Helping bring clarity to complex jargon
6 April 2006 - the date at which the current tax regime took effect for UK Occupational Pension and Personal Pension arrangements. In particular, the date that the Lifetime Allowance and the Annual Allowance were introduced. There were two ways in which individuals could protect the benefits already earned up to A Day - these were known as Primary Protection and Enhanced Protection.
AA - 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 Pension Schemes, contributions paid in to the scheme are compared directly to the Annual Allowance. In a Defined Benefit scheme, 16 times the increase in benefits over a given year after adjusting for CPI inflation is compared.
For the tax year 2010/11, the Annual Allowance was £255,000. The Annual Allowance was reduced to £50,000 with effect from the 2011/12 tax year. From 2014/15 the Annual Allowance will be £40,000.
The Association of British Insurers is the trade association for insurers companies and represents virtually the whole of the UK insurance company market.
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 manager's expectations.
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.
The rate at which pension builds up for members of a Defined Benefit Scheme. In a Defined Benefit Scheme, pension benefits are usually derived by multiplying the accrual rate by length of service and by a measure of earnings (for example salary at retirement or earlier leaving may be used in a Final Salary Scheme).
Accrued Benefits / Accrued Rights
The amount of pension benefits accumulated before a particular date.
A style of investment management where the manager attempts to out-perform a stated Benchmark using skill to identify those sectors or stocks which are expected to perform well.
A member of a Defined Benefit Pension Scheme who is accruing pension benefits, or a member of a Defined Contribution Pension Scheme who is paying contributions.
The UK professional body, comprising the Institute and Faculty of Actuaries.
Also see FFA, FIA, Institute and Faculty of Actuaries.
An assessment of whether a Defined Benefit Pension Scheme has sufficient assets to meet the anticipated future benefit payments due from the scheme (its Liabilities). A Scheme Funding Valuation is carried out by the Scheme Actuary at least once every three years.
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 and general insurance, pension funds and the investment of the funds underlying those businesses although they are involved in other areas too.
Also see Scheme Actuary.
The PPF Administration Levy pays for the ongoing administrative costs of the PPF. Schemes pay an amount per scheme member, which varies according to the total size of the scheme.
The individual or body responsible to Her Majesty’s Revenue & Customs (HMRC) for the operation of an Occupational Pension Scheme. This may be the Trustees of the scheme, even if the day-to-day running of the scheme has been delegated to a third-party practitioner.
An Actuarial Valuation method which implicitly accounts for the current Funding position of the scheme, by calculating the contribution rate which would be expected to bring the scheme to being fully funded over the future working lifetime of active members.
See also: Current Unit Method, Projected Unit Method.
ALM - Asset Liability Modelling
A model projecting a scheme’s assets and Liabilities 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 Scheme Funding and solvency positions, and contribution requirements in the future.
ALMs are typically run using many simulations, showing a range of possible future outcomes dependent upon the investment strategy chosen. From this, an optimal investment strategy can be chosen.
A measure of investment out-performance relative to a relevant Benchmark Index. Positive alpha indicates that a fund has outperformed the Benchmark. It is therefore used as a measure of an Active Manager’s skill and performance.
See also Beta.
An investment which does not fall into the traditional asset classes of Equities, Bonds and Cash. Examples may include currency, Property, Commodities and infrastructure.
AMC - Annual Management Charge
A fee charged by an investment manager for managing assets. It is usually expressed as a percentage of the fund value.
The Association of Member Nominated Trustees (AMNT) was formed in September 2010 and aims to support Member Nominated Trustees in their role as Trustees.
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 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.
ARR – Age-related Rebate
The part of a National Insurance rebate to a Contracted-out Money Purchase (COMP) scheme that depends on the age of the contracted-out member. As the ability to contract-out on a Money Purchase basis ended on 6 April 2012, ARRs are now being phased out.
The ASB issues 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.
The breakdown of a scheme’s assets in different asset classes (for example Equities, Bonds, Cash, and Alternatives).
Attained Age Method
An actuarial Funding method which considers the cost of benefits accruing to Active members over their future working lifetimes.
An arrangement where an employer automatically includes an employee as a member of a work-based pension scheme. Auto-enrolment will start becoming compulsory from October 2012, although employees are able to opt-out if they do not wish to save.
AVC - Additional Voluntary Contribution
Contributions to an Occupational Pension Scheme over and above a member's normal contributions (if any), which the member may elect to pay to the scheme (if the scheme allows) in order to secure additional benefits.
An asset management strategy which invests across a range of different asset classes. Balanced mandates typically have peer group Benchmarks.
BAS – Board for Actuarial Standards
Until July 2012, the BAS had been responsible for setting actuarial standards independently of the Actuarial Profession. Oversight of the UK Actuarial Profession and independent setting of Technical Actuarial Standards has now passed to the FRC which deals with these matters through the Accounting Council of the FRC's Codes and Standards Committee.
The Actuarial Profession continues to set ethical standards.
Basic State Pension
The first level of State pension provision in the UK, giving a flat rate pension of around £107.45 per week (2012/13 tax year) for single pensioners. To qualify for the full amount of the Basic State Pension you must have paid, or have had credited to you, National Insurance Contributions over a full working lifetime of 30 years. The Basic State Pension is proportioned for contribution records shorter than 30 years.
One hundredth of one percent. For example 0.50% is 50 basis points (or 50 bps).
BCE - Benefit Crystallisation Event
A Benefit Crystallisation Event (BCE) usually occurs when benefits are put into payment in respect of a member of a registered pension scheme. There are different eleven different BCEs covering the various benefits a scheme may offer (eg pension commencing or a transfer to an overseas pension scheme).
The value of the benefits crystallised will reduce a member's available Lifetime Allowance (LTA). Any benefits above the LTA will be subject to a tax charge.
