Glossary

The definitions below are taken from The Pensions Regulator website. We've selected these from a larger list of definitions to help you understand pensions-related language. For the full list, see www.thepensionsregulator.gov.uk/glossary.

J

K

O

Q

U

V

W

X

Z

A

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.

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

The day-to-day running of a pension scheme, eg collection of contributions, payment of benefits, record-keeping.
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.

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.

assets

Items such as equities, gilts, property and cash.

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.

B

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.

benefits

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

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.

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.

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

C

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.

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.

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.

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.

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 trustee

A company which acts as a trustee.

current unit method

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

D

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.

deferred member

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

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.

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.

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.

E

employer covenant

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

ENT

Employer-nominated trustee.

A trustee chosen by the sponsoring employer.

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.

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.

F

final salary scheme

See DB Scheme.

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.

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.

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).

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.

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.

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.

IFA

See financial advisor.

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.

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.

L

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.

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.

M

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.

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).

MNT

Member-nominated trustee.

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

N

NIC

National Insurance contributions.

NICO

National Insurance Contributions Office.

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

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.

P

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.

pensioner

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

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.

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.

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.

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).

projected unit method

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

R

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.

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.

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.

scheme actuary

See actuary.

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

shareholder

Someone who owns shares in a company.

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.

T

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.

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.

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).

trivial commutation

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

trust deed

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

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.

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.

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.