Glossary
A Day
6 April 2006 - the date at which the current tax regime took effect for UK occupational and personal pension arrangements. In particular, the date that the Lifetime Allowance and the Annual Allowance were introduced. There were several ways in which individuals could protect the benefits already earned up to A Day - these were known as Primary Protection and Enhanced Protection.
Absolute return funds
Absolute return is a style of investment where the manager aims to produce a positive return in all market conditions, by varying the asset allocation (or otherwise) depending upon the managers expectations.
ABI - Association of British Insurers
The Association of British Insurers is the trade association for insurers companies and represents virtually the whole of the UK insurance company market.
ACA - Association of Consulting Actuaries
The ACA's members are all professionally qualified actuaries who advise individuals and corporate clients on a wide range of financial issues including pensions, life and general insurance, healthcare and many other areas.
ACCA - Association of Chartered Certified Accountants
ACII - Associate of the Chartered Insurance Institute
Actuarial Profession - Actuarial Profession
The UK professional body, comprising the Faculty of Actuaries in Scotland and the Institute of Actuaries elsewhere.
Actuary
An actuary is an expert in statistics and its application to solving problems regarding financial predictions. Actuaries are particularly involved in the fields of life insurance, pension funds, general insurance and the investment of the funds underlying those businesses. However, their involvement is not necessarily limited to those fields.
Appointed Actuary
An actuary appointed by an insurance company or friendly society in connection with its long term business as required by legislation. The main statutory role of the Appointed Actuary is to carry out a regular valuation of the reserves the insurer should hold to pay for future policy benefits. They must also advise the insurer's board on actuarial matters and, in particular, on the fair treatment of policyholders.
ALM - Asset Liability Modelling
A model which projects a fund into the future. Usually, assets are projected using a stochastic investment model and liabilities using a cashflow model. By combining projections of assets and liabilities it is possible to estimate expected funding and solvency positions, and contribution requirements at in the future. Running many simulations will show a range of possible future outcomes dependent upon the investment strategy chosen - from this the optimal investment strategy can be chosen.
Barnett Waddingham offers ALM as a service to its pension fund clients.
AMPS - Association of Member-Directed Pension Schemes
Formed by the combination of the Association of Pensioneer Trustees (APT) and the SIPP Providers Group (SPG).
Annual Allowance
The annual limit on increases to accrued pension benefits (before retirement) introduced at A Day by the Finance Act 2004. For Defined Contribution arrangements, the Annual Allowance applies to the contributions paid in to the scheme, but in a Defined Benefit scheme, the annual allowance applies to 10 times the increase in benefits over that year. For the tax year 2008/09, the Annual Allowance is £235,000.
Annuity
A series of regular payments. More particularly, a contract under which one party (often an insurance company) agrees to make regular payments to another party, usually lasting until the receiving party dies. For example, personal pension policyholders often use their accumulated cash fund at retirement to purchase an annuity from an insurance company.
APFS - Associate of The Personal Finance Society
APL - Association of Pension Lawyers
APMI - Associate of the Pensions Management Institute (PMI)
See also: FPMI
See also: MPMI
APT - Association of Pensioneer Trustees
ASA - Associate of the Society of Actuaries
ASB - Accounting Standards Board
The role of the Accounting Standards Board is to issue UK accounting standards. It is recognised for that purpose under the Companies Act 1985. It took over the task of setting accounting standards from the Accounting Standards Committee in 1990.
AVC - Additional Voluntary Contribution
Contributions to an occupational pension scheme over and above a member's normal contributions (if any), which the member elects to pay to the scheme (if the scheme allows) in order to secure additional benefits.
Asset Share
The accumulation of insurance premiums paid by the policyholder, less deductions, plus allocations, accumulated at the rate of investment return achieved. Where investment returns have been smoothed, the asset share is known as a smoothed asset share, otherwise it is an unsmoothed asset share. Deductions usually include expenses and any other charges (e.g. tax, guarantee costs, cost of death benefits) applicable to the policy, policies or fund. Allocations may include profits (or losses) on business financed by the with-profits fund.
Asset shares are used by insurance companies to help them set bonuses and maturity payouts on their with-profit policies.
Basic State Pension
The first level of State pension provision in the UK, giving a flat rate pension of around £90.70 per week (2008/9 tax year) for single pensioners (albeit contingent on National Insurance contributions over a full working lifetime of 44 years, and adjusted pro-rata for contributions over less than 44 years).