A situation where the stockmarket is falling. A commonly used measure is that the stock market must have fallen 20% over two months or more for it to be considered a bear market.
See also Bull Market.
A reference to which a fund’s performance is compared, for example the performance of the FTSE All-Share Index may be used as a Benchmark for the performance of a UK Equity fund.
A set of actuarial assumptions (or an actuarial basis) used to project cashflows, where the future assumptions do not contain any Prudence and are not optimistic. In other words there is felt to be an equal chance that the future experience will be better or worse than predicted.
See also Prudent.
That part of an investment’s performance that is considered to be related to the performance of the market as a whole. The market considered will usually be the Benchmark against which the performance of the investment is being measured.
See also Alpha.
The difference in the price paid and price received for a security. The bid price is the price at which an investor can sell a security. The offer price is the price at which an investor can buy a security. The bid price is always lower than or equal to the offer price. The difference (the spread) represents the trading cost of an investment round-trip (ie buying and then immediately selling the security).
A bond is a form of debt issued to raise capital. Bonds may be issued by companies , governments and also non-governmental organisations (for example the European Investment Bank or the International Monetary Fund (IMF)). Bonds issued by the British Government are known as Gilts.
A bond investor will pay a given price for a bond and, in return, will receive a regular series of interest payments, known as Coupons (usually either once or twice a year), followed by a lump sum payment (the nominal value of the bond) when the bond matures. The coupons will generally be a specified percentage of the nominal value.
See also Gilt, Corporate Bond, Coupon, Index-linked Bond.
Bulk Annuity Policy
A policy offered by UK insurers whereby pension schemes pay a lump sum in exchange for an Annuity that pays the retirement income in respect of some or all of the scheme's Pensioner Members.
A sustained period of market gains. A widely used measure is that the stock market must have risen 20% over two months or more for it to be considered a bull market.
See also Bear Market.
Buy-in / Buy-out
A “de-risking” investment decision taken by the Trustees of a Defined Benefit Pension Scheme to match the Liabilities of a group of members by purchasing Bulk Annuity Policies with an insurance company. If the policies are held in the Trustees’ name then it is a “Buy-in”. If the policies are assigned to the member (effectively severing the link with the scheme), then it is a “Buy-out”.
A set of actuarial assumptions used to estimate the Funding Level of a pension scheme assuming that the scheme is Wound up and the benefits are secured with an insurance company (via a Buy-out policy).
CARE – Career Average Revalued Earnings Scheme
A Defined Benefit Pension Scheme where retirement benefits are calculated using an average of Pensionable Earnings over the members’ Pensionable Service, often with each year’s earnings figure revalued in line with inflation up to retirement.
The most liquid form of financial asset; includes notes, coins and bank deposits.
Cash Equivalent Transfer Value
The amount of money a Defined Benefit Pension Scheme pays to another pension arrangement when a member’s benefits are transferred between the two.
Clearance applications can be made to the Pensions Regulator in order to prevent it from exercising its anti- avoidance powers during events such as mergers or restructuring.
A pension scheme which is either closed to new employees, or closed to new employees and further accrual of benefits.
See also Open Scheme.
The CMI carries out research into Mortality and morbidity experience. The CMI was originally established by the Actuarial Profession to carry out industry-wide claims experience investigations in the field of life and health insurance. The CMI also took over research into the mortality of members of Self Administered Pension Schemes (SAPS) in 2006.
COMB Scheme – Contracted-out Mixed Benefits Scheme
A Scheme which offered Contracted-out Salary Related (COSR) and Contracted-out Money Purchase (COMP) benefits.
Basic raw materials such as metals, oil and food stocks. Commodities are included in the Alternative Investments category. Investors can trade in commodities directly or more commonly through commodity Derivatives.
The rate at which pension is exchanged (commuted) for a cash lump sum within a scheme.
COMP Scheme – Contracted-out Money Purchase Scheme
An Occupational Pension Scheme that Contracted-out of the State Second Pension (S2P) before 6 April 2012. To qualify as a COMP scheme, contributions to the scheme had to be at least equal to the National Insurance Contributions (NIC) rebates received by the employer and employees. These contributions had to be tracked separately and certain restrictions applied on the type of benefits that could be provided using these “Protected Rights”.
Typically, COMP schemes are Defined Contribution in nature, although it was also possible for a Defined Benefit Pension Scheme to be contracted-out on a COMP basis. Contracting-out on a Money Purchase basis was abolished from 6 April 2012.
See also COSR Scheme, COMB Scheme.
Conflicts of Interest
Where an inherent interest of one role conflicts with the inherent interest of another role, a conflict arises. Examples include Trustees who are also senior directors of the sponsoring employer. The Pensions Regulator expects that Trustees of Occupational Pension Schemes document a formal conflicts of interest policy setting out how conflicts will be avoided or managed, and has produced guidance on the matter.
Many individuals and Occupational Pension Schemes are contracted out of the Second State Pension (S2P). This means that members pay lower National Insurance Contributions because they forfeit their entitlement to S2P.
See also Age-related Rebate, COMB Scheme, COMP Scheme, COSR Scheme.
A financial obligation imposed on an employer or employers (or other persons associated or connected with them) by the Pensions Regulator, which requires the payment of a specified sum of money to a pension scheme.
A Contribution Notice may be issued if there has been “an act or omission” which was intended to avoid or reduce a potential debt recovery (under s75 of the Pensions Act 1995), or if the Regulator considers that an act or failure to act is "materially detrimental" to the likelihood of a member receiving benefits.
In an Actuarial Valuation, the cost of future benefits accruing is often considered over members’ future working lifetimes or shorter periods. The period selected is known as the Control Period. Standard Contribution Rates are calculated so as to be stable over the specified Control Period.
See Current Unit Method, Projected Unit Method.
A Bond issued by a company or corporation. Bonds issued by non-governmental organisations may sometimes be described as ‘corporate bonds’, although they are more commonly termed ‘non-government’ bonds.
