Glossary

Defined Benefit & Transfers Glossary

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accrual rate

The rate at which a member builds up pension benefits in a defined benefit pension scheme.

accrued benefits

The benefits for service already completed.

See also: accrued rights.

accrued rights

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

active fund management

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

See also: passive fund management.

active member

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

actuarial valuation

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

See also: actuary.

actuary

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

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

administration

The day-to-day running of a pension scheme (DB and DC), eg collection of contributions, payment of benefits, record-keeping.

advisers

Persons or companies appointed by the trustee board (DB and DC) or individuals (DC) to give advice. The trustee board is legally required to appoint certain advisers.

DB members wishing to transfer to a DC arrangement with transfer values in excess of £30,000 are required to take advice from a qualified transfer specialist regulated and authorised by the FCA.

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

annual allowance

The maximum amount of pension savings that can be built up in any one tax year before liability to an annual allowance charge, which is a tax charge levied by HMRC.

annual management charge

An investment manager is generally remunerated through receipt of an Annual Management Charge (AMC). The AMC is normally a percentage of the assets, but other pricing options can be used, such as a fixed fee, although this is relatively rare.

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.

annuity conversion risk

The risk that the amount of pension a member can buy is adversely affected by changes in annuity rates or investment markets. Also referred to as pension conversion risk.

approved scheme

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

asset allocation

The assignment of the money in an investment portfolio (DB or DC) to different asset classes or categories and to different markets within an asset class. It normally excludes the selection of individual securities (company shares or bonds) within a market.

assets

Investment entities such as equities, gilts, property and cash.

assets under management

The amount of investor money that an investment firm manages on behalf of its clients.

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. Though no longer a legal requirement it is still offered by many schemes. Benefits van be either defined contribution or defined benefit (added years).

See also: FSAVC.

Auto-enrolment

Under the Pensions Act 2008, every employer in the UK must put certain staff into a pension scheme and contribute towards it. This is called 'automatic enrolment' or ‘auto-enrolment’. It is being phased in up to February 2018.

Although you must be enrolled into the scheme if you meet the criteria, it is not compulsory to stay in it. You can choose to opt out at any time. If you opt out within one month, any contributions you have already made will be refunded, as if you had never joined. If you opt out after this, the type of scheme your employer sets up will determine whether you receive an immediate return of contributions, less any deductions, or a preserved pension.

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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.

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 (DB and DC).

benefits statement

DB: 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. Also referred to as a statement of entitlement.

bonds

Loans made to an issuer (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). 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.

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capital risk

The risk that an investor may lose all or part of the amount invested. The term may be applied to both losses that are realised and losses ‘on paper’ that arise due to fluctuating investment returns but are only realised if the asset is sold.

capital markets

The markets in which capital is raised initially through the issue of shares (equities) and loans (bonds) and then subsequently traded.

Cash Equivalent Transfer Value

DB only: 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 transfer value or CETV.

The amount of money offered by sponsors is governed by rules laid down by The Pensions Regulator referencing the underlying investments so as to protect the interests of members who do not transfer out.

cash flow

The amount of actual money being received and spent. In the case of a pension scheme, the amount of money being received into the scheme in contributions and investment returns and the amount of money being paid out by the scheme. In the case of DB schemes, projected cash flows usually refer to cash required in the future by the trustees to pay for pension liabilities when they fall due. In the case of individuals and households cash flows refer to budgeted income and expenditure and may therefore include personal contributions to or income from pension schemes.

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.

Consumer Prices Index (CPI)

An index of UK price inflation. It is the UK’s version of the Harmonised Index of Consumer Prices (HICP), which is a Europe-wide standardised measure of inflation.

See also: Retail Prices Index (RPI).

contracted in

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

See also: contracted out.

contracted out

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

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

See also: contracted in, contracting out certificate.

contributory scheme

A scheme which requires contributions from active members.

corporate bonds

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

CPI

See: Consumer Prices Index (CPI).

currency risk

The possibility that currency movement will, either for better or worse, affect the value of assets, investments, and their related interest and dividend payment streams, especially those securities denominated in foreign currency. It is also referred to as exchange rate risk. Its effect is likely to be different depending on whether it is observed over the short term (relating only to changes in nominal exchange rates) or the long term (relating to cumulative changes in real exchange rates or purchasing power).

In the case of a pension fund it assumes that the currency in which a fund value is expressed or accounted for is the currency in which the liabilities (or purposes) of the fund arise, such as because it is the currency in which pension income will be spent.

