is redeemed for its full face value.

Agent

When acting as agent, a transition manager takes responsibility to act in the client’s best interests. The alternative to agency trading is a principal transaction, where the transition manager commits capital to what a client needs to sell and vice versa.

Crossing

A “cross” trade is one in which buyer and seller meet without disclosing their intentions to the general marketplace. The confidentiality of a cross trade reduces market impact and eliminates the need to pay some or all of the bid/ask spread. There are many mechanisms for achieving crosses. Many managers’ preeminent franchise in equity block trading is founded on the ability to “find the other side” of trading needs without having to release information to the general marketplace.

Derivatives

Derivatives can be used to maintain, increase, or decrease exposure to the asset classes included in the transition. Subject to determining the authority, suitability, and willingness of the client to enter into derivatives transactions, a transition manager may use Index Futures, Bond Futures, Swaps, and/or Exchange Traded Funds, depending on anticipated cost versus tracking error and usefulness in providing economic value to the implementation of the overall plan.

Explicit costs

Commissions and taxes generated from a portfolio transition. Because they are easily identifiable, one can measure them more easily than implicit costs. These costs can be viewed as the iceberg that sits above the waterline—highly visible, but usually the smaller element of the cost of a transition.

External crossing

Transition managers utilize external crossing networks when they are unable (or prohibited) to use internal sources of liquidity (such as in-house index funds, or other client portfolios making trades) to prevent having to sell or buy securities in the open market, at a higher price.

Fiduciary

According to the CFA Institute, a fiduciary is defined as a person acting with responsibility on behalf of a client as a trusted advisor, with a duty of loyalty ensuring that reasonable care will be exercised in relation to a client’s investment assets, and that all investment actions should be carried out for the sole benefit of the client, in the client’s best interest. All investment managers, consultants, and other advisors, such as transition managers, have fiduciary responsibility towards acting in a client’s best interests, but not all are willing to be a “named fiduciary”, accepting total responsibility for the making (and accepting the outcome) of investment decisions. Some transition management providers, who also are registered investment advisers, may not be a named legal fiduciary with respect to transitions.

Implementation shortfall

Captures all aspects of cost (implicit and explicit) and is, therefore, the most comprehensive measure of performance in a portfolio transition. Assumes that the portfolio restructuring is undertaken instantaneously at the outset and at zero cost. The value of each individual transaction is compared to this benchmark, as are the mark-to-markets for all transactions not completed. The implementation shortfall is the sum of these calculations. While it does not consider what happens to the target securities after they are purchased, it does measure the true cost of getting from point A to point B (at the time point B is reached) for each individual security.

Implicit costs

Execution and trading costs associated with a Transition, including:

• Opportunity cost—refers to the price movement that occurs while executing the transition. It is the cost/gain associated with the time gap in transferring from the legacy portfolio to the target portfolio.
• This cost can be minimized via transaction optimization.
• Market impact—the amount by which you move the price of a security by placing an order in the market. Crossing can minimize market impact.
• Bid/Ask spread—the cost of being a liquidity demander rather than a provider. Internal crossing Internal crossing refers to the ability of a transition manager to trade securities during a transition through their own internal index funds, or other client portfolios, reducing trading costs because there is no need to buy or sell the security in the open market.

Legacy portfolio

Portfolio from which the securities are being transitioned.

Operating costs

Open market trading should be thought of as the “round trip” effect of selling a security in the marketplace, at its current market value, and then buying whatever new security one needs in its place, again, in the market. The explicit disadvantage of open market trading is the much higher cost of commissions, with commissions paid for every one security sold and every new one purchased. Open market trades also leave a portfolio vulnerable to opportunity costs and market impact costs.

Pre-trading analysis

Specific reports that can be generated prior to a transition that include liquidity, bid/ask, sector, currency, country, theoretical risk bid, exchange, market cap, market impact, performance, style risk, trading pattern and index tracking reports. These reports should estimate the risks involved in the transition. The magnitude of those risks, and their sources, are compared with market impact costs estimated by the transition manager’s proprietary models. The pre-trade analysis represents a game plan for the transition that is later used for comparison with actual results.

