This is a guide to help people understand pensions terminology generally. The regulator also issues technical and practitioner guidance which contain glossaries of the technical and legal terms used in them. If there is any difference between the terms used here and similar terms explained in those glossaries, the glossary definitions attached to the relevant guidance should be used.

A

ABI

Association of British Insurers.

The ABI represents the collective interests of the UK's insurance industry, including all the major pension providers.

On its website the ABI sets out its role as follows:

"The Association speaks out on issues of common interest; helps to inform and participate in debates on public policy issues; and also acts as an advocate for high standards of customer service in the insurance industry."

It also provides an advisory service on corporate governance to those of its members who are active shareholders.

absolute return

An investment policy/strategy that aims to give the same return regardless of market conditions. The return should not rise or fall in line with UK equities, but will often offer a fixed percentage above bank rates, inflation or other objective measure.

See also: targeted return.

accrued benefits

The benefits for service already completed.

See also: accrued rights.

accrued rights

The rights related to service already completed to which a member is entitled under an occupational pension scheme. The value of accrued rights for active members may be calculated on the basis of current salary or, alternatively, may include an allowance for future salary increases.

active fund management

The management of assets (eg equities, gilts) in which the skill of the fund manager is used to select particular stocks at particular times, with the aim of achieving higher than average growth for the assets in question.

See also: passive fund management.

active member

A member of an occupational pension scheme who is at present accruing benefits under that scheme in respect of current service.

actuarial valuation

Commonly refers to an investigation by an actuary into the ability of a defined benefit scheme to meet its liabilities. This is usually to assess the funding level and recommend a contribution rate.

See also: actuary.

actuary

A professional adviser able to conduct an actuarial valuation, and to advise on policy issues eg transfer values, the drawing up of the statement of funding principles, and the choice of appropriate assumptions.

DB schemes are required to have a named scheme actuary appointed by the trustees or managers of the occupational pension scheme.

administration

  1. The day-to-day running of a pension scheme, eg collection of contributions, payment of benefits, record-keeping.
  2. The position in which an insolvent company may find itself if an administrator has been appointed by a court for the purpose of administering the payment of debts by the company.

An administrator is likely to be appointed where there is a realistic chance of selling a company as a going concern.

administrative receivership

The position in which an insolvent company may find itself when debenture holders, eg banks, have appointed an administrative receiver (often called the receiver) to realise a company's assets and use the proceeds to pay any preferential creditors (eg HMRC, the NISPI) and the debenture holders themselves.

advisers

Persons or companies appointed by the trustee board to give advice. The trustee board is legally required to appoint certain advisers.

See also: actuary; benefits consultantcustodian; IFA; independent trustee; insurance broker; lawyer; pensions manager.

alpha

Returns on a portfolio which exceed those indicated by movements in the index for the asset class in question.

Usually alpha is achieved by appointing fund managers with specific skills in selecting the asset in question which will allow for these excess returns.

See also: beta.

annuity

A series of payments, which may be subject to increases, made at stated intervals until the end of the agreed period or the life of the annuitant. This is often achieved by means of an insurance policy underpinned by guarantees.

approved scheme

The term used until recently by HMRC to describe those schemes meeting the requirements which entitle them to the tax privileges associated with pension funding. Now known as registered schemes.

articles of association

This document lists the regulations of a company. It includes the purposes of the company and the way it will be run. It should be sent, with the memorandum of association, to the Registrar of Companies when the company is formed.

Companies include trust companies set up for the purpose of running a pension scheme.

assessment date

The date of the employer's insolvency, and the date on which the Pension Protection Fund assessment period starts.

See also: assessment period.

assessment period

This starts on the assessment date and is the period of time during which the Pension Protection Fund works with the scheme trustees to assess whether it can assume responsibility for the scheme. The period lasts a minimum of a year.

See also: assessment date.

assets

Items such as equities, gilts, property and cash.

augmentation

The provision of additional benefits offered to members of a DB scheme, normally where the cost is borne by the scheme and/or the employer.

automatic enrolment

Employers have legal duties to enrol eligible jobholders into a qualifying workplace pension scheme and make contributions towards it. The jobholder cannot be required to take any action in order to become an active member of the scheme. A jobholder who has been automatically enrolled is free to opt out and get a refund of the contributions they have paid.

AVC

Additional voluntary contribution.

Contributions over and above a member's normal contributions if any, which the member elects to pay to an occupational pension scheme in order to secure additional benefits.

A legal requirement until 2006, but still offered by many schemes.

See also: FSAVC.

B

back end loading

An arrangement between trustees and employer allowing the employer to make good a deficit by paying the extra contributions needed in unequal instalments. The early instalments will be smaller than the later ones. This expression is used in relation to the recovery plan.

Barber judgement

The European Court judgement which established that men and women should be treated equally in relation to their pensions. The judgement was handed down on 17 May 1990 and this became the reference date for all changes to scheme benefit rules to comply with the ruling.

Despite this, state benefits remain unequal and will remain so for many years to come and this creates difficulties for schemes with GMPs in relation to equalisation.

Barber window

The time period which elapsed between the Barber judgement in the European Court (17 May 1990) and the date on which the scheme complied (or is due to comply) with the ruling that scheme benefits should be equalised between men and women.

basic state pension

The flat rate (not earnings related) state pension paid to all who have met the minimum NI contribution requirements, their spouses, subject to certain conditions, and widow(er)s.

bear market

A market in which equity prices are falling and sellers are more predominant than buyers. It is the opposite of a bull market, in which prices are rising and there are more buyers than sellers.

benchmark

A measure against which fund management performance is to be judged. A series of appropriate indices is chosen which reflects the requirements of the trustees. Usually a target is set which requires an agreed percentage better performance from the fund manager than the benchmark.

beneficiary

A member of a pension scheme who is entitled to a benefit from the scheme or a dependant who will become entitled on the death of the member.

benefit schedule

A schedule prepared by the administrators listing all scheme members (including dependants in receipt of benefits), and the benefits to which they are entitled. Usually drawn up when the administration is changing hands (eg when a scheme is being transferred to the PPF).

benefits

Any payments made to a beneficiary, including tax-free lump sums, pension payments and death benefits.

benefits consultant

Benefits consultants advise on remuneration and pension benefits. They may be retained by the employer or the trustees or both. They may be scheme actuaries.

benefits statement

A statement or estimate of benefits payable in respect of an individual's membership of a pension scheme, eg annually during employment, on retirement, in the event of wind up.

beta

Returns on a portfolio which can be attributed to movements in the market as a whole, rather than the skills of a particular fund manager. Usually achieved by holding a portfolio which exactly mirrors a particular index, eg the FTSE 350.

See also: alpha.

bonds

Loans made to an issuer (often the Government or a company) which undertakes to repay the loan at an agreed later date.

The term refers generically to corporate bonds or government bonds (gilts). However, in common parlance, the term bond is more likely to be used with reference to a corporate bond, while the term gilt refers exclusively to government investments, including index-linked gilts.

BR19

The form submitted by an individual to the Benefits Agency requesting a statement, estimating their state pension entitlement. It can be submitted up to four months before retirement age.

breach of trust

Any act or omission on the part of the trustee that is inconsistent with the terms of the trust agreement or the law of trusts.

bull market

A market in which equity prices are rising and buyers are more predominant than sellers. It is the opposite of a bear market, in which prices are falling and there are more sellers than buyers

buy-out

The purchase of an annuity for each member of a scheme which will guarantee pension benefits as nearly as possible equal to those which would otherwise be paid by the scheme.

buy-out debt

The amount of money required to purchase life assurance annuities for each member of a scheme which will guarantee pension benefits equal to those which would otherwise be paid by the scheme.

This may also be referred to as the 'section 75 debt' or 'debt on the employer'.

C

call option

A contract with a bank which is paid for up front and which will allow the investor to buy certain specified assets at an agreed price at some time in the future, even if the market value of those assets at that time is more than that agreed price.

capital markets

The markets in which capital is raised initially through the issue of shares (equities) and loans (bonds) and then subsequently traded. The stock market (dealing with the trading of equities) forms a significant, but by no means only, part of the capital market.

cash balance scheme

A type of scheme in which a percentage of salary is set aside each year for each member. The employer undertakes to ensure that each annual contribution will grow by a specified amount which is linked to prevailing interest rates. At retirement, the member's minimum accumulated fund will be determined by the specified minimum rate of growth for each contribution. It may bear no relation to levels of pay and it may be considerably higher than the minimum, if investments have been successful.

cash flow

The amount of actual money being received and spent. In the case of a pension scheme, the amount of money being received into the scheme in contributions and investment returns and the amount of money being paid out by the scheme.

In common parlance, in the case of DB schemes, projected cash flows usually refer to cash required in the future by the trustees to pay for pension liabilities when they fall due.

closed scheme

A pension scheme which does not admit new members. Contributions may or may not continue and benefits may or may not be provided for future service.

codes of practice

The Pensions Regulator's codes of practice give practical information about how trustees can comply with legal requirements, and set out the standards of conduct and practice expected.

combined code

The combined code on corporate governance sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders. The code was devised and is maintained by the Financial Reporting Council.

See also: listing rules.

commutation factors

Commutation factors dictate the extent to which pension benefits are increased or reduced by late or early retirement. They also determine the relationship between the lump sum taken (if any) and the level of the remaining pension.

Companies House

An executive agency of the department for business, enterprise and regulatory reform (BERR), which examines and stores company information delivered under the Companies Act and related legislation and makes this information available to the public on request. This includes annual financial statements from every limited company, whether or not it is quoted on any exchange.

compromise agreement

A legal agreement, the effect of which is to reduce the amount of the debt due from a sponsoring employer to a scheme under section 75 of the Pensions Act 1995.

Where a compromise agreement has been reached, a scheme will not usually be eligible for PPF compensation, unless the PPF agreed to the compromise at the time it was made.

See also: recoverable debt.

conflicts of interest

A conflict, for example, between:

  • a trustee's interest as an employee, eg financial director, and his or her duty as a trustee
  • the duty of a professional to the employer as well as to the trustees, where they are acting for both

contingent assets

Assets which are owned by the employer and which may be offered as security to the trustees of a pension scheme in deficit, where the employer covenant is weak and where the contribution required is not acceptable to the employer.

contracted in

Commonly used to describe a scheme which is not contracted out of the State Second Pension (S2P, previously SERPS) – ie where the members continue to be entitled to S2P.

See also: contracted out.

contracted out

Commonly used to describe a scheme which provides benefits in place of the State Second Pension (S2P, previously SERPS).

Currently these benefits from the scheme are paid for by means of a rebate of the relevant NI contributions.

See also: contracted in, contracting out certificate.

contracting out certificate

The certificate issued by HMRC, in respect of an occupational pension scheme which satisfies the conditions for contracting out.

See also: contracted out.

contribution holiday

A period during which normal employer contributions are temporarily suspended, usually when the fund is in surplus. Very exceptionally, members' regular contributions could also be suspended.

contributory scheme

A scheme which requires contributions from active members (even if such contributions are temporarily suspended during a contribution holiday).

corporate bonds

A bond with a fixed interest rate issued by a company for a fixed period of time.

corporate lawyer

A specialist in the legal implications of changes in the ownership of companies or significant changes in corporate structures.

corporate trustee

A company which acts as a trustee.

See also: articles of association and trust corporation.

coupon

The fixed rate of interest paid at prescribed intervals to the owner of a bond. The value of index-linked gilts increases each year with inflation, which has the effect of increasing the amount of the interest paid.

current unit method

A method of calculating technical provisions which takes no account of future salary increases which are over and above inflation.

custodian

A financial institution set up as a corporate trustee and independent of the investment management function to store and safeguard a scheme's assets, including the maintenance of accurate records of ownership. It may also collect income, produce tax reclaims and provide other services where required, such as stock lending.

custody of assets

The storing and safekeeping of securities (scheme assets) together with maintenance of accurate records of ownership and the management of those securities, eg the collection of dividends and other activities where required, such as stock lending.

See also: custodian; stock lending.

D

data interface file

A schedule of members and their benefits to be provided to the PPF by trustees at the end of the assessment period in a specified format (see PPF website).

DB scheme

Defined benefit scheme.