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DB scheme

Defined benefit scheme. A type of occupational pension type that provides a promised level of annual income. The amount of income is normally based upon length of service and salary (either at the date of leaving - hence 'final-salary' - or averaged over a specified period of time). The attraction of these schemes is that members are insulated from investment risk, inflation risk and longevity risk. All are borne by the employer. It is up to the employer to ensure the scheme is sufficiently funded to enable the trustees to pay pensions as they fall due, for as long as beneficiaries live. Trustees are bound by trust law and pension regulation to ensure the adequacy of the assets to meet the liabilities so members can be largely indifferent to the risks borne by the trustees that the members would otherwise be exposed to.

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

DC scheme

Defined contribution scheme. A type of pension in which a member's benefits are determined by the value of the fund. It offers no promised level of income. The capital value of the plan and the income stream it can provide are dependent on the contributions made, the investment return achieved, the charges that apply and, if an annuity is purchased, the prevailing annuity rates.

Members of DC pension schemes have choices as to how the capital accumulated is converted into a stream of payments (referred to as ‘income’ to be comparable with the income paid under a DB arrangement). Conversion of capital to income can take the form of an annuity (whereby an insurance company sets the terms for conversion based on prevailing interest rates) or a draw from capital, or drawdown (continued investment with the rate of withdrawal determined by the member).

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 dependents.

decumulation

The process of taking an income from a pension fund, for example by purchasing an annuity with a DC pension pot, or by using income drawdown.

decumulation phase

Typical within a lifestyle strategy within a DC scheme. The period of switching a member’s investment from growth asset into bond like assets in anticipation of decumulation.

default investment strategy

In the context of a DC pension scheme, a default investment strategy is the fund or mix of funds in which contributions will automatically be invested in the absence of any explicit fund choices by that member.

deferred member

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

See also: deferred pension.

deferred pension

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

deferred pensioner

See deferred member.

deficit

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

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.

de-risking

Reducing exposure to investment risks such as equity risk or interest rate risk, or non-investment risks such as longevity. It normally involves replacing assets with uncertain future returns with assets with known future returns, normally selected because they behave like, or match, a liability of the scheme. In DB schemes, it typically refers to a scheme-wide process of increasing the proportion of liability-matching assets. In DC arrangements it typically refers to the process of replacing equities and property assets by fixed income investments in the approach to retirement (also known as lifestyling and the expected path of de-risking through time is typically known as the glide path). In the case of drawdown from a DC arrangement, it may be staggered to match the expected stream of income withdrawals through retirement.

See also lifestyling, glide path

discount

Calculate the value of assets expected to be needed today in order to pay benefits in the future.

discount rate

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

See also: present value.

diversification

The process of investing in a number of different asset classes, and individual investments within those asset classes, so as to limit exposure to any single source of risk.

drawdown

The process of drawing money from a portfolio to meet spending. In the context of a personal pension plan, it is applied generally to the different options existing under different stages of legislation for taking benefits other than by the purchase of an annuity or tax free cash.

In the context of a non-pension portfolio, consuming the income generated by the investments is not always thought of as drawdown but may be a planned rate relative, for example, to expected total return in order to meet conditions such as sustainability for a given period of time.

See also income drawdown, flexible drawdown

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employer covenant

The degree to which the employer is willing and able to meet the funding requirements of the scheme. It is a matter of judgement that varies with both general economic and market conditions and the specific financial strength of the sponsor.

equities

Shares in a company which are bought and sold on a stock exchange. In finance in general, ‘equity’ expresses the degree ownership in any asset after all debts associated with that asset are paid off (eg a house or a car). Stocks are equity because they represent ownership in a firm, whose value is calculated after deducting its liabilities from its assets.

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.

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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. Also known as an Independent Financial Adviser, the individual or company must be authorised and regulated by the Financial Conduct Authority (FCA). Specific qualifications and permission are required to advise on transfers from an occupational scheme with guaranteed benefits.

financial planner

A professional, usually a financial adviser or wealth manager, who helps individuals and companies meet their long-term financial objectives by analysing the client's situation and developing a programme to achieve that client's goals.

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.

Financial Services Authority (FSA)

See Financial Conduct Authority.

fixed interest

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

Flex-access Drawdown

The flexibility under the Pension Freedoms legislation to take without conditions any amount ofincome from a personal pension plan after age 55. Payments may be a combination of Pension Commencement Lump Sum (tax free and subject to a maximum) and taxable income. Income may be either regular or irregular, as suits the individual.

Anyone previously with Flexible Drawdown, meeting the conditