Figure 9: financial instruments / securities: participation interests
The financial system is again presented in Figure 9. The securities issued by the three investment vehicle categories (which we call participation interests - PIs) are highlighted, as well as the household sector (as the main lenders) which is our interest here. The institutions under each category are:
- Contractual intermediaries (CIs):
- Long-term insurers (LTIs).
- Retirement funds (RFs).
- Collective investment schemes (CISs):
- Securities unit trusts (SUTs).
- Property unit trusts (PUTs).
- Exchange traded funds (ETFs).
- Alternative investments (AIs):
- Private equity funds (PEFs).
- Hedge funds (HFs).
As can be seen, the investment vehicles jointly are holders of the securities issued by the ultimate borrowers and other financial intermediaries [debt (and deposits) and shares]. Not shown here is that certain of the investment vehicles also hold certain real assets.
In most countries the statute covering life companies (long-term insurers / assurers) makes provision for the following different classes of life business. The insurers are obliged to register under one or more of these classes:
- Sinking fund
The products of these classes are called policies, for example, assistance policies, life policies, and so on. Figure 10 illustrates the classes of business and indicates that the only products which can be regarded as investment products are life insurance / assurance policies36. Life policies are classified into two categories:
- Endowment policies.
- Annuity policies.
Figure 10: life company business
Figure 11: classes of annuities
The endowment policies that apply to individuals are:
- Pure risk policies (called term life and risk life assurance policies).
- Pure endowment polices.
- Combination policies (called universal life policies).
Of the endowment policies the pure endowment policy is the only one which is a pure investment vehicle. There are two broad categories:
- Guaranteed return plus bonuses.
- Direct profit participation.
All annuity policies are pure investment vehicles; there are three types:
- Retirement annuities.
- Living annuities.
- Conventional annuities.
Figure 11 illustrates the various types of annuities.
Retirement funds (RFs) are the best-known investment vehicles. By retirement, most individuals' share of the fund of which they are a member (called member's interest, undivided share, participation interest) represents their largest asset; usually the next largest asset in terms of value is their residential property.
Retirement funds are contractual savings institutions, and they are akin to savings plans. Persons employed (the participants or members) and/or their employers contribute a certain amount of funds per time period (usually monthly) to the fund. This usually takes place during the working lifetime of the members, the purpose being to provide financially for retirement.
There are three types of retirement fund:
- Pension fund (also called defined benefit fund - rules of the fund provide for a specified benefit at retirement).
- Provident fund (also called defined contribution fund - rules of the fund do not commit the fund to a particular benefit; the company and the employee contribute a specified amount to the fund).
- Preservation fund (a "parking" fund until retirement required by statute when a retirement fund participant leaves employment).