A scheme in which the benefits are defined in the scheme rules and accrue independently of the contributions payable and investment returns. Most commonly, the benefits are related to members' earnings when leaving the scheme or retiring, and the length of pensionable service.

Also known as 'final salary' or 'salary-related' scheme.

DC scheme

Defined contribution scheme.

A scheme in which a member's benefits are determined by the value of the pension fund at retirement. The fund, in turn, is determined by the contributions paid into it in respect of that member, and any investment returns.

Also known as 'money purchase' scheme.

death in service (DIS)

Death which occurs while a member of a pension scheme is still employed by the sponsoring employer. Benefits may be payable to dependants.

debt notice

The notice served on the employer by the trustees of a scheme in wind up, setting out the debt due from the employer to the scheme. The debt is the shortfall between the value of the assets and the liabilities.

deed of appointment

A deed by which a new trustee is appointed.

deferred anuity

An insurance policy which guarantees a series of payments, which may be subject to increases and which will start at retirement. The payments are made regularly until the death of the policy holder. The policy can be set up to provide benefits for dependants after the death of the policy holder.

deferred member

A member entitled to a deferred pension (sometimes known as 'preserved benefits').

See also: deferred pension.

deferred pension

A benefit relating to the past service of members of an occupational pension scheme who are no longer active members but have not yet retired. The benefits are payable at retirement or earlier death.

deferred pensioner

See deferred member.

deficit

The amount by which a scheme's liabilities exceed its assets.

defined accrued benefit method

A method for calculating technical provisions which is the same as the current unit method for most schemes, but which takes into account any departure from expected benefits in the event of the wind up of the scheme. It is therefore appropriate for schemes considering winding up.

See also: current unit method.

dependant

A person who is financially dependent on a member or pensioner or was so at the time of death or retirement of the member or pensioner. Scheme rules will define a dependant precisely, eg age at which children cease to be dependants.

derivatives

A generic term to describe a contract for the exchange of an asset at a given price on (or not later than) a given date. They are used when there is a risk that movement in a market between now and that future date could result in loss to the investor.

See also: futures, options.

discharge

The distribution of benefits usually by means of annuities. This is the final element of the wind up process.

discharge notice

Contains information for members about what their benefits will be from the wound up scheme, including:

  • any departure from expected benefits
  • any options available to members and the timescale for making a decision

disclosure

The disclosure requirements cover the information, which trustees are obliged to provide, about a scheme and the benefits for individuals. Some of this information must be given to evidence automatically, and other aspects of it must be provided on request.

discount rate

The discount rate is the assumed investment return used in a present value calculation of assets.

See also: present value.

dividend

A distribution of profits made by a company to its shareholders, usually half-yearly. The company usually has total discretion as to the size of the dividend and even whether or not to pay a dividend.

E

earmarked scheme

A DC scheme where all the benefits are secured by an insurance policy. Under the umbrella of the policy, each member accumulates an individual (earmarked) pension fund.

earmarking

The application of a court order made when a member of a pension scheme divorces, directing the trustees to pay some or all of the member's benefits to the ex spouse at the time they would otherwise have become payable to the member. Civil partners are treated in the same way.

effective date

The date at which the liabilities and assets of the scheme are measured for the purposes of a valuation.

employer covenant

The degree to which the employer is willing and able to meet the funding requirements of the scheme.

engagement letters

Used by accountants, investment banks and other advisers to set out the terms under which they are giving advice, they are now used by a wide range of advisers and suppliers. The precise form of the document will vary greatly depending on which type of adviser you are appointing. There are statutory requirements prescribing how scheme actuaries and scheme auditors must be appointed, and also the professional bodies that regulate your advisers will have their own requirements.

Usually drawn up by the adviser in question, the document should reflect everything you have agreed with your adviser including their liability limit, agreed fees and charges, their conflict of interest policy and arrangements for terminating their appointment.

Also known as: terms of appointment, letter of engagement, letter of appointment, signed agreement, contract.

ENT

Employer-nominated trustee.

A trustee chosen by the sponsoring employer.

equalisation

The modification of benefits accrued after 17 May 1990, so that one sex is treated no less favourably than the other.

equities

Shares in a company which are bought and sold on a stock exchange. Owning shares makes shareholders part owners of the company in question and usually entitles them to a share of the profits (if any), which are paid as dividends.

Exchange

Exchange is The Pensions Regulator's online service used by trustees and other pensions professionals to share important information with us about their schemes.

exemption clause

A clause in a trust document which gives trustees a degree of protection in the event of a breach of trust.

exoneration clause

A clause in a trust document which gives trustees a degree of protection in the event of a breach of trust.

expression of wish

A means by which a member can indicate to the trustees a preference as to the recipient of any lump sum death benefit.

external audit

An examination of the financial statements of the scheme by an individual or firm (the external auditor) appointed by the trustees or managers of an occupational pension scheme. The results of the examination are incorporated within the auditor's report.

external auditor

See external audit.

F

final salary scheme

See DB scheme.

final salary underpin

The entitlement of a DC scheme member to a minimum level of salary related pension if the member's accumulated pension pot is not sufficient to fund it.

financial adviser

Advises individual members about the options that are best for them and how they should organise their investments.

Advises the trustees of small schemes, who are often directors of the sponsoring employer, especially when the scheme is being set up.

Financial Conduct Authority (FCA)

On 1 April 2013 the Financial Services Authority (FSA) split into two regulatory bodies - the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

The FCA is responsible for regulating the standards of conduct in retail and wholesale, financial markets and for supervising the infrastructure that supports those markets. The FCA also has responsibility for the prudential regulation of firms that are not regulated by the PRA.

See also: Prudential Regulation Authority.

Financial Services Authority (FSA)

On 1 April 2013 the Financial Services Authority (FSA) split into two regulatory bodies - the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

See also: Prudential Regulation Authority and Financial Conduct Authority.

fixed interest

A generic term covering all investments which pay interest at a pre-agreed rate for a fixed term, including corporate bonds, gilts and index-linked gilts.

fixed term

See: fixed interest.

front end loading

The practice of levying higher annual charges on contributions made at the beginning of a contract than are charged on contributions paid later on in the life of the contract. These higher annual charges on early contributions are maintained throughout the life of the contract.

FSAVC

Free-standing additional voluntary contribution.