Bonds
A bond is a form of debt issued by organisations, with the purpose of raising finance. Bonds may be issued by companies (where they are known as corporate bonds), governments, international institutions and supranationals. Bonds issued by the British Government are known as gilts. Bonds are issued by organisations that wish to raise capital by borrowing. They sell (or issue) a bond for which they receive a lump sum. In return they agree to pay a regular series of interest payments, known as coupons (commonly twice a year) and a lump sum at the end of the term of the bond (known as maturity). So a bond is effectively a loan from the bond holder (the investor) to the organisation that issued the bond.
Bonds issued by the Governments of developed countries are typically the most secure long-term investment available. As they are low risk they have a low expected return with yields typically lower than other types of bonds. Corporate bonds are generally less secure than Government bonds. The level of security depends on the company that has issued the bond and the type and term of the bond. As corporate bonds have a higher risk of default than Government bonds, investors require a bigger return to compensate for this increased risk, and hence yields are usually higher on corporate bonds. Corporate bonds are given a rating to allow investors to assess the security of the investment. The top rating is AAA, then AA, and A and so on.
Bonds can either be fixed or index-linked. A fixed bond pays an income stream and redemption payment at maturity that is fixed in monetary terms. However, high inflation will erode the real value of these payments. Index-linked bonds provide a secure investment in real terms, as the coupon payments and the redemption proceeds are linked to movements in the Retail Prices Index (RPI).
CII - Chartered Insurance Institute
Professional and educational body for insurance and financial services, the CII provides support for practitioners and sets high professional and personal standards.
CMI - Continuous Mortality Investigation
The CMI was established by the Actuarial Profession to carry out industry-wide claims experience investigations in the field of life and health insurance.
Defined Benefit
A type of pension scheme, in which the benefits payable on retirement are based upon a formula. Final salary pension schemes are the most common type of defined benefit schemes. The benefit is predictable in advance, but the contributions required to achieve that benefit will depend upon the experience of the scheme (for example the investment return achieved). Usually the majority of the risk in providing the pension is borne by the employer in a defined benefit scheme, because if the pension costs more than expected, the employer must increase their contributions. This is the opposite of 'Defined Contribution'.
Defined Contribution
A type of pension scheme, in which the benefits payable on retirement are dependent upon the amount of money paid in, the investment return received and the cost of purchasing a pension at retirement. The benefit is very hard to predict in advance, because it will depend upon the experience of the scheme (for example the investment return achieved). Usually the majority of the risk in providing the pension is borne by the member in a defined contribution scheme, because if the pension costs more than expected, the member will receive a lower pension. This is the opposite of 'Defined Benefit'.
DipPFS - The Personal Finance Society Diploma
Accredited on completion of the Advanced Financial Planning Certificate run by the Chartered Insurance Institute or now holding The Personal Finance Society Diploma.
DSS - Department for Social Security
See DWP.
DWP - Department for Work and Pensions
The ministry of the UK Government dealing with social security issues, including the UK state pension and some pensions regulation. Formerly known as the DSS.
Earnings Cap
The Earnings Cap ("The Cap") was introduced Finance Act 1989, to put a ceiling on the remuneration which can be used for calculating the maximum pension benefits paid at retirement from an occupational pension scheme, for those people who joined the pension scheme after 1 June 1989. In April 2006 (A Day), the calculation of maximum benefits was replaced by the Lifetime Allowance, and so the Earnings Cap (which was £105,600 per annum for the tax year 2005/06) was no longer needed.
Since A Day, a number of schemes have continued to apply a cap on earnings, HMRC specifies the notional earnings cap, which for 2008/09 is £117,600.
Enhanced Protection
Introduced by the Finance Act 2004 as a way of protecting benefits built up prior to A Day. Broadly speaking, the individual concerned can apply for Enhanced Protection to keep the benefits built up plus some prescribed increases until retirement, so long as the individual doesn't accrue any additional pension elsewhere.
Equities
Equities are the principal way in which manycompanies are financed. When a company wants to raise money they can sell shares for which they receive a lump sum. In return the shareholder (buyer) has a share in the equity capital (or ownership) of the company. This differs from bonds in that the shareholder is not loaning the company money but is buying a share in the ownership of the company.
The shareholder is entitled to receive a share in the net profits of the company. This income is paid in the form of dividends. The dividend payments are not guaranteed to be paid and the amount is uncertain. Shareholders also have the right to attend and vote at general meetings of the company.
Most equity investment is in shares that are listed on a stock exchange. In order to obtain a listing, companies have to comply with the stock exchange's regulations. These regulations give investors a measure of protection as they include conditions that the company must fulfil to gain and maintain a listing. Shares that are not listed on a stock exchange are not subject to the same degree of regulation and are therefore riskier from an investor's point of view - these are known as 'Private Equity'. Unlike bonds, equities are not generally redeemable (i.e. they don't end at a given date). However, they can be traded daily on a stock exchange, where the price is determined by supply and demand, and so can change quite significantly quite quickly.
Equities offer investors high potential returns for high risk. In the long run dividend payments are expected to grow with inflation and real growth in the company. However, as equities are not redeemable there is a high risk of capital loss should the company run into financial trouble.
EURACS - European Actuarial and Consulting Services
EURACS is one of the largest actuarial organisations which is independent of back, insurance or other influences. EURACS is represented in North America by NORACS - a similar association covering the USA, Canada and Mexico.
Expert Witness
Faculty of Actuaries
The Faculty of Actuaries is the professional body representing actuaries in Scotland
See also: Institute of Actuaries, Actuarial Profession
FFA - Fellow of the Faculty of Actuaries
FIA - Fellow of the Institute of Actuaries
FPMI - Fellow of the Pensions Management Institute (PMI)
FRS17 - Financial Reporting Standard 17
This is the UK accounting standard which implemented International Accounting Standard 19 in the UK.
FSA - Financial Services Authority
General information about financial services is available from the Financial Services Authority (FSA). The FSA is an independent watchdog set up by the Government to regulate financial services and protect consumers' rights. It provides free and independent information about financial matters.
FURBS - Funded Unapproved Retirement Benefit Schemes
GAD - Government Actuary's Department
A UK Government department which is involved with providing actuarial advice on public policy and other issues.
GMP - Guaranteed Minimum Pension
The minimum pension that a UK salary-related occupational pension scheme must have provided in order to have contracted out of SERPS (now called S2P) between 1978 and 1997. It is broadly equivalent to the SERPs pension which the member would have received if the employment had not been contracted-out.
Hedge Funds
An investment fund that uses sophisticated techniques to (attempt to) generate higher returns, or less volatile returns (or some combination of these). Compare to investing in the standard asset classes, the charges will usually be higher for hedge funds, and the assets will be less liquid (perhaps with a month's notice required to withdraw funds, for example).
HMRC - HM Revenue and Customs
The UK Government body responsible for the collection and administration of taxes and duties. Previously called the Inland Revenue.
Inland Revenue
See HM Revenue and Customs
IP - Income Protection
An insurance contract issued by life insurance companies to provide a benefit to the insured whilst he or she is incapable of earning a living through disability.
See also: Permanent Health Insurance
Institute of Actuaries
The Institute of Actuaries is the professional body representing actuaries in England and Wales. The Institute of Actuaries was formed in 1848 and was granted its Royal Charter of Incorporation in 1884.
See also: Faculty of Actuaries, Actuarial Profession
ICAEW - Institute of Chartered Accountants in England and Wales
The Institute of Chartered Accountants in England and Wales is the largest professional accountancy body in Europe and its qualification, which allows members to call themselves Chartered Accountants and use the designatory letters ACA or FCA, is recognised all over the world as a prestigious business qualification.
IAA - International Actuarial Association
An international association representing actuaries worldwide.
IACA - International Association of Consulting Actuaries
The Consulting section of the International Actuarial Association
ISA - Individual Savings Account
Tax-efficient UK savings vehicle combining characteristics of TESSAs and PEPs. Introduced by the UK Government in 1999.
LDI - Liability Driven Investment
An investment management style, in which a bond portfolio is built up to (broadly) match the cashflows of the liabilities, either by investing in those bonds directly, or synthetic bonds created using swaps. This can be done directly, or using appropriate pooled funds. Use of swaps allows for the option of 'gearing' so that the portfolio is fully immunised against interest rate and inflation movements, but some of the assets are still available to invest in risk seeking assets (which then adds risk back in to the portfolio).
LTA - Lifetime Allowance
The limit on pension benefits at retirement introduced at A Day by the Finance Act 2004. Benefits paid in excess of the LTA are subject to an extra tax charge. For the tax year 2008/9, the standard LTA is £1,650,000.
See also: Primary Protection, Enhanced Protection
LPI - Limited Price Indexation
The requirement under UK pensions law to increase pensions in payment under an occupational pension scheme (excluding AVCs) and protected rights under an appropriate personal pension scheme, by a minimum amount. For pensions accrued in respect of service from 6 April 1997 to 5 April 2005, the minimum yearly increase is price inflation up to 5% maximum - known as '5% LPI'. For benefits accrued since April 2005, the minimum increase is price inflation up to 2.5% - or '2.5% LPI'.
Long Term Care
Care provided to those who are unable to look after themselves without some kind of support. It includes care provided in the home, in sheltered accommodation, residential or nursing homes, but not care provided in a hospital unless it is intended to be permanent.
Definition taken from SIAS Paper "Long term care insurance: a guide to product design and pricing", Dullaway and Elliot, 1998.
MBO - Management Buy-Out
The purchase of a Company by its managers.
MCSD - Microsoft Certified Solutions Developer
Accredited on completion of the course of examinations set by Microsoft Inc.
MFR - Minimum Finding Requirement
A minimum funding standard for UK Defined Benefit pension schemes from the Pension Act 1995. The MFR was replaced in the Pensions Act 2004 by the Scheme Funding rules, which apply to actuarial valuations since September 2005.
MIG - Minimum Income Guarantee
A top up State benefit to ensure that every pensioner in Britain receives at least a minimum income.
MNT - Member Nominated Trustee
A requirement under UK pensions law (the Pensions Act 1995) that at least one-third of the trustees of an occupational pension scheme have been elected by (a representative body of) the active and pensioner members of the scheme.
MOM - Manager Of Managers
A Manager of Managers undertakes research of the market of investment management houses in order to identify firms, or individuals within those firms, who they consider to be the best available specialists for different asset categories or different investment styles.
MPMI - Ordinary Member of the Pensions Management Institute (PMI)
Individuals who have either completed the Qualification in Pensions Administration NVQ or the Retirement Provision Diploma are entitled to apply to use these designatory initials.
MSFA - Member of the Society of Financial Advisers (now DipPFS)
Accredited on completion of the Advanced Financial Planning Certificate run by the Chartered Insurance Institute or now holding The Personal Finance Society Diploma.
Myners Review
A review of institutional investment practices in the UK Pensions and Life industries carried out by Paul Myners.
NAPF - National Association of Pension Funds
Formed in 1923, the National Association of Pension Funds (NAPF) is the leading organisation providing representation and other services for those involved in designing, operating, investing funds and advising occupational pension schemes in the UK.
NI - National Insurance
A form of UK tax levied on income and allocated to the provision of, inter alia, basic state pension and S2P benefits.
NORACS - North American Actuarial and Consulting Services
NORACS is a network of leading actuarial consulting firms offering services in employee benefits, compensation and insurance. NORACS firms have offices and serve clients throughout North America and the UK. NORACS also maintains an affiliation with EURACS, allowing it to serve clients throughout Europe.
ONS - Office for National Statistics
OPAS - Occupational Pensions Advisory Service
See TPAS
OPRA - Occupational Pensions Regulatory Authority
See TPR
Pension Credit
The Minimum Income Guarantee (MIG) tops up the income of pensioners receiving less than the minimum income. As this is available to all pensioners, before the pensions credit was introduced, people who had saved enough to top up their state pension to the minimum income would be no better off than people who had saved nothing at all. Under the pension credit, less of the MIG benefit is lost by people who have made retirement savings.
PPF - Pension Protection Fund
The organisation established in the Pensions Act 2004 to provide an 'insurance' arrangement for UK Defined Benefit pension schemes (other than those backed by the Government). The PPF charge all relevant schemes an annual levy based on the size of the scheme, and the risk of the scheme failing (i.e. winding up with a deficit, which the employer is unable to fill). This risk is calculated based on the strength of the employer and the funding level of the scheme on a specified basis.
When a scheme enters wind up, it will be assessed by the PPF, and if the assets are insufficient (after any recovery from the employer), the PPF will take over the scheme. The PPF does not pay full benefits - the benefit structure is simplified; pension increases are reduced; and those below retirement age (whether actually retired or not, with the exception of ill-health pensioners and spouses) have their benefits reduced by 10% and a cap applied (for the tax year 2008/9 the cap at 65 is £30,856.35 which equates to £27,770.72 for those receiving compensation at the 90% level).