The extent to which the returns of two asset classes or securities move together. The correlation between two asset classes or securities will vary over time and according to the period of measurement.
COSR Scheme – Contracted-out Salary-Related Scheme
A Defined Benefits Pension Scheme that has Contracted-out of the State Second Pension (S2P). COSR schemes are required to pay benefits that meet or exceed the “Reference Scheme” minimum for at least 90% of members. Members’ benefits in a COSR scheme are often referred to as “section 9(2B)” rights.
Before April 1997, contracting-out on a salary-related basis was achieved by providing Guaranteed Minimum Pensions (GMPs).
The interest payment made by the issuer of a bond to the investor. The coupon is expressed as a percentage of the bond’s nominal value.
The sponsoring employer's legal obligations to a Defined Benefit Pension Scheme, and its ability and willingness to meet those obligations.
CPI - Consumer Prices Index
The UK Index of consumer prices. The Government has a stated CPI inflation target of 2.0% pa. The CPI is calculated and published by the Office for National Statistics (ONS).
See also RPI – Retail Prices Index.
A rating, normally issued by a ratings agency, identifying an entity’s perceived creditworthiness. The higher the rating, the lower the relative risk of default on its debt. Ratings range from AAA to D (or C for certain rating agencies). A rating of BBB or higher is said to be “investment grade”. Lower-rated bonds are said to be “high Yield” or “junk”.
See also D&B - Dun & Bradstreet.
An event where any sort of retirement benefit is paid, including lump sums on death before retirement. For example, an Annuity purchase, taking a pension from an Occupational Pension Scheme or taking a Pension Commencement Lump Sum. At each Crystallisation Event, a test against a member's personal Lifetime Allowance is carried out.
Current Unit Method
An Actuarial Valuation method similar to the Projected Unit Method, but where Pensionable Earnings growth is only considered over the Control Period, rather than over the whole of expected future working lifetimes.
See also Projected Unit Method, Attained Age Method.
D&B – Dun & Bradstreet
A Credit Rating agency currently used by the PPF to categorise companies according to risk of failure. D&B apply a Failure Score in the range 1-100, indicating the percentage of companies in the UK it perceives to be at equal or greater risk of failure over the next year. The PPF then use D&B Failure Scores in the calculation of a scheme’s PPF Levy.
An employee who is no longer an Active Member of an Occupational Pension Scheme, but who has Preserved Benefits in the scheme that have yet to come into payment.
See also Active Member, Pensioner Member.
The amount by which the Actuarial Liability exceeds the value of assets at a specified date. See also Surplus.
Deficit Recovery Contributions
Additional contributions, above the ongoing future service contributions, required in order to fund the Deficit in respect of a scheme's past service Liabilities.
Defined Ambition (DA) Pension Scheme
A form of pension scheme where the risks are shared between the sponsoring company and the member, rather than being borne almost wholly by one party (such as for Defined Benefit Pension Schemes or Defined Contribution Pension Schemes). In 2012, the DWP began consulting on ways in which the UK legislative framework could be amended to allow companies to set up DA Pension Schemes.
Defined Benefit (DB) Pension Scheme
A type of pension scheme in which the benefits payable on retirement are based upon a formula, usually relating to Pensionable Service and Pensionable Salary. Final Salary Schemes are the most common type of Defined Benefit Pension 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 in a Defined Benefit scheme is borne by the employer, because if the pension costs more than expected the employer must increase its contributions.
See also Defined Contribution Pension Scheme.
Defined Contribution (DC) Pension Scheme
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 in a Defined Contribution scheme is borne by the member, because if experience is poor, the member will receive a lower pension.
See also Defined Benefit Pension Scheme.
An investment fund into which Defined Contribution Scheme contributions are allocated unless a member makes the decision to invest in other available funds.
A financial instrument whose value (and therefore price) is derived from another underlying asset.
Investment across a range of asset classes or securities in order to reduce the risk of an investment portfolio.
Diversified Growth Fund
A form of Target Return Fund in which the portfolio is invested in a wide variety of different asset classes.
The distribution of a company’s profits or reserves to shareholders. Dividends are usually paid at the discretion of the company’s directors.
The weighted average time to payment of the cashflows of a financial product or series of Liability payments. Duration is used as a measure of the price sensitivity of a Bond to changes in interest rates.
DWP - Department for Work and Pensions
The Government department dealing with social security issues, including the UK state pension and some pensions regulation. Formerly known as the Department for Social Security (DSS).
Depending on a scheme’s Trust Deed and Rules, a member may be able to start receiving their pension before their Normal Retirement Age. Pension benefits will often be reduced on early retirement to take account of the longer period of time for which they are expected to be paid.
A member cannot take early retirement before age 55, unless they are in ill-health or they have a protected lower retirement age.
The Earnings Cap was introduced in the Finance Act 1989 as a ceiling on the remuneration which could be used for calculating the maximum pension benefits paid at retirement from an Occupational Pension Scheme for those people who joined the pension scheme on or after 1 June 1989.
From 6 April 2006 (A Day), the calculation of maximum benefits was replaced by the Lifetime Allowance, so the Earnings Cap (£105,600 per annum for the tax year 2005/06) was no longer a legislative requirement.
A number of schemes have continued to apply a cap on pensionable earnings since A Day. Up until 2010/11, HMRC specified a “notional” Earnings Cap. HMRC no longer specifies the figure so schemes are expected to work it out for themselves by projecting previous years’ Earnings Caps in line with RPI inflation (2012/13: £137,400 pa) or CPI inflation (2012/13: £135,000 pa).
Employer-Financed / Funded Retirement Benefits Scheme. This is a non-registered pension arrangement which is not assessed against the Lifetime Allowance and Finance Act legislation on pensions. (Note: EFRBS are formally defined in section 393A of the Income Tax (Earnings and Pensions) Act 2003 (as amended)).