Contributions to an individual pension policy separate from an occupational pension scheme, made by an active member of that scheme. Benefits are provided from that policy using contributions from the member only.

It is possible to contract out using an FSAVC scheme in which case the rebate of the relevant national insurance contributions Will be added to the pension policy.

FSMA

Financial Services and Markets Act.

This act, passed in 2000, sets out the framework under which the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) operate.

See also: Prudential Regulation Authority and Financial Conduct Authority.

FTSE indicies

Financial Times Stock Exchange indices.

Various indices, published by the Financial Times, showing the movement of share prices of the companies which are included in any particular index.

The FTSE100 index shows the movement in share prices of the top one hundred companies (by capital value) listed on the London Stock Exchange.

Other FTSE indices include the FTSE all-share index (which includes all the shares listed on the London Stock Exchange). There is also a range of FTSE indices for UK Gilts.

fully insured scheme

Where the benefits to which each member is entitled under the scheme rules are secured exclusively by an insurance company taken out by the trustees.

fund manager

An individual (or company) to whom the trustees delegate the management of all or part of the scheme's assets.

Also known as investment manager.

funding level

The relationship (normally expressed as a percentage) between the actuarial value of a scheme's assets and liabilities at a specified date (usually the valuation date).

funding position

The absolute amount of any surplus or deficit.

funding target

The desired funding level, usually 100% on the ongoing basis.

funnel of doubt

The shape of a graph to illustrate a range of probable outcomes from a given investment strategy. If the desired outcome is represented by a straight line half way up the vertical axis (investment return) and parallel to the horizontal axis (time), the range of probable outcomes around the centre near the vertical is very small but it widens with the passage of time, making a funnel.

Some investment strategies (eg 100% UK Government bonds and gilts) will have a very narrow funnel representing a narrow range of probable outcomes while other, more volatile strategies, will result in a much wider range (ie a much wider funnel).

futures

A contract which binds two parties to complete a sale or purchase at a specified future date at a price which is fixed at the time the contract is affected.

G

gilts

Bonds issued by the UK Government, which have a fixed interest rate. If they are index-linked, the value of the gilts increases each year with inflation, which has the effect of increasing the amount of the interest paid.

GMP

Guaranteed minimum pension.

The minimum pension which an occupational pension scheme must provide as one of the conditions of contracting out of SERPS for service before 6 April 1997 (unless it was a DC scheme contracted out through the provision of protected rights).

group personal pension

An arrangement made for the employees of a particular employer, to participate in personal pension schemes with the same pension provider. Each member has a separate pension policy (contract) with the pension provider, although contributions are collected by the employer who then pays them to the provider.

Because of the contractual arrangements, a group personal pension scheme is referred to as a contract-based scheme, rather than a trust-based scheme, and there is no board of trustees.

growth asset

Assets which can, broadly speaking, be expected to grow in value in line with the economy as a whole over the long term. Examples include equities or property.

See also: growth manager; value manager, value asset, price earnings ratio.

growth manager

Fund managers who invest in shareholdings which they expect to increase in value, almost regardless of the dividends paid. They tend, therefore, to favour shares with a high price/earnings ratio (expensive shares).

Growth managers are more likely to do well in rising markets when this type of share tends to perform strongly.

See also: price earnings ratio; value manager, value asset, growth asset.

guidance

The Pensions Regulator issues guidance to help improve understanding of work-based pension schemes and to promote good practice.

This guidance is intended to be helpful but is not a statement of law. It does not carry as much weight as a code of practice, because a court or tribunal will not take it into account when deciding whether a particular legal requirement has been met.

See also: codes of practice.

H

HMRC

HM Revenue & Customs

Formed in April 2005, following the merger of Inland Revenue and HM Customs and Excise Departments, HMRC determines the tax environment within which pension schemes operate.

I

IDRP

Internal disputes resolution procedure.

The written procedure to deal with disputes between beneficiaries on the one hand and trustees on the other, which occupational pension schemes are required to put in place.

income drawdown

Mechanism for the withdrawal of retirement income from an approved money purchase pension arrangement in order to defer the eventual purchase of an annuity. Now largely replaced by unsecured pension arrangements introduced by tax changes with effect from April 2006 (usually Self-Invested Pension Plans: 'SIPPs').

See also: unsecured pension arrangement.

indemnity clause

A clause in the trust document that affords a degree of protection to trustees in the event of a breach of trust.

independent trustee

An individual or company which performs the duties of the trustee but has no other direct or indirect involvement with the pension scheme or its advisers, the sponsoring employer or the members.

The regulator may appoint an independent trustee to an occupational pension scheme, where an insolvency practitioner has been appointed to the employer.

index-linked gilts

Bonds issued by the UK Government for a fixed term, which have a fixed interest rate. Because they are index-linked, the value of the gilts increases each year with inflation, which has the effect of increasing the amount of the interest paid.

Often known as inflation-linked gilts.

See also: giltscorporate bonds.

indices

Show the average movement of the value of a compilation of assets. Different indices apply to different assets, eg shares in smaller companies, shares in larger companies, property, gilts and corporate bonds.

Overseas assets have their own indices, eg the Dow Jones and the Nasdaq in the US.

See also: FTSE indices.

inducements

An offer made by an employer to encourage members to transfer out of the scheme. This usually takes the form of an upfront cash payment, but could be a one-off contribution to an alternative (probably DC) pension arrangement.

inflation-linked gilts

See index-linked gilts.

initial notice

Formal communication from trustees to members where a scheme is in wind up/entry into the PPF assessment period, to be issued within one month of the date winding up or the PPF assessment date.

insurance broker

An individual or company authorised by the FSA to advise on and arrange any general insurance policy, such a policy to cover death in service benefits, trustee indemnity insurance etc.

internal audit

An audit undertaken by, or on behalf of, the administrators of the scheme. It only considers the administration of the scheme, its systems and processes, and whether potential risks are being adequately managed.

See also: risk register.

investigating accountant

An accountant who specialises in the close examination of financial statements of companies, in order to determine whether there is any threat to the employer covenant, usually where there is the possibility of corporate restructuring, takeover or merger.

investment consultant

An adviser to the trustees on investment strategy, usually after the scheme actuary has advised the trustees on the split between fixed interest and volatile investments. Also advises the trustees on suitable fund managers for the assets in question.

investment management agreement

The document agreed between a fund manager and the trustees of a scheme setting out the basis upon which the fund manager will manage a portfolio of investments for the trustees.

See also: fund manager.

investment manager

See fund manager.

investment portfolio

A collection of assets owned by a particular person, people or organisation, eg a trustee board.

L

lawyer

See scheme lawyer.

lay trustee

Nominated by the employer (ENTs) or elected by members (MNTs), they are usually members of the scheme and/or employees of the sponsoring employer and are not paid except for incidental expenses. In the charity sector lay trustees may also be elected or appointed by outside persons or entities.

letter of appointment

A letter officially appointing an adviser to the trustees.

leverage

The use of borrowed money in the context of alternative investments which allows for the purchase of more of a given asset than would otherwise be possible. Because of the greater size of holding, the risk is increased; while gains are potentially correspondingly higher, so are losses.

If the investment is via a pooled fund, any losses can be limited to the size of the actual investment.

liabilities

Amounts which a pension scheme has an obligation to pay now or in the future. The value of liabilities payable in the future can not be accurately determined, and will be dependent on the use of assumptions.

LIBOR

London Interbank Offered Rate (LIBOR).

A benchmark for short term interest rates between banks world wide, which is published daily.

lifestyling

An asset allocation strategy used mainly in defined contribution schemes whereby a member's investments are adjusted depending on age and length of time to retirement. Typically assets are switched gradually from equities to bonds and cash as retirement approaches.

liquid asset

An asset which is relatively easy and quick to buy or sell, eg equities, fixed interest investments.

liquidation

Liquidation is a type of insolvency in which the company usually closes down, the assets of the business are realised, and the proceeds distributed amongst the creditors in a prescribed way.

listing rules

Made by the FSA and enforceable, they apply to all publicly listed companies (eg listed on the London Stock Exchange or any other exchange).

The listing rules cover such matters as the disclosure of price sensitive information, communications on new share offers, rights issues, and potential or actual takeover bids for the company. They also require the company to disclose the ways in which they have applied the combined code in their annual report and accounts.

See also: combined code.

LPI

Limited price indexation.

The minimum annual rate of indexation which must be applied to pensions in payment or deferred pensions, where they relate to service after 5 April 1997.

LPI is the lesser of the actual rate of inflation and either 5% or 2.5% depending upon the date when the service was accrued and whether the pension is in payment or deferred.

However, schemes are can make increases in pension payments over and above LPI if they wish and the rules allow.

See also: RPI.

lump sum

A sum of money that members can choose to take at retirement. It is currently paid free of tax. If this option is chosen the member then receives a reduced pension.

See also: tax-free lump sum.

M

mandate

That part of the investment management agreement which stipulates the target return and covers such matters as the proportion of the assets in question which may be invested in different sectors/geographical areas/fixed interest/equities/property (a constrained mandate). Alternatively, it may go so far as to offer the manager total discretion about how to achieve the target (an unconstrained mandate).

See also: investment management agreement.

market neutral

Describes a product designed to give the same return regardless of market conditions. The return should not rise or fall in line with UK equities, but will often offer a fixed percentage above bank rates, inflation or other objective measure.

See also: targeted return.

member

A person who has been admitted to membership of a pension scheme and is entitled to benefit under that scheme.

Sometimes narrowly used to refer only to an active member.

See also: active member; deferred member; pensioner.

memorandum of association

A document setting out the details that a company must send to the Registrar of Companies, with the articles of association, when the company is formed. These details include the name of the company, its registered address and its objectives.

Trustee boards set up as a corporate entity equally require a 'mem & arts'.

See also: articles of association; corporate trustee.

MFR

Minimum funding requirement.

A requirement under earlier legislation that the actuarial value of the assets of a defined benefit scheme should not be less than the actuarial value of its liabilities, given a prescribed set of actuarial assumptions. This requirement has been superseded by the requirement for scheme specific calculations.

MND

Member-nominated director.

A director of a corporate trustee of an occupational pension scheme, appointed or elected by the members in line with MNT requirements.

In the case of very small schemes, where the sponsor is a private company, the corporate trustee may, in effect, be the board of directors of the company, subject to the requirements for member-nominated trustees.

Usually referred to as a member-nominated trustee (MNT).

See also: MNT.

MNT

Member-nominated trustee.

A trustee of an occupational pension scheme appointed or elected by the members in line with MNT requirements.

See also: MND.

money purchase scheme

See DC scheme.

Morris review

A review of the actuarial profession published on 16 March 2005 and available on the HM Treasury website.

mortality rates

Statistics relating to the ages at which people die.

N

NAPF

National Association of Pension Funds.

UK body providing representation and other services for those involved in designing, operating, advising and investing in all aspects of pensions and other retirement provision.

NIC

National Insurance contributions.

NICO

National Insurance Contributions Office.

Part of HMRC, responsible for the collection and recording of national insurance contributions.

NISPI

National Insurance Services to Pensions Industry.

A team within the National Insurance Contributions Office (NICO), dealing with occupational pension schemes and appropriate personal pension schemes which are contracted out of the state additional pension scheme (SERPS, State Earnings Related Pension Scheme or S2P, the State Second Pension).

non-contributory scheme

A scheme which does not require contributions from its active members.

non-professional clients

Generally defined as having limited investment expertise. Pension scheme trustees tend to fall into this category and they may have other factors to consider apart from investment returns, eg the employer covenant, their attitude to risk etc.

Advisers and fund managers are required to give trustees the opportunity to designate themselves as non professional and therefore in need of extra protection, which is likely to result in higher costs for advice and management.

See also: professional clients.

notice (of wind up)

The formal written notification between the employer and the trustee that wind up has been started. The notice must be formally acknowledged in writing. The format will vary from scheme to scheme and should be discussed with the scheme lawyer.

NPA

Normal pension age.

Earliest age at which a member can receive full pension benefits. It is not necessarily the same as normal pension date or normal retirement age.

O

on risk date

In an annuity purchase, this is the date deemed to be the date at which the risk for a particular set of members is transferred to a provider in exchange for a premium.

OPRA

Occupational Pensions Regulatory Authority.

Established by the Pensions Act 1995, OPRA was responsible for supervising occupational pension schemes. OPRA was superseded by The Pensions Regulator with effect from April 2005.

See also: Pensions Regulator.

options

A contract with a bank, which is paid for upfront and which will allow the investor to buy or sell certain specified assets at an agreed price at some time in the future. The market value of those assets may have moved in a way which makes the contract disadvantageous for the bank at the time it is exercised.

See also: put option; call option.

P

par value

The value of a loan at the time it is made by the original investor, also known as the 'maturity value' or 'face value'. It is the amount which the issuer will pay back to the current owner of the bond at the agreed maturity date. For index-linked gilts, the par value is the size of the original loan uplifted to take account of inflation in the meantime.

partial projected unit method

method for calculating technical provisions that takes some (but not full) account of future salary increases (eg salary increases for a limited period perhaps where scheme closure is envisaged).

participating employer

An employer who contributes or has contributed to a multi-employer or industry-wide occupational pension scheme and has been admitted to participate in the scheme under the scheme rules.

passive fund management

The management of assets, eg equities, gilts, by holding an exact replica of a given index, eg FTSE100, FTSE350, with the result that the assets in question move exactly in line with the chosen index.

See also: active fund management.

Pension Protection Fund (PPF)

Established to pay compensation to members of eligible defined benefit pension schemes, whose sponsoring employers become insolvent. The PPF is funded by a levy on all eligible DB schemes.

The PPF became operational on 6 April 2005.

pension scheme SORP (statement of recommended practice)

See SORP.

pension transfer

See transfer value.

pensioner

A person who is currently receiving a pension from a pension scheme.

pensions administration

The day-to-day running of the scheme, including the collection and allocation of contributions, the routine calculation of the benefits of individual members on retirement, in deferment, on death or ill-health. It also includes the maintenance of accurate and up-to-date member records and the management of operational risks.

Administration is sometimes performed internally by employees of the sponsoring employer, sometimes contracted-out to a third party administrator, and sometimes carried out by the pension provider, in the case of fully insured schemes.

pensions administrator

See pensions administration.

pensions in payment

Pensions that are currently being paid.

pensions manager

May be the manager of a pensions administration area, or may act as the secretary to the trustees, or may even be the chief executive of the pension scheme.

See also: pensions administration.

Pensions Ombudsman

Deals with:

  • disputes about entitlement and complaints of maladministration from individual members of occupational pension schemes
  • disputes between trustees of occupational pension schemes and employers
  • disputes between trustees of different occupational pension schemes

Pensions Regulator

Regulates work-based pension schemes in the UK.

Pensions Regulator Tribunal

The independent body set up to hear references (appeals) on determinations (rulings) made by the Determinations Panel. The tribunal issues its own guidance on the form and content of such an appeal.

The tribunal may consider any evidence available to it in relation to the subject of the appeal. This includes evidence that was not available at the time of the original determination.

pooled fund

Also known as pooled arrangement.

A fund in which large numbers of investors hold units, as part of a 'pool'. The underlying assets are managed by a fund manager and not directly owned by the investors.

PPF

See Pension Protection Fund (PPF).

PPF buy-out quote

A quote obtained by the trustees when their scheme is in the PPF assessment period. The quote gives the cost of providing the benefits on the basis of the PPF levels of compensation.

PPF credit rating

Used by the Pension Protection Fund (PPF) to estimate the risk of insolvency of a sponsoring employer, in the calculation of the risk-based element of the levy. Credit ratings for all sponsoring employers of DB schemes are provided by a single credit-rating agency to ensure consistency.

See also: Pension Protection Fund (PPF), PPF levy.

PPF levy

A levy on all occupational pension schemes eligible for protection under the PP, to fund the PPF, based on a combination of scheme-based and risk-based factors.

The scheme-based element relates to the number of members in a scheme.

The risk-based element takes account of the funding level of a scheme and the risk of insolvency for the sponsoring employer. It may also take account of the value of certain contingent assets, guarantees and other commitments to the scheme from the sponsoring employer.

See also: Pension Protection Fund (PPF); PPF credit rating.

preferential creditor

A creditor who is entitled to receive certain payments in priority to debenture holders and other unsecured creditors. These creditors include:

  • HMRC (income tax deducted at source, VAT) and National Insurance contributions
  • occupational pension schemes (members' contributions for the four months prior to the insolvency event, and employers' contracted out contributions for the 12 months prior to that date)
  • wages in the four months prior to the insolvency event

present value

A method used to calculate the current value of a series of future pension payments and future receipts, such as contributions and investment returns.

See also: discount rate.

preserved benefits

Benefits arising on an individual ceasing to be an active member of an occupational pension scheme, payable at a later date (eg a member who leaves that employment before retirement date).

price earnings ratio

The most common measure of how expensive a share is. It shows how a company's shares are priced in relation to its historical earnings. A high P/E ratio shows that the market expects the company's earnings to grow fast in the future (ie an expensive share). The opposite applies to shares with a low P/E ratio.

The P/E ratio is calculated by dividing the earnings per share figure into the market price of the shares. If a company has earnings per share of 35p and the market price is 500p, the shares have a P/E ratio of 14.3 (500 divided by 35). In other words, the shares are selling at 14.3 times earnings.

priority order

The provisions contained in the scheme documentation or in overriding legislation setting out the order of precedence of liabilities to be followed if the scheme is in wind up.

professional clients

Defined as having a good understanding of their own goals and requirements, and a good knowledge of financial theory. There will be many boards of trustees who categorise themselves as professional clients. They will not be in need of the extra protection given to non-professional clients.

See also: non-professional clients.

projected unit method

A method for calculating technical provisions which takes full account of future salary increases.

protected liabilities

Applying where a scheme is in wind up or an assessment period for the PPF, they represent the value of members' benefits at PPF compensation levels, plus any other liabilities and the estimated expenses of winding up the pension scheme.

protected rights basis

Applies where a scheme is contracted out of S2P (or SEPRS) on a money purchase basis, funded by NI rebates plus any incentive payable in the early years of contracting out.

Prudential Regulation Authority (PRA)

On 1 April 2013 the Financial Services Authority (FSA) split into two regulatory bodies - the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

The PRA is responsible for the authorisation, in conjunction with the FCA, and prudential supervision of individual deposit takers (including banks, building societies and credit unions), insurers (including friendly societies) and certain designated investment firms.

See also: Financial Conduct Authority.

put option

A contract with a bank which is paid for up front and which will allow the investor to sell certain specified assets at an agreed price at some time in the future, even if the market value of those assets at that time is less than that agreed price.

Q

quoted company

A company which has its shares listed on an exchange (eg the London Stock Exchange, the New York Stock Exchange, etc).

R

real returns

The difference between the rate of return of an investment and a selected measure of inflation (eg RPI) over the same period.

See also: returns.

rebalancing

Adjusting a portfolio to bring it back into line with the benchmark or with the investment strategy.

recoverable debt

The amount of the debt due from the employer (ie the shortfall between the assets and the liabilities) which the trustees of a scheme in wind up can actually recover from the insolvent company.

recovery plan

DB schemes only.

A strategy by which an employer will make up the deficit in an underfunded scheme over a specified period of time.

See also: schedule of contributions.

register

The record of all occupational pension schemes maintained by The Pensions Regulator.

registered

The term used by HMRC to describe those schemes meeting the requirements which entitle them to the tax privileges associated with funded occupational pension schemes. Formerly known as approved schemes.

registrable information

The scheme specific information required by The Pensions Regulator and held on the register of occupational pension schemes.

relationship manager

An employee of a fund management company who maintains the relationship with trustee clients.

relevant date

The date at which the assets of the scheme must be valued for PPF purposes (where a scheme is in the PPF assessment period); this is the day immediately before the assessment date.

See also: assessment date.

returns

The amount by which an investor benefits from owning an asset (interest, dividends and any change in value less any charges levied).

See also: real returns.

risk premium

The extra yield of an investment (over the gilt yield) demanded by investors to compensate them for the higher risk.

Sometimes used in the calculation of expected investment returns on equities, when selecting an assumption for the discount rate.

risk register

A document listing potential risks, their consequences to the scheme, and controls in place for mitigating those risks.

See also: internal audit.

RPI

Retail Prices Index.

The index of retail prices (for all items) published by the Office of National Statistics, which is used to determine the rate of inflation over the previous 12 months. Increase to state pensions and index-linked gilts are equal to the rate of change in the RPI, while increases to private pensions in payment are dependent on the rate of change in the RPI.

See also: LPI.

S

S2P

State Second Pension.

The earnings related element of the state pension scheme which has replaced the State Earnings Related Pension Scheme (SERPS) to enhance the basic state pension.

salary sacrifice

A written agreement between the employer and employee whereby the employee forgoes part of his/her future earnings in return for a corresponding contribution by the employer to a pension scheme.

NB. This is not the same as an AVC, which is paid by the employee.

schedule of contributions

Specifies the contributions payable by the employer over a given period of years, and includes any special contributions paid under a recovery plan.

See also: recovery plan.

scheme actuary

See actuary.

scheme auditor

See external auditor.

scheme booklet

A booklet for members which should clearly set out the benefits offered by the scheme and how the scheme is run. The scheme booklet is given to all members of the scheme when they join.

scheme lawyer

A legal adviser to the scheme who advises trustee boards on the appropriate or relevant provisions of:

  • trust and pensions law
  • their own scheme's trust deed and rules

scheme statutory discharge

The discharge of trustee liabilities on completion of a wind up.

scope guidance

Provided by The Pensions Regulator, setting out the topics on which trustees should have knowledge and understanding to comply with recent legislation.

section 143 valuation

An actuarial valuation carried out on a prescribed basis, required under the Pensions Act 2004 to determine whether the value of a defined benefit scheme's assets is less than the amount of its protected liabilities at the PPF assessment date.

section 179 valuation

An actuarial valuation to determine the funding of an eligible pension scheme, for the purpose of calculating the PPF risk based levy.

section 61 Trustee Act 1925

This states that the court can excuse a trustee for a mistake made, if the trustee acted honestly and reasonably and should not necessarily have asked for the court's directions at an earlier stage.

section 75 debt

See buy-out debt.

SERPS

State Earnings Related Pension Scheme (replaced by S2P, the State Second Pension).

See also: S2P.

SFP

Statement of funding principles.

Sets out a scheme's policy for meeting the statutory funding objective for an ongoing scheme (DB schemes only).

shareholder

Someone who owns shares in a company.

shorting

The practice, by fund managers, of selling assets which are not owned but borrowed. This is done on the expectation that the value of those assets will decrease and that they can be bought back later at a lower price and returned to the original owner. The fund manager's profit is the difference between the selling price and the subsequent reduced purchase price.

SIP

Statement of investment principles.

A written statement of the principles governing decisions about investments for an occupational pension scheme, which trustees are required to prepare and maintain. When preparing the SIP, trustees must have regard to advice from a suitably qualified person, and consult with the employer.

SLA

Service level agreement.

Part of a service contract which specifies the precise level of service to be provided under the contract, and will give examples which will include expected timescales. It will also detail action that will be taken if the requirements of the SLA are not met.

SORP

Statement of recommended practice.

Guidance on best accounting practice for the presentation of financial information prepared by the particular sector to which the SORP relates (in this case, occupational pensions).

sponsoring employer

The employer with responsibility for meeting the liabilities of a DB pension scheme.

In DC schemes, typically the employer who sets up and/or assumes responsibility for the running of the scheme, and meets the expenses.

SRI

Socially responsible investment.

Investments that comply with any social, environmental and ethical principles which may be adopted by the trustees.

Occupational pension schemes are required to disclose the extent to which, if at all, social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments.

stamp duty

The tax paid on the acquisition of certain assets, eg property, equities etc, with a value above a certain threshold determined by the treasury.

statutory debt

See buy-out debt.

statutory funding objective

The requirement for an ongoing scheme to have sufficient and appropriate assets to cover its technical provisions, or a recovery plan to reach that position.

See also: technical provisions; recovery plan.

statutory independent trustee

An independent trustee, appointed at the discretion of the regulator to a scheme where the employer has become insolvent. The independent trustee must be chosen from the regulator's register of approved independent trustees.

statutory objectives

The three specific objectives set for The Pensions Regulator in the Pensions Act 2004:

  • to protect the benefits of members of work-based pension schemes
  • to promote good administration of work-based pension schemes
  • to reduce the risk of situations arising that may lead to claims for compensation from the Pension Protection Fund

stock lending

A temporary transfer of securities (for example, equities) by an owner (typically a pension scheme) to a borrower (usually a fund manager). The borrower undertakes to return those securities to the lender at pre-agreed time.

See also: shorting.

strategic investment

Carried out by trustees as part of the preparation of their SIP, it is the practice of making long term decisions on asset allocation so that they are able to pay pension benefits as they fall due.

See also: tactical investment.

superannuation

The pension paid to retired members of an occupational pension scheme.

supervisor

An insolvency practitioner appointed to supervise the carrying out of a members' or creditors' voluntary arrangement.

suppliers

People or organisations providing services for the trustees, eg administration, IT infrastructure, custody arrangements etc.

swaps

Arrangements by which one type of income stream is swapped for another (eg an income stream at a variable rate of interest may be swapped for an income stream at a fixed rate of interest). Such an arrangement is often made through an investment bank.

Interest rate swaps are the most frequently used but there are types of swaps available, eg to offset the risk of inflation or longevity.

T

tactical investment

Day to day investment decisions (eg stock selection) for which the function and the responsibility may be delegated to the fund managers.

See also: strategic investment.

tail risk

The residual risk of a very large loss outside the normal range of probability.

targeted return

A particular absolute return agreed between the trustees and the fund manager.

See also: absolute return.

tax-free lump sum

A sum of money available to pension scheme members at retirement in exchange for a reduction in pension payments. It is currently paid free of tax.

technical provisions

They measure the extent of the liabilities to pay pension benefits in relation to past service as they fall due.

terminal bonus

The bonus paid when a with profits insurance policy matures. Such a bonus is customary but not guaranteed.

terminated

Used to describe an occupational pensions scheme which has been wound up.

See also: winding up.

The Pensions Regulator

See Pensions Regulator.

the regulator

The Pensions Regulator.

TPAS

The Pensions Advisory Service.

An independent organisation which gives free advice to the public about occupational or personal pension scheme. It does not give financial advice or advice on state scheme benefits.

Formerly known as the Occupational Pensions Advisory Service (OPAS) when its remit was restricted to occupational pensions.

traffic light principle

The Pensions Regulator's principle to help trustees decide whether a breach of the law is serious enough to report ('of material significance').

A breach is in the red category when:

  1. it is caused by dishonesty, deliberate contravention of the law, poor advice, or poor scheme governance;
  2. it is significant;
  3. steps are not being taken to put it right; and
  4. it has wider implications.

'Amber' breaches are harder to define as they fall in between red and green. They might consist of several failures of administration that, although not significant in themselves, have a cumulative significance because steps are not taken to put things right.

'Green' breaches are those that are not caused deliberately or dishonestly, or by poor governance or poor advice; they are not significant, steps are being taken to put them right, and they don't have wider implications.

transfer value

The amount of money which a scheme will pay to another pension arrangement in lieu of benefits which have accrued to a member. Sometimes referred to as a CETV (cash equivalent transfer value).

trigger

  1. Used to describe the particular situation which puts a scheme into wind up. It enables trustees to pinpoint the precise moment when this occurs, which becomes the 'as at' date for calculating benefits.
  2. A feature of a scheme's recovery plan which will cause the regulator to check that members' benefits are not unduly threatened.

trivial commutation

The conversion of a pension, which is below a prescribed level, into a cash sum (commutation).

trust corporation

A company empowered under trust law to act as a custodian for scheme assets and which is expected to provide professional expertise in managing trusts.

trust deed

A legal document, executed in the form of a deed, which establishes, regulates or amends a (pension scheme) trust.

See also: trust document; trust rules.

trust document

Comprising the trust deed and the trust rules, also known as the trust deed and rules.

See also: trust deed; trust rules.

trust rules

A legal document, usually attached to the trust deed, which establishes the rules under which the (pension scheme) trust will operate including such matters as who should be a member and what the benefits will be.

See also: trust deed; trust document.

trustee

An individual or company appointed to carry out the purposes of a trust in accordance with the provisions of the trust instrument and general principles of trust law.

U

unsecured pension arrangement

An arrangement which allows a DC scheme member of retirement age to defer the purchase of an annuity and instead invest the fund in assets of his choice. The member may or may not draw down an income, subject to certain limits.

This arrangement can usually only be maintained up to the age of 75.

See also: income drawdown.

V

value asset

A type of asset which should achieve high income returns in relation to price. This type of asset should do relatively well in falling markets as it is expected to hold its value better than other assets, eg growth assets.

See also: value manager; growth asset; growth manager, price earnings ratio.

value manager

A type of manager who aims to achieve results by investing in companies that offer high income returns in relation to the price of the shares (ie shares with a low price/earnings ratio).

Value managers tend to do relatively well in falling markets because shares with a low price/earnings ratio (cheap shares) tend to hold their value better than others, eg growth managers.

See also: growth manager; growth asset, value asset, price earnings ratio.

W

winding up

The process of closing down an occupational pension scheme. In the case of a DB scheme this is usually achieved by applying the assets to the purchase of insurance policies (annuities) for the beneficiaries, or by transferring the assets and liabilities to another pension scheme, in accordance with the scheme documentation or statute.

In the case of a DC scheme wind up is usually achieved by transferring members' funds to a new pension arrangement.

winding up lump sum

The conversion of a pension which is below a prescribed level, into a cash sum (commutation), payable where a scheme is winding up.

with profits annuity

An annuity purchased through a with profits insurance policy. In the early years income may be smaller than a normal annuity, with the expectation that it will increase over time with investment returns.

withdrawal

Arrangements required to ensure that, in the event of a bulk transfer, the pension rights of all members are protected.

Y

yield

A measure of the annual income earned on an investment.

For shares this is normally the annual value of the dividends expressed as a percentage of the market price of the share.

For bonds, the yield will be the annual interest rate divided by the price paid for the bond, which may be more or less than the nominal value.

In the case of inflation-linked gilts the value of the gilt will increase with inflation, leading to increased yield.

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