PHI - Permanent Health Insurance
An insurance contract issued by life insurance companies to provide a benefit to the insured whilst he or she is incapable of earning a living through disability.
See also: Income Protection
PMI - Pensions Management Institute (PMI)
Formed in 1976 to promote professionalism amongst those involved with pension scheme management and consultancy.
Primary Protection
Introduced by the Finance Act 2004 as a way of protecting benefits built up prior to A Day. Broadly speaking, the individual concerned can apply for Primary Protection and have a higher Lifetime Allowance than standard - based on their previous entitlement.
Private Equity
See Equities.
PSO - Pension Schemes Office
QPA - Qualification in Pensions Administration
A national vocational qualification (NVQ) in pensions administration sponsored by the Pensions Management Institute (PMI). Successful completion of the qualification entitles the candidate to apply for ordinary membership of the PMI and to use the designatory initials MPMI.
RPI - Retail Price Index
The UK index of consumer prices. Several variants from the headline rate exist, including RPIX (prices excluding mortgage payments).
S2P - State Second Pension
The earnings-related part of the UK state retirement pension which replaced SERPS (the State Earnings Related Pension Scheme) effective from April 2002.
Scheme Actuary
The named actuary appointed by the trustees or managers of an occupational pension scheme under Section 47 of the UK Pensions Act 1995.
Scheme Funding Requirement
Introduced by the Pensions Act 2004, replacing the MFR. Each Defined Benefit pension scheme must now have its own 'Statement of Funding Principles', set by the trustees (agreed with the employer usually), setting out the trustees' approach to funding the scheme on a prudent basis.
SIAS - Staple Inn Actuarial Society
Founded in 1910 as the Institute of Actuaries students' society. The Society has evolved to become a body arranging a wide range of activities both professional and social.
SIPPs - Self Invested Personal Pensions
SMPIs - Statutory Money Purchase Illustrations
Statutory Money Purchase Illustrations (SMPIs) are required to be issued annually for all types of Defined Contribution arrangements with a few exemptions (but including money purchase AVCs and money purchase transfers-in under a Defined Benefit scheme). They are calculated in accordance with a set of assumptions prescribed by the Actuarial Profession and are required for schemes years ending on or after 6 April 2003.
SOA - Society of Actuaries
The professional body representing actuaries in the USA.
SOFP - Statement of Funding Principles
A statement by the trustees of UK Defined Benefit schemes and required under the law, setting out the trustees' approach to funding the scheme.
SOIP - Statement of Investment Principles
A statement by the trustees of UK occupational schemes and required under the law, setting out the trustees' attitude to certain specified investment issues, including such matters as risk and ethical investment.
SPC - Society of Pension Consultants
A forum for pension consultants in the UK.
SSAS - Small Self-Administered Pension Schemes
Stamp Duty - Stamp Duty Land Tax
A UK tax payable on acquiring legal title to some forms of property, including shares.
Stakeholder
A type of Defined Contribution pension introduced by the Government on 6 April 2001. It is intended to be low-cost. Most employers who do not provide an occupational pension scheme for their employees will be required to provide access to a stakeholder scheme.
TEPs - Traded Endowment Policies
Trustees
Individual or body given possession of trust property with legal obligation to administer it solely for the purposes set out in that trust.
TKU - Trustee Knowledge and Understanding
A requirement set out in the Pensions Act 2004 for all UK pension scheme trustees to be conversant with the scheme's documentation, and the UK pensions law to the extent that it is necessary for their role.
TPAS (formerly OPAS) - The Pension Advisory Service
The Pension Advisory Service (name changed from Occupational Pensions Advisory Service in 2004) is a grant-aided, non-profit making company limited by guarantee. TPAS is an independent and voluntary organisation giving free help and advice to members of the public who have a problem concerning either a company or personal pension. Advice on State scheme benefits is not provided.
TPR - The Pensions Regulator
The Pensions Regulator is the new regulator of work-based pension schemes in the UK. Created under the Pensions Act 2004, they have wider powers and a new proactive and risk-focused approach to regulation compared to OPRA (the Occupational Pensions Regulatory Authority), its predecessor.