Pre-trading analysis

The total costs of the transaction are measured versus a pre-specified benchmark in a report. Within this analysis, expectations of commissions, taxes, and duties and in many cases bid/ask spreads are compared and contrasted versus the results.

Target portfolio

Portfolio to which the securities are being transitioned.

Transparency

The transition process that provides for a clear, transparent, and auditable process through every stage and results in a full audit trail.

VWAP

Volume Weighted Average Price, or VWAP, is a measure of evaluating transaction costs. Simply put, to calculate the VWAP, add up the Rand amount traded for every transaction (price times shares traded) and then divide by the total shares traded for the day. Another way of making an approximate VWAP calculation is to take the open, close, high, and low prices for a security for the day, and then divide by four. Some brokers will guarantee a VWAP price to investment managers, but do not take into account the need for timeliness, or best execution, for a particular client.

A

Annuity: An income product purchased at retirement using your savings from a retirement fund. It pays you a regular income after you stop working. The main types are Life Annuities (guaranteed for life) and Living Annuities (flexible but dependent on investment performance).

Arrears Contributions: Contributions paid late by an employer or member to make up for missed or delayed payments into the fund.

Asset Allocation: How a retirement fund invests its assets—typically across shares, bonds, property, and cash—to balance growth and risk.

 

B

Beneficiary: A person (or persons) nominated to receive your retirement fund benefits when you pass away. Trustees must still assess your dependants under Section 37C before final distribution.

Benefit Statement: A summary provided by your retirement fund showing your contributions, fund value, and projected retirement benefit.

 

C

Contribution: Money paid into a retirement fund each month. Usually, both you and your employer contribute a percentage of your salary.

Commutation: The process of converting part of your retirement savings into a once-off lump sum at retirement, with the rest used to purchase an annuity for income.

Compound Growth: When the returns earned on your investments are reinvested, allowing your money to grow faster over time.

 

D

Defined Benefit Fund: A retirement fund where your benefit at retirement is based on a formula (often linked to your final salary and years of service).

Defined Contribution Fund: A fund where your retirement benefit depends on the amount you and your employer contribute, plus investment performance.

Dependants: People who rely on you financially. When you pass away, trustees must consider their needs when distributing death benefits.

 

 

E

Early Withdrawal: Taking your retirement savings before reaching retirement age (for example, when changing jobs). This is discouraged because of tax penalties and loss of compound growth.

Employer Contribution: The portion your employer pays into your retirement fund, usually as part of your total remuneration package.

Exit Benefit: The benefit payable when you leave the fund—due to resignation, dismissal, retrenchment, disability, or retirement.

 

F

Fund Administrator: The company that manages the day-to-day administration of a retirement fund—processing contributions, claims, and payments.

Fund Rules: The legal document that sets out how your retirement fund operates, including contribution rates, benefits, and eligibility.

Fund Value: The total accumulated amount in your retirement fund, including contributions, investment returns, and any applicable bonuses.

 

G

Group Life Cover: An insurance benefit often linked to your retirement fund, providing a lump-sum payment to your beneficiaries if you die while employed.

Governance: The framework ensuring that the retirement fund is managed ethically, legally, and in members’ best interests—usually overseen by the board of trustees.

 

I 

Ill-Health Retirement: Retiring before normal retirement age due to illness or disability, which may trigger special fund benefits depending on the fund rules.

Investment Portfolio: The collection of investments (like equities, bonds, and property) that make up your retirement fund’s assets.

 

L

Life Annuity: An annuity that guarantees you an income for the rest of your life, regardless of how long you live. Payments can continue to a spouse after your death, depending on the option selected.

Living Annuity: A flexible retirement income product that allows you to decide how your savings are invested and how much income you draw each year, within limits. You carry the investment risk.

Lump Sum Benefit: A once-off cash payment taken from your retirement fund at withdrawal, retrenchment, or retirement—subject to tax rules.

 

M

Member: An employee who belongs to an employer’s retirement fund.

Minimum Benefit: The lowest amount a member must receive when leaving the fund, as required by the Pension Funds Act or fund rules.

 

N

Normal Retirement Age: The standard age at which you can retire from your fund, usually between 55 and 65, depending on the rules of your fund.

Nomination of Beneficiaries: The process of listing the people you’d like to receive your benefits after your death. Trustees use this list as a guide under Section 37C.

 

P

Pension Fund: An employer-based retirement fund where both the employer and employee contribute. At retirement, up to one-third can usually be taken as a lump sum, and the rest must be used to buy an annuity.

Provident Fund: A type of employer-based fund that used to allow full lump-sum withdrawal at retirement. Since March 2021, new contributions are aligned with pension fund rules (two-thirds must purchase an annuity).

Preservation Fund: A fund used to keep your savings invested if you leave your employer before retirement, helping preserve your benefits until retirement age.

 

R

Retirement Benefit: The money or income you receive when you retire, which may be paid as a lump sum, annuity, or a combination of both.

Retirement Fund: A collective term for pension, provident, and retirement annuity funds designed to help you save for retirement.

Risk Benefits: Insurance-based benefits (such as life, disability, or funeral cover) linked to your membership in a retirement fund.

 

S

Section 37C: A section of the Pension Funds Act that governs how death benefits are distributed. Trustees must identify dependants and allocate benefits fairly, even if they differ from your nomination form.

Severance Benefit: A lump-sum payment from your employer when you are retrenched or your position is terminated, which may be paid into your retirement fund or directly to you.

 

T

Tax-Free Savings Account (TFSA): A separate investment account where all returns (interest, dividends, and capital gains) are tax-free. It complements but does not replace your retirement fund.

Transfer: Moving your accumulated savings from one fund or employer to another without triggering a tax event, ensuring your savings remain invested.

Two-Pot Retirement System: Introduced in South Africa on 1 September 2024, this system splits new contributions into two parts:

Savings Pot (one-third): You may withdraw from this once a year for emergencies or short-term needs (subject to tax).

Retirement Pot (two-thirds): Must stay invested until you retire, ensuring long-term savings.

The system helps prevent total cash-outs when changing jobs and promotes better retirement outcomes.

 

U

Umbrella Fund: A large retirement fund that combines the retirement plans of multiple, unrelated employers under a single legal structure. Each participating employer becomes a “sub-fund” within the umbrella, benefiting from:

• Lower administration costs (due to economies of scale),
• Simplified compliance and governance, and
• Access to professional fund management and trusteeship.

Umbrella funds are commonly used by small to medium employers who want to offer quality retirement benefits without running their own standalone fund. Members still enjoy individual fund values, benefits, and investment choices within the umbrella structure.

 

V

Vesting Portion: The portion of your retirement fund built up before the introduction of the Two-Pot System, which continues under old rules.

Voluntary Contribution: Extra money you choose to contribute to your retirement fund to boost your retirement savings.

 

W

Withdrawal Benefit: The amount payable if you resign, are dismissed, or leave your employer before retirement. Under the Two-Pot System, you can only access the Savings Pot, not your Retirement Pot.

 

A

Annuity: An income product purchased at retirement using your savings from a retirement fund. It pays you a regular income after you stop working. The main types are Life Annuities (guaranteed for life) and Living Annuities (flexible but dependent on investment performance).

Arrears Contributions: Contributions paid late by an employer or member to make up for missed or delayed payments into the fund.

Asset Allocation: How a retirement fund invests its assets—typically across shares, bonds, property, and cash—to balance growth and risk.

 

B

Beneficiary: A person (or persons) nominated to receive your retirement fund benefits when you pass away. Trustees must still assess your dependants under Section 37C before final distribution.

Benefit Statement: A summary provided by your retirement fund showing your contributions, fund value, and projected retirement benefit.

 

C

Contribution: Money paid into a retirement fund each month. Usually, both you and your employer contribute a percentage of your salary.

Commutation: The process of converting part of your retirement savings into a once-off lump sum at retirement, with the rest used to purchase an annuity for income.

Compound Growth: When the returns earned on your investments are reinvested, allowing your money to grow faster over time.

 

D

Defined Benefit Fund: A retirement fund where your benefit at retirement is based on a formula (often linked to your final salary and years of service).

Defined Contribution Fund: A fund where your retirement benefit depends on the amount you and your employer contribute, plus investment performance.

Dependants: People who rely on you financially. When you pass away, trustees must consider their needs when distributing death benefits.

 

E

Early Withdrawal: Taking your retirement savings before reaching retirement age (for example, when changing jobs). This is discouraged because of tax penalties and loss of compound growth.

Employer Contribution: The portion your employer pays into your retirement fund, usually as part of your total remuneration package.

Exit Benefit: The benefit payable when you leave the fund—due to resignation, dismissal, retrenchment, disability, or retirement.

 

F

Fund Administrator: The company that manages the day-to-day administration of a retirement fund—processing contributions, claims, and payments.

Fund Rules: The legal document that sets out how your retirement fund operates, including contribution rates, benefits, and eligibility.

Fund Value: The total accumulated amount in your retirement fund, including contributions, investment returns, and any applicable bonuses.

 

G

Group Life Cover: An insurance benefit often linked to your retirement fund, providing a lump-sum payment to your beneficiaries if you die while employed.

Governance: The framework ensuring that the retirement fund is managed ethically, legally, and in members’ best interests—usually overseen by the board of trustees.

 

I

Ill-Health Retirement: Retiring before normal retirement age due to illness or disability, which may trigger special fund benefits depending on the fund rules.

Investment Portfolio: The collection of investments (like equities, bonds, and property) that make up your retirement fund’s assets.

 

L

Life Annuity: An annuity that guarantees you an income for the rest of your life, regardless of how long you live. Payments can continue to a spouse after your death, depending on the option selected.

Living Annuity: A flexible retirement income product that allows you to decide how your savings are invested and how much income you draw each year, within limits. You carry the investment risk.

Lump Sum Benefit: A once-off cash payment taken from your retirement fund at withdrawal, retrenchment, or retirement—subject to tax rules.

 

M

Member: An employee who belongs to an employer’s retirement fund.

Minimum Benefit: The lowest amount a member must receive when leaving the fund, as required by the Pension Funds Act or fund rules.

 

N

Normal Retirement Age: The standard age at which you can retire from your fund, usually between 55 and 65, depending on the rules of your fund.

Nomination of Beneficiaries: The process of listing the people you’d like to receive your benefits after your death. Trustees use this list as a guide under Section 37C.

 

P

Pension Fund: An employer-based retirement fund where both the employer and employee contribute. At retirement, up to one-third can usually be taken as a lump sum, and the rest must be used to buy an annuity.

Provident Fund: A type of employer-based fund that used to allow full lump-sum withdrawal at retirement. Since March 2021, new contributions are aligned with pension fund rules (two-thirds must purchase an annuity).

Preservation Fund: A fund used to keep your savings invested if you leave your employer before retirement, helping preserve your benefits until retirement age.

 

R

Retirement Benefit: The money or income you receive when you retire, which may be paid as a lump sum, annuity, or a combination of both.

Retirement Fund: A collective term for pension, provident, and retirement annuity funds designed to help you save for retirement.

Risk Benefits: Insurance-based benefits (such as life, disability, or funeral cover) linked to your membership in a retirement fund.

 

S

Section 37C: A section of the Pension Funds Act that governs how death benefits are distributed. Trustees must identify dependants and allocate benefits fairly, even if they differ from your nomination form.

Severance Benefit: A lump-sum payment from your employer when you are retrenched or your position is terminated, which may be paid into your retirement fund or directly to you.

 

T

Tax-Free Savings Account (TFSA): A separate investment account where all returns (interest, dividends, and capital gains) are tax-free. It complements but does not replace your retirement fund.

Transfer: Moving your accumulated savings from one fund or employer to another without triggering a tax event, ensuring your savings remain invested.

Two-Pot Retirement System: Introduced in South Africa on 1 September 2024, this system splits new contributions into two parts:

Savings Pot (one-third):

You may withdraw from this once a year for emergencies or short-term needs (subject to tax).

Retirement Pot (two-thirds):

Must stay invested until you retire, ensuring long-term savings.

The system helps prevent total cash-outs when changing jobs and promotes better retirement outcomes.

 

U

Umbrella Fund: A large retirement fund that combines the retirement plans of multiple, unrelated employers under a single legal structure. Each participating employer becomes a “sub-fund” within the umbrella, benefiting from:

• Lower administration costs (due to economies of scale),
• Simplified compliance and governance, and
• Access to professional fund management and trusteeship.

Umbrella funds are commonly used by small to medium employers who want to offer quality retirement benefits without running their own standalone fund. Members still enjoy individual fund values, benefits, and investment choices within the umbrella structure.

 

V

Vesting Portion: The portion of your retirement fund built up before the introduction of the Two-Pot System, which continues under old rules.

Voluntary Contribution: Extra money you choose to contribute to your retirement fund to boost your retirement savings.

 

W

Withdrawal Benefit: The amount payable if you resign, are dismissed, or leave your employer before retirement. Under the Two-Pot System, you can only access the Savings Pot, not your Retirement Pot.

A

Accidental Death Benefit: An additional payout if the insured dies as a direct result of an accident, often added to a life policy as an optional benefit.

Act of God: An event outside human control — like floods, lightning, or earthquakes — that causes damage or loss. Coverage depends on your policy terms.

Actual Cash Value (ACV): The value of an insured item at the time of loss, taking depreciation into account (replacement cost minus wear and tear).

Additional Premium: An extra amount charged when cover is increased or risk exposure changes (e.g., buying a new car or adding a driver).

 

B

Beneficiary: A person or entity designated to receive proceeds from a life insurance or investment policy upon the policyholder’s death.

Broker (Insurance Broker): A qualified professional who provides independent advice and helps you choose suitable insurance products from various insurers.

Business Interruption Cover: Insurance that compensates a business for lost income during periods when operations are interrupted due to an insured event, such as fire or flood.

 

C

Claim: A formal request to your insurer for payment or repair after a loss or damage covered by your policy.

Claim Excess (Deductible): The amount you must pay out of pocket when making a claim before your insurer covers the rest. Higher excesses usually reduce your premium.

Comprehensive Cover: Insurance that covers damage or loss to your own property as well as third-party liability — e.g., for motor or home insurance.

Cover (Coverage): The protection provided by an insurance policy — outlining what events or losses are insured.

Cooling-Off Period: A legally prescribed period (typically 31 days in South Africa) allowing you to cancel a new insurance policy without penalty, provided no claim has been made.

 

D

Damage: Physical harm to property or possessions caused by an insured event such as fire, theft, or accident.

Depreciation: The reduction in value of an asset over time due to age, wear, or obsolescence — used to calculate actual cash value in claims.

Disability Insurance: Provides a lump sum or income benefit if you become unable to work due to illness or injury.

 

E

Endorsement: An amendment or addition to an insurance policy that changes its terms — such as adding a new item, driver, or risk.

Excess: See Claim Excess. The initial portion of a claim paid by the insured.

Exclusion: Specific conditions or losses that are not covered by the insurance policy (e.g., wear and tear, illegal activity, or intentional damage).

 

F

Funeral Cover: A policy designed to provide quick payment to cover funeral expenses when the insured person passes away.

First Loss Cover: A policy that covers up to a specified limit for certain items or risks, regardless of the total value insured.

Force Majeure: Another term for Act of God — unforeseeable circumstances preventing the fulfilment of an obligation or causing damage.

 

G

Grace Period: The extra time (often 15 to 30 days) you have after a premium due date to make payment before the policy lapses.

Group Insurance: Cover provided to a group of people under a single contract — for example, employee life and disability benefits.

 

H

Household Contents Insurance: Covers the possessions inside your home against risks such as theft, fire, or storm damage.

Homeowners (Building) Insurance: Covers the physical structure of your home — including walls, roof, and fixtures — against damage from insured events.

 

I

Income Protection: An insurance product that replaces part of your income if you’re unable to work due to illness or injury.

Indemnity: The principle that insurance restores you to the same financial position you were in before a loss — not better or worse.

Insured Value (Sum Insured): The maximum amount your insurer will pay in the event of a covered loss.

Insurer: The company that provides the insurance coverage and pays claims.

 

L

Lapse: When a policy ends because premiums haven’t been paid within the allowed grace period, leaving you without cover.

Liability Insurance: Covers legal costs and compensation if you’re found legally responsible for causing injury or damage to someone else or their property.

Life Cover (Life Insurance): A policy that pays a lump sum to your nominated beneficiaries upon your death, helping them cover debts and living expenses.

Limited Cover: Insurance that only covers specific risks or events rather than a wide range (for example, third-party only motor insurance).

 

M

Market Value: The price an asset would reasonably sell for on the open market at the time of loss — not necessarily the replacement cost.

Material Change: A significant change in your circumstances (e.g., new address, occupation, or vehicle use) that must be disclosed to your insurer to avoid affecting cover.

Medical Underwriting: The process where an insurer evaluates your health and lifestyle before approving life or disability insurance.

 

N

No-Claim Bonus (NCB): A discount or reward for not making any claims during a specified period, common in car insurance.

Non-Disclosure: Failing to share important information (like medical history or previous claims) that could affect your policy’s validity.

 

P

Peril: An event or cause of loss that is insured, such as fire, theft, or storm.

Policy: The official document outlining your insurance contract — including the cover details, exclusions, premiums, and claim procedures.

Policyholder: The person or entity who owns the insurance policy and is responsible for paying the premiums.

Premium: The regular payment you make (monthly, quarterly, or annually) to keep your insurance policy active.

Personal Liability: Cover that protects you if you accidentally cause injury or damage to another person or their property.

 

R

Reinstatement Value (Replacement Cost): The cost of replacing or repairing an item without deduction for wear and tear — the opposite of actual cash value.

Reinsurance: Insurance purchased by insurance companies to protect themselves from large losses.

Risk: The possibility of a loss occurring. Insurers use risk assessments to calculate premiums.

 

S

SASRIA Cover: Special cover provided in South Africa for damage caused by strikes, riots, public disorder, or terrorism. It’s usually added automatically to motor or property policies.

Surrender Value: The cash amount payable if you cancel a life or investment policy before its maturity.

Sum Assured: The guaranteed amount the insurer will pay on a valid claim under a life policy.

 

T

Term Life Insurance: A life insurance policy that provides cover for a specific period (e.g., 10 or 20 years). If you pass away during the term, a payout is made; if not, the policy ends.

Third-Party Cover: Insurance that covers damage or injury you cause to others or their property, but not to your own possessions.

Total Permanent Disability (TPD): A condition that prevents you from ever returning to work. A lump-sum payment is made under this benefit.

 

U

Underwriter (Insurer): The person or company that evaluates risk and determines the premium and policy terms.

Underinsurance: When the value of your insured items is less than their actual replacement value — leading to partial payouts in the event of a claim.

 

V

Void Policy: An insurance policy declared invalid, often due to non-disclosure, fraud, or breach of policy conditions.

 

W

Waiting Period: The period that must pass after taking out a policy before certain benefits become payable — for example, six months for some health or funeral benefits. 

Warranty: A condition you must meet for cover to remain valid — for instance, keeping your security system in working order.

A

Annuity: A financial product that provides you with a regular income during retirement, usually purchased using your retirement savings. The main types are Living Annuities and Life Annuities.

Asset Allocation: The strategy of spreading your investments across different asset classes—like shares, bonds, property, and cash—to balance risk and potential returns.

 

B

Beneficiary: The person(s) or organisation(s) you nominate to receive your retirement fund or life policy benefits after your death.

Bond: An investment where you lend money to a government or company in exchange for regular interest payments and repayment of the principal at maturity.

 

C

Compound Interest: Interest earned on both the original investment (principal) and any interest that has already been added to it—helping your money grow faster over time.

Contribution: The amount of money you or your employer regularly pay into your retirement savings or pension fund.

 

D

Defined Benefit Fund: A retirement fund where your benefits are based on a formula, often linked to your final salary and years of service.

Defined Contribution Fund: A retirement fund where your benefits depend on how much you (and possibly your employer) contribute, and how your investments perform.

Diversification: Investing in different asset types or sectors to reduce overall risk.

 

E

Emergency Fund: Money saved to cover unexpected costs (like car repairs or medical bills) so you don’t need to access your retirement savings early.

Estate Planning: The process of arranging how your assets will be managed and distributed after your death—often involving a will, trust, or beneficiary nominations.

 

F

Financial Advisor: A qualified professional like Avena Wealth who provides guidance on managing money, including retirement planning, investments, and insurance.

Fund Value: The total value of your retirement savings or investment at a specific point in time.

 

G

Guaranteed Annuity (see also Life Annuity): An annuity that provides a fixed, guaranteed income for life—protecting you from outliving your savings. The insurer takes on the investment and longevity risk.

 

I

Inflation: The general increase in prices over time, which decreases your purchasing power. Your retirement plan should account for inflation to maintain your standard of living.

Investment Horizon: The amount of time you plan to invest before you need to start drawing from your savings.

 

L

Life Annuity: A type of annuity that guarantees you an income for the rest of your life, no matter how long you live. It can be structured to continue paying a spouse or beneficiary after your death. The income amount is usually fixed or may increase annually, depending on the product terms. 

Living Annuity: A flexible post-retirement investment that allows you to choose how your money is invested and how much income you withdraw each year. You bear the investment risk—if your returns are low or withdrawals too high, your capital may run out.

Lump Sum: A once-off payment you can take from your retirement fund at retirement or withdrawal, subject to tax regulations.

 

P

Pension Fund: A workplace-based retirement fund where both employer and employee contribute, providing a pension income at retirement.

Preservation Fund: A retirement fund used to preserve your savings if you leave your employer before retirement. It keeps your money invested and growing until you retire.

Provident Fund: Similar to a pension fund, but historically allowed members to take their full savings as a lump sum at retirement (though new rules now align these more closely with pension funds).

 

R

Retirement Age: The age when you choose or are required to retire and begin drawing your retirement benefits.

Retirement Annuity (RA): An individual retirement savings product that allows you to make personal contributions, independent of your employer, and enjoy tax benefits.

Risk Tolerance: Your comfort level with potential losses in exchange for higher potential returns when investing.

 

S

SARS (South African Revenue Service): The authority responsible for tax administration, including retirement contribution deductions and withdrawal tax calculations.

Section 37C: A section of the Pension Funds Act that governs how death benefits are distributed by trustees, based on financial dependency rather than just listed beneficiaries.

 

T

Tax-Free Savings Account (TFSA): A savings vehicle that allows you to earn returns free of tax on interest, dividends, and capital gains—ideal for long-term investing alongside retirement savings.

Transfer: The process of moving your retirement savings from one fund or provider to another, usually when changing employers or restructuring investments.

Two-Pot Retirement System (South Africa): A system introduced by the South African government (effective 1 September 2024) to help individuals balance retirement security and short-term financial access.

Under this system, your retirement contributions are split into two “pots”:

Savings Pot: Up to one-third of future contributions go into this pot. You may withdraw from it once per tax year for emergencies or short-term needs (subject to tax).

Retirement Pot: The remaining two-thirds must stay invested until retirement, ensuring that you continue to build long-term savings.

At retirement, you can withdraw the savings pot balance as a lump sum and must use the retirement pot to buy an annuity or draw an income.

This system applies to pension, provident, and retirement annuity funds and aims to prevent total cash-outs when changing jobs, helping preserve savings for retirement.

 

V

Voluntary Contribution: Additional contributions you make to your retirement savings beyond the required or regular amount, helping you grow your retirement fund faster.

A

Actuarial Value: An estimate of the fair value of a life right or annuity, based on life expectancy, interest rates, and other assumptions.

Admin Levy (Administration Levy): A recurring monthly charge to cover the operational and management costs of the village — such as staff, maintenance, insurance, and administration.

 

B

Body Corporate: A legal entity created when a sectional title scheme is registered. It manages the common property and ensures compliance with the Sectional Titles Act and scheme rules.

Buy-in Price: The initial payment made to secure the right to occupy a retirement village unit — applicable in life-right, sectional title, or share-block models.

 

C

Care Centre: An on-site healthcare facility offering assisted living or frail care for residents needing daily support or nursing.

Capital Gain / Loss: The profit or loss realised when disposing of property or rights, subject to Capital Gains Tax (CGT).

Continuing Care: A model allowing residents to move from independent living to assisted or frail care without leaving the village.

 

D

Deferred Management Fee (DMF): A fee retained by the operator when a resident leaves or passes away, usually calculated as a percentage of the resale price. It covers long-term maintenance and management costs.

Developer: The entity that establishes and markets the retirement village, often retaining ownership or management control under a specific Act.

 

E

Estate Planning: The process of structuring one’s financial affairs — wills, trusts, and nominations — to ensure smooth transfer of assets upon death.

Exit Fee: A payment due when vacating a village, which may depend on the resale or original purchase value.

 

F

Frail Care: Comprehensive care provided to residents who cannot live independently due to medical or mobility issues.

Financial Sector Conduct Authority (FSCA): South Africa’s financial regulator ensuring fair treatment of consumers and compliance in financial advice, investment, and insurance services.

 

L

Levy Stabilisation Fund: A fund built up by residents’ contributions to manage future levy increases and cushion against inflation.

Life Right: A popular tenure form in South African retirement villages. The resident pays a lump sum for the right to occupy a unit for life, without owning it. Upon death or departure, the right reverts to the developer or operator, often with a pre-agreed refund formula.

Legislation Affecting Retirement Villages

Housing Development Schemes for Retired Persons Act 65 of 1988 (“HDSRP Act”): This Act regulates the development and sale of housing schemes for people aged 50 and older. It provides legal protection to retirees by ensuring full disclosure of the rights and obligations before purchase, particularly under life-right or leasehold arrangements. It also prescribes that contracts must be registered with the Deeds Office for enforceability.

Older Persons Act 13 of 2006: The Act promotes the well-being, safety, and dignity of older persons. It mandates standards for residential facilities, care centres, and service providers. It also establishes mechanisms to prevent abuse, neglect, or exploitation of older persons in retirement and care facilities.

Sectional Titles Act 95 of 1986: This Act governs the ownership of property under sectional title — where individuals own their unit and jointly own common areas through a body corporate. Many retirement villages use this model, and the Act outlines management, voting rights, levies, and trustee duties.

Share Blocks Control Act 59 of 1980: Applies to developments where residents buy shares in a company that owns the property, giving them the right to occupy a specific unit. The Act protects shareholders by regulating disclosures, financial management, and the use of funds in share block schemes — sometimes used in older retirement developments.

Public Finance Management Act 1 of 1999 (PFMA): Applies primarily to public-sector retirement or social housing initiatives. It governs how public funds are managed, ensuring accountability and proper financial controls in government-supported or subsidised retirement housing projects.

Property Practitioners Act 22 of 2019: Regulates property practitioners (including estate agents and developers) to ensure ethical conduct, transparency, and consumer protection. It requires practitioners to be registered, operate trust accounts, and disclose defects and conflicts of interest — key when marketing or selling retirement units or life rights.

 

M

Management Association / HOA (Homeowners Association): The entity managing a village developed under a freehold or HOA model, often governed by the Companies Act or the HOA’s constitution.

Medical Aid Gap Cover: Insurance covering the shortfall between what medical specialists charge and what your medical aid reimburses.

 

O

Occupation Date: The date from which a resident may legally occupy their unit.

Operating Costs: Day-to-day expenses of running the village, including security, garden services, administration, and utilities.

 

R

Resale Value: The price obtained when a unit or life right is resold. The amount payable to the departing resident or estate depends on the contract type and resale formula.

Retirement Village Regulations: Rules that govern the sale, occupation, and management of retirement housing in South Africa — primarily under the Housing Development Schemes for Retired Persons Act 65 of 1988.

 

S

Sectional Title: An ownership model where residents own individual units and share ownership of common areas through the body corporate.

Service Centre: A facility offering essential services such as meals, recreation, healthcare, and social support.

 

T

Transfer Duty: A tax payable to SARS when acquiring ownership of a property (not applicable to life rights).

Trustee (Body Corporate): An elected individual who manages the affairs of the sectional title scheme on behalf of all owners.

 

W

Will: A legal document directing how your assets should be distributed after death — essential for protecting your rights and estate within a retirement structure.