See also FURBS, UURBS.
Introduced by the Finance Act 2004 as a way of protecting benefits built up prior to A Day. Broadly speaking, an individual could apply for Enhanced Protection (before 6 April 2009) to keep the benefits they had built up plus some prescribed increases until retirement, as long as they did not accrue any additional pension elsewhere.
See also Primary Protection.
Equities are shares in the ownership of a company and are the principal way in which many listed companies are financed. Investors pay money for newly-issued shares and in return receives a share in the equity capital (or ownership) of the company and a right to a share of future profits in the form of Dividends. Once issued, shares listed on a stock market can be traded at the current market price.
Shares that are not listed on a stock exchange are known as Private Equity.
ERP - Equity Risk Premium
The expected excess return on Equities over and above the Risk-free Rate of return.
ETF – Exchange-traded Fund
A Derivative security which is traded on an exchange like individual shares. An ETF may track a whole market e.g. FTSE 100 or parts of a market e.g. mining shares.
An investment strategy which excludes investments in particular companies’ shares whose nature of business is deemed to be unethical (including tobacco, arms, addictive substances etc). It may also actively select investment in socially responsible companies which support practices such as the use of alternative energy, environmental protection and human rights.
See also SRI – Socially Responsible Investment.
ETV – Enhanced Transfer Value
An offer from a Defined Benefit Scheme employer intended to encourage a member to transfer their benefits from an Occupational Pension Scheme to an alternative arrangement. The enhancement may take the form of a cash payment or an increase to the Cash Equivalent Transfer Value (or both).
EURACS is one of the largest European actuarial organisations and consists of actuarial firms across Europe offering services in pensions, employee benefits and insurance. EURACS maintains an affiliation with NORACS, allowing it to serve clients across North America.
See D&B – Dun and Bradstreet.
FAS - Financial Assistance Scheme
The FAS is a Government-funded arrangement, set up in 2005 to help members of under-funded Defined Benefit Schemes that began Winding-up between 1 January 1997 and 5 April 2005 where the employer is insolvent, no longer exists or is no longer legally required to meet a debt to the scheme.
In addition, the FAS helps members of schemes that started to wind up after 5 April 2005 but who are ineligible for help from the PPF because the employer became insolvent before this date.
The structure of FAS compensation is similar, but not identical to PPF compensation.
FFA - Fellow of the (Institute and) Faculty of Actuaries
Members of the Actuarial Profession are admitted to the class of Fellow on successful completion of the required actuarial exams and having met the work-based skills requirement. On qualification, fellows may use either the FFA or FIA suffix. Prior to the merger of the Institute of Actuaries and Faculty of Actuaries, the FFA suffix was exclusively used by fellows of the Faculty.
See also FIA.
FIA - Fellow of the Institute (and Faculty) of Actuaries
Members of the Actuarial Profession are admitted to the class of Fellow on successful completion of the required actuarial exams and having met the work-based skills requirement. On qualification, fellows may use either the FFA or FIA suffix. Prior to the merger of the Institute of Actuaries and Faculty of Actuaries, the FIA suffix was exclusively used by fellows of the Institute.
See also FFA.
All Occupational Pension Scheme Trustees are subject to a fiduciary duty - ie to act in accordance with the Trust Deed and Rules and in the best interests of all the beneficiaries.
Final Salary Scheme
A Defined Benefit Scheme in which the pension benefits payable on retirement are based on members’ Pensionable Salaries at, or close to, retirement.
See also CARE Scheme, Defined Benefit Pension Scheme.
If you expect your pension savings to be more than £1.5 million when you come to take your benefits on or after 6 April 2012 you can use fixed protection to protect them from the Lifetime Allowance charge.
FPMI - Fellow of the Pensions Management Institute (PMI)
Fraud Compensation Levy
The Pension Protection Fund is able to raise a fraud compensation levy to fund the Fraud Compensation Fund.
The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. The Accounting Council of the FRC's Codes and Standards Committee has oversight of the UK Actuarial Profession and independently sets Technical Actuarial Standards.
See also: ASB, BAS, TAS.
FRS17 - Financial Reporting Standard 17
The UK accounting standard covering accounting for pension costs in companies’ accounts.
FCA - Financial Conduct Authority
The FCA 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 and general information about financial services.
FSD – Financial Support Direction
A direction issued by the Pensions Regulator to provide financial support for all or part of the Liabilities of an under-funded pension scheme.
The setting aside of money now to meet future Liabilities. For Defined Benefit Pension Schemes, funding also refers to the actuarial costing basis underlying Valuations of the scheme on which decisions about employer contributions are based.
The relative value of a scheme’s assets and Liabilities, usually expressed as a percentage (known as the Funding Ratio).
The relative value of a scheme’s assets and Liabilities, expressed as a percentage.
FURBS - Funded Unapproved Retirement Benefit Scheme
An unapproved pension scheme funded by an employer to provide a member with additional lump sum and / or income in retirement (often because the member was subject to the Earnings Cap). Because they were not approved by HM Revenue & Customs, FURBS only qualified for limited tax reliefs. No new FURBS can be established since A Day.
See also EFRBS, UURBS.
A UK Government department which is involved with providing actuarial advice on public policy and other issues.
A Bond issued by the UK Government.
See also Bonds.
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 replaced by S2P) between 1978 and 1997. It is broadly equivalent to the SERPS pension which the member would have received had the employment not been contracted-out.
The amount of time and resources that trustees can dedicate to implementing and monitoring investment strategy.
Group Personal Pensions (GPPs)
GPPs operate on a Money Purchase basis. They are a series of Personal Pension plans administratively linked for cost efficiency. They usually accept employer contributions as well as a member’s contributions.
Group Risk Benefits
Group Risk Benefits are designed to protect employees and their families in the event of long-term illness or death while working for an organisation. Group Risk Benefits include pensions, life assurance (a type of death-in-service benefit), group accident insurance, Income Protection (also known as Permanent Health Insurance or PHI), and group critical illness.
An investment made with the aim of reducing risk by taking an offsetting position.
A loosely regulated investment fund which uses a variety of investment strategies, products and positions in order to generate returns. Originally, hedge funds were set up to reduce (or “Hedge”) risk, but the term is now used for a wider variety of funds, some of which may adopt risky strategies.
The UK Government body responsible for the collection and administration of taxes and duties. Previously called the Inland Revenue / Customs & Excise.
A pension scheme which offers a combination of Defined Benefit (DB) and Defined Contribution (DC) benefits. Often this will be in the form of a DB pension with an underpin related to member contributions, or a DC arrangement with a Final Salary underpin (such as GMP).
IAS19 – International Accounting Standard 19
The international accounting standard covering accounting for pension costs in companies’ accounts.
A Trustee, usually a professional, who is not otherwise linked with the pension scheme or the employer. There is a legal requirement to appoint an Independent Trustee on the Winding up of a Defined Benefit Scheme where the employer is insolvent.
A statistical measure which indicates the general level of prices or value in a market. For example a stock market index such as the FTSE 100 shows the level of the share prices of the 100 biggest companies (by Market Capitalisation) on the London Stock Exchange at a given time.
A bond where the Coupon payments and nominal value are increased with an Index – usually an inflation Index such as the Retail Prices Index.
See also Bond.
See HM Revenue & Customs.
IDRP - Internal Dispute Resolution Procedure
An IDRP is a policy that every Occupational Pension Scheme must make available, allowing a member to appeal to the scheme Trustees on any decision with which they are dissatisfied.
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 due to illness or disability.
See also: Permanent Health Insurance.
The Institute and Faculty of Actuaries came into being on 1 August 2010 as a result of the merger of the Institute of Actuaries and the Faculty of Actuaries. Voting members of both bodies voted to merge their respective organisations in a ballot held on 25 May 2010. It is the professional body representing actuaries in the United Kingdom, and operates publicly under the name “the Actuarial Profession”.
ISA - Individual Savings Account
ISAs are tax-efficient UK savings vehicles combining characteristics of TESSAs and PEPs. They were 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 in synthetic Bonds created using Swaps. This can be done directly, or using appropriate Pooled Funds. The 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).
The estimated value, using actuarial methods and assumptions, placed on the obligations of a pension scheme. These obligations include the present value of future pension instalments and contingent benefits and may include the expected value of future expenses.
LIBOR – London Inter-Bank Offered Rate
A measure of the rates of interest at which banks are lending to each other over the short term. LIBOR is widely used as a Benchmark for short term interest rates.
The use of debt or borrowing to increase one’s position in a financial transaction. As a result, both risk and potential returns are increased (also known as Gearing).
The process of changing a member’s investment strategy in a Defined Contribution Scheme according to the period until their retirement. Typically, as the member approaches retirement, assets are moved away from more risky assets such as Equities into less risky assets such as Cash and Gilts.
The ease with which an asset can be realised as Cash without affecting the price of the asset.
An investment position in which the investor owns or buys an asset. This is the opposite of being in a Short position.
See also Short.
How long an individual is expected to live.
See also Mortality.
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 expected to be permanent.
LPI - Limited Price Indexation
The requirement under UK pensions law to increase pensions in payment under an Occupational Pension Scheme by a minimum amount that is linked to inflation.
For pensions accrued in respect of service from 6 April 1997 to 5 April 2005, the minimum annual increase is price inflation up to 5% maximum – something known as “5% LPI”. For benefits accrued since April 2005, the minimum yearly increase is price inflation up to 2.5% - or “2.5% LPI”. Since 2011, LPI increases may be calculated using Retail Prices Index (RPI) or Consumer Prices Index (CPI) inflation.
See also Retail Prices Index, Consumer Prices Index.
LTA - Lifetime Allowance
The maximum total pension benefits at retirement that can qualify for the most beneficial tax treatment introduced at A Day. Benefits paid in excess of the LTA are subject to an extra tax charge. For the tax year 2011/12, the standard LTA is £1,800,000. The standard LTA reduced to £1,500,000 from 6 April 2012. From 2014/15, the LTA will be £1,250,000.
Benefits are tested against the LTA whenever a Benefit Crystallisation Event (BCE) occurs.
See also: Primary Protection, Enhanced Protection, Annual Allowance.
Market Capitalisation (Market Cap)
The total value of a company as measure by its share price. It is calculated as the share price multiplied by the number of shares in issue.
An investment portfolio whose assets aim to precisely match the Liability cashflows of a scheme. A matched portfolio is therefore Hedged against changes in interest rates and inflation rates. In practice, it is very difficult to precisely match Liabilities unless a Buy-out or Buy-in is arranged.
MFR – Minimum Funding Requirement
The Pensions Act 1995 required pension schemes to be fully funded (or take certain actions to be fully funded) using a prescribed set of actuarial assumptions. This was replaced in 2005 by the Scheme Funding Requirement.
MND – Member Nominated Director
Where the Trustee of a pension scheme is a corporate body, UK pensions law requires that (a representative body of) the Active and Pensioner Members have the opportunity to nominate at least one third of the directors. These are known as Member Nominated Directors.
See also MNT.
MNT - Member Nominated Trustee
UK pensions law requires (see Pensions Act 1995) that (a representative body of) the Active and Pensioner Members of an Occupational Pension Scheme to have the opportunity to nominate at least one-third of the Trustees. A Trustee elected under such arrangements is known as a Member Nominated Trustee.
MOM - Manager Of Managers
A Manager of Managers undertakes research of the market of investment managers 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.
Money Purchase Pension Scheme
An alternative name for a Defined Contribution (DC) Pension Scheme.
The risk of death of a particular individual based on factors such as age, health, gender, and lifestyle.
The number or proportion of deaths in a given period, or from a particular cause.
A statistical table showing the expected rates of death at different ages for a specified group of people.
A review of institutional investment practices in the UK Pensions and Life Insurance industries carried out by Paul Myners in 2001. This led to a series of recommendations and principles for pension scheme Trustees. A progress review was published in 2004 and updated principles were published in 2010 following a government consultation.
Formed in 1923, the National Association of Pension Funds (NAPF) provides representation and other services for those involved in designing, operating, investing funds and advising Occupational Pension Schemes in the UK.
A not-for-profit Defined Contribution Pension Scheme established via the Pensions Act 2008 for Employers who have not set up an alternative arrangement to comply with Auto-enrolment requirements.
NIC - National Insurance Contributions
A form of UK tax levied on income and allocated to the provision of, among other things, Basic State Pension and S2P benefits.
NISPI – National Insurance Services to the Pensions Industry
NISPI is a directorate within the National Insurance Contributions Office (part of HMRC) which deals with Contracted-out pension arrangements.
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.
Certain events, specified under section 69 of the Pensions Act 2004, must be notified to the Pensions Regulator. Notifiable Events may be scheme-related (such as the payment of a large Transfer Value) or employer-related (such as a decision by sponsoring company to cease trading in the UK). Trustees are responsible for reporting scheme-related Notifiable Events; the employer is responsible for reporting employer-related Notifiable Events.
NRA - Normal Retirement Age
The contractual age from which retirement benefits are paid from a pension scheme.
NRD - Normal Retirement Date
The date a member reaches Normal Retirement Age.
Occupational Pension Scheme
A pension scheme offered by an employer, providing pension and other benefits to people in its employment. See also Personal Pension Plan.
OMO – Open Market Option
Under the Finance Act 1975, someone approaching retirement must be allowed to “shop around” for alternative providers to convert their pension fund into an Annuity, instead of accepting the default rate offered by their current provider.
OPAS - Occupational Pensions Advisory Service
See TPAS - The Pension Advisory Service.
A pension scheme which is open to new employees.
See also Closed Scheme.
The risk associated with the execution of a company’s operations – for example the risk of fraud or of mistakes being made.
OPRA - Occupational Pensions Regulatory Authority
See TPR – The Pensions Regulator.
The ONS is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to Parliament. The ONS is the UK Government's single largest statistical producer. It is responsible for producing, among other statistics, monthly RPI and CPI figures.
A Participating Employer is an company whose employees are (or were) able to become members of a particular Occupational Pension Scheme.
See also Principal Employer, Statutory Employer.
A style of fund management which aims to generate returns which are broadly in line with an Index by replicating the composition of that Index.
PAYG - Pay As You Go
The practice of paying for benefits when they fall due, as opposed to setting aside money in advance of it being required. This method is used to finance S2P and state pensions in general, where there is no invested fund. Benefits are funded from current contributions via the tax system.
See also: Funding.
Earnings used to calculate pension contributions in a Defined Benefit Pension Scheme. A different name may also be used, such as Pensionable Earnings. The measure will vary from scheme to scheme and should be precisely defined in the scheme’s Trust Deed and Rules.
Length of employment / scheme membership used to calculate pension benefits in a Defined Benefit Pension Scheme. The measure will vary from scheme to scheme and should be precisely defined in the scheme’s Trust Deed and Rules. A different name may also be used.
PCLS – Pension Commencement Lump Sum
The cash sum obtained by exchanging some pension on retirement. It is usually paid free of tax. Members are generally not permitted to take more than 25% of the total value of their pension benefits as a PCLS without incurring additional tax charges. Also informally known as a tax-free cash lump sum.
See also Commutation Factor.
A member of a pension scheme who is in receipt of a pension benefit.
The Pensions Ombudsman is charged with investigating complaints of maladminstration and other disputes between members or beneficiaries and the Trustees or managers of pension schemes.
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 long term illness or disability.
See also: Income Protection.
PIE – Pension Increase Exchange
An offer, usually from a Defined Benefit Scheme employer, under which a member would give-up future (non-statutory) pension increases in exchange for a one-off uplift to their pension.
PMI - Pensions Management Institute
A professional body, formed in 1976 to promote professionalism amongst those involved with pension scheme management and consultancy.
An investment fund in which individual investments are aggregated. This permits economies of scale and allows small investors to access diverse portfolios.
See also Segregated Fund.
The PPF was established by 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 meet). 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 Winding up, it will be assessed by the PPF. If, after any recovery from the employer, the assets are insufficient to pay a given level of benefits the PPF will take over the scheme. The compensation paid by the PPF is generally lower than full benefits. The benefit structure is simplified - for example, pension increases are generally reduced and most members below retirement age have their benefits reduced by 10% and a cap applied. For 2012/13 the cap at 65 is £34,049.84, equivalent to £30,644.86 for those receiving compensation at the 90% level.
PPP – Personal Pension Plan
A pension arrangement available to individuals, usually through a specialist provider or insurance company. All PPP’s are Defined Contribution Schemes.
PQM – Pension Quality Mark
The Pension Quality Mark (PQM) is a quality standard in pension provision recognised by the pensions industry.
Members who leave an Occupational Pension Scheme before Normal Retirement Age can leave their benefit entitlement with the scheme and wait for it to become payable at a later date. The associated benefits are known as “preserved” or “deferred” benefits.
See also Deferred Pensioner.
The Principal Employer is the main sponsor of an Occupational Pension Scheme, as set out in the scheme’s legal documentation. The Principal Employer may have special powers in relation to amending the rules, Winding-up the scheme, or appointing new Trustees.
See also Participating Employer, Statutory Employer
Introduced by the Finance Act 2004 as a way of protecting benefits built up prior to A Day. Broadly speaking, the individual concerned could apply for Primary Protection before 6 April 2009 and, based on their previous entitlement, have a higher Lifetime Allowance than the standard.
Investment in companies whose Equity is held privately rather than listed on a stock exchange. This can include venture capital and management buy-outs.
See also Equities.
Projected Unit Method
A method used in Actuarial Valuations where allowance is made for the future growth of Pensionable Salaries between the valuation date and retirement. The cost of benefits accruing is considered over a specified ‘Control Period’.
See also Attained Age Method, Current Unit Method, Control Period, Aggregate Method.
An asset class which consists of commercial property such as shops and offices and, to a lesser extent, private residential property. The owners of property receive income in the form of rent payments and capital gains and losses on the change of the property value.
The fund built up in a Defined Contribution Scheme from rebates resulting from being Contracted-out of the State Second Pension (S2P). Historically, there were a number of restrictions on the use of Protected Rights, but these were removed between 2006 and 2012.
Contracting-out for Money Purchase Schemes ceased on 6 April 2012 and it is no longer a legislative requirement to separately record Protected Rights.
Prudence / Prudent Assumptions
Legislation requires that the assumptions used in Actuarial Valuations for Scheme Funding purposes are chosen prudently. Although not defined in legislation or guidance, prudence is generally accepted to mean including a margin for adverse deviation, over and above best-estimate assumptions.
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.
An investment technique which aims to trade using mathematical and statistical methods.
A Recovery Plan must be put in place if a scheme’s Statutory Funding Objective (SFO) is not met. The Recovery Plan must set out how and when the SFO will be met although (unlike the Minimum Funding Requirement - MFR), there is no statutory minimum period over which the shortfall must be made up.
The tendency to avoid making investment decisions on the back of not wanting to ‘regret’ the decision if the outcome is not favourable.
See TPR – the Pensions Regulator.
The risk that the proceeds of an investment will not earn the same rate of return as the original investment. For example, due to a fall in interest rates, the original Yield on a Bond may be higher than the reinvestment rate that is earned on the Bond’s coupon payments.
Relative Return Fund
An asset management strategy which aims to produce returns relative to a specific Index’s performance and therefore typically has an Index Benchmark. For example, such a mandate may have a target of exceeding the return on the FTSE All Share by 2% per annum.
See also Absolute Return Fund.
The increase, usually in line with inflation, of a Deferred Pension between the date the member leaves the scheme and their Normal Retirement Date.
The theoretical rate of interest which is earned on an investment which has zero risk of default. Short term Gilt Yields are often used as a proxy for the risk-free rate in the UK due to the low default risk attached with these assets.
RPI - Retail Prices Index
A UK Index of consumer prices. Several variants from the headline rate exist, including RPIX (prices excluding mortgage payments).
See also CPI – Consumer Prices Index.
RPSM – Registered Pension Schemes Manual
The Registered Pension Schemes Manual (RPSM) is the guide to registered pension schemes issued by HMRC. It contains a number of separate sections (Technical Pages, Member Pages, Scheme Administrator Pages and Employer Pages), each targeted at a different audience.
The sections form a guide to pension scheme taxation since 6 April 2006 (A Day).
RST – Reference Scheme Test
A comparison of a Contracted-out Defined Benefit Pension Scheme with the statutory Reference Scheme, as required under section 12B of the Pension Schemes Act 1993. The Scheme Actuary must certify that the scheme meets the Reference Scheme Test.
S2P - State Second Pension
The earnings-related part of the UK state retirement pension which replaced SERPS (the State Earnings Related Pension Scheme) from April 2002.
An arrangement between employer and employee where the employee gives up part of their pay for a corresponding contribution to their pension arrangement.
Schedule of Contributions
A formal agreement between the Trustees of a Defined Benefit Pension Scheme and the employer, setting out how much the employer and employees will contribute to the scheme. The Scheme Actuary must certify that the Schedule of Contributions is adequate to meet the Statutory Funding Objective. The Trustees must monitor adherence to the schedule and report any material failures to the Pensions Regulator.
The named actuary appointed by the Trustees or managers of an occupational pension scheme under Section 47 of the Pensions Act 1995.
An individual appointed by the Trustees of an Occupational Pension Scheme under Section 47 of the Pensions Act 1995 to audit the annual accounts.
Scheme Funding Requirement
Scheme Funding was introduced by the Pensions Act 2004 and came into force on 30 December 2005, replacing the Minimum Funding Requirement.
Rather than prescribing the approach to a triennial Valuation, legislation requires Trustees and the employer to agree a Funding target (the Statutory Funding Objective). Each Defined Benefit Pension Scheme must now have its own Statement of Funding Principles, set by the Trustees and usually agreed with the employer, setting out the Trustees' approach to Funding the scheme on a Prudent basis.
Trustees are required to choose assumptions "Prudently" and, if their scheme is not fully Funded, they will need to agree a Recovery Plan. A Schedule of Contributions may be required if the employer and / or members contribute to the scheme.
An investment fund where the investor has direct ownership of the underlying assets and therefore is segregated from other investors. This contrasts to a Pooled Fund where investors, rather than owning the underlying assets, own units in the fund which give the right to the value of the underlying assets.
SERPS – State Earnings Related Pension Scheme
Earnings-related state benefits that were accrued between 6 April 1978 and 5 April 2002. SERPS has now been replaced with S2P – the State Second Pension.
SFO - Statutory Funding Objective
The requirement that the Trustees of a Defined Benefit Pension Scheme must aim to have the scheme's Liabilities (measured on a Scheme Funding basis) covered by appropriate and sufficient assets.
SFP - Statement of Funding Principles
A statement by the Trustees of UK Defined Benefit Schemes, setting out the Trustees' approach to Funding the scheme.
See also Scheme Funding.
An investment position in which an investor sells an asset. The investor need not necessarily own the asset to sell it - the investor could first borrow the asset from a third party before returning it at a later date.
See also Long.
SIP - Statement of Investment Principles
A statement by the Trustees of UK Occupational Pension Schemes, setting out the Trustees' attitude to certain specified investment issues, including such matters as risk and Ethical Investment.
SIPP – Self Invested Personal Pensions
A type of Personal Pension Plan which allows individuals to make their own investment decisions.
SMPI - Statutory Money Purchase Illustration
Statutory Money Purchase Illustrations (SMPIs) are required annually for all types of Defined Contribution Pension Schemes with a few exemptions. They are calculated in accordance with a set of assumptions set out by the Board for Actuarial Standards.
Solvency II / Solvency 2
The Solvency II Directive 2009/138/EC is an EU Directive intended to harmonise insurance regulation – in particular the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.
Solvency II is likely to come into effect on 1 January 2014. There is discussion about whether Solvency II could, or should, be extended to pension arrangements.
SPA - State Pension Age
The age from which state pension benefits, such as the Basic State Pension and S2P are due to be paid. SPAs for men and women will be equalised at 65 by October 2018. SPAs are due to increase to 66 by October 2020 and 67 by 2028.
SRI – Socially Responsible Investment
An investment approach which aims to promote social welfare as well as maximise investment returns.
See also Ethical Investment.
SSAS – Small Self-administered Scheme
A company pension scheme set up under trust where the members are usually senior personnel (eg company directors). SSASs can be exempt from many of the legislative requirements that apply to larger schemes (such as the Trustee Knowledge and Understanding requirements of the Pensions Act 2004 and the Member-Nominated Trustee regulations).
Loans can be made by the SSAS to the sponsoring employer, but are subject to certain conditions set by HMRC.
A type of Defined Contribution Pension Scheme introduced by the Government with effect from 6 April 2001. It was intended to be low-cost. Most employers who do not provide an Occupational Pension Scheme for their employees are required to provide access to a Stakeholder Pension scheme. These requirements are changing from 2012 with the advent of Auto-enrolment.
Standard Contribution Rate
The contribution rate (employer and employee) required to fund future accrual of benefits, before any adjustment for Surplus or deficit in respect of past service.
An employer with a legal obligation to financially support a pension scheme. Specifically, the Statutory Employer(s) to a scheme will be those employers who are legally responsible for:
See also Participating Employer, Principal Employer.
A stochastic model is one which simulates a series of possible future outcomes, based on a mathematical approach where one or more of the elements (for example the projected rate of price inflation) follows a specified probability distribution, rather than being a fixed (“deterministic”) assumption.
An excess of assets compared with the Liability at a specified date.
See also Deficit.
A financial instrument where two parties agree at the outset to exchange a series of specified cashflows over a defined period. Examples include interest-rate swaps and currency swaps.
The collective term for investment strategies whose performances are not measured against specific market Indices but against given target returns. Target Return strategies are used on the premise that investors do not want to lose money by tracking an Index and therefore would prefer an absolute return on the investment.
See also Diversified Growth Fund.
TAS – Technical Actuarial Standard
A series of Technical Actuarial Standards (TAS) has been published by the Board for Actuarial Standards (BAS), previously part of the Financial Reporting Council (FRC). TASs contain a number of principles, all of which need to be considered by Actuaries when carrying out actuarial work that is deemed within the scope of that TAS. There are TASs relating to Data, Modelling, Reporting, Transformations and Pensions, for example.
TASs are now set by the Accounting Council of the FRC's Codes and Standards Committee.
TPAS (formerly the Occupational Pensions Advisory Service) 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.
See Cash Equivalent Transfer Value.
A pension scheme member can take all pension benefits as a lump sum, if trivial. The member must be at least age 60 and have total pension rights (across all their pension arrangements) valued at less than £18,000 (2012/13 tax year). Benefits can also be deemed trivial in other situations.
TRIx – Total Return Index
An Index that is calculated on the basis that distributions such as Dividends or Coupons are reinvested.
Trust Deed and Rules
The legal documents which set up and prescribe the operation of most Occupational Pension Schemes.
Individuals or a 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, UK pensions and trust law and the principles relating to the Funding of an occupational scheme and the investment of scheme assets, to the extent that it is necessary for their role.
The Pensions Regulator is the regulator of work-based pension schemes in the UK. Created under the Pensions Act 2004, it has wider powers and a more proactive and risk-focused approach to regulation than OPRA (the Occupational Pensions Regulatory Authority), its predecessor.
Unauthorised Payments / Benefits
Benefits other than those authorised by various Finance Acts (eg benefits above the Lifetime Allowance or Annual Allowance) which incur an additional tax charge.
UURBS – Unfunded Unapproved Retirement Benefits Scheme
A former unapproved pension arrangement that an employer did not fund, but that was used to provide a member with additional lump sum and/or income in retirement (often because the member was subject to the Earnings Cap). No new UURBS can be established after A Day.
UURBS did not generally qualify for tax reliefs, although an employer could deduct the benefits paid to an employee from its liability for corporation tax.
See also EFRBS, FURBS.
A comparison of a scheme’s assets with its Actuarial Liability, sometimes also including a calculation of the cost of accruing benefits (if any). Assumptions are used to determine the estimated value of benefits payable.
A formal valuation of an Defined Benefits Pension Scheme is carried out at least every three years. This generally leads to agreement of the employers’ contributions for the following three years.
The variation in the level of returns experienced over a given period (usually annually). It is measured by the standard deviation or variance of returns. It is commonly used as a proxy for the level of risk of a security or asset.
The process of closing down and liquidating an Occupational Pension Scheme, usually by transferring members’ benefits to individual arrangements.
The total expected rate of return on an investment. This may include both the income part of return such as Dividends or Coupon payments as well as capital gains / losses from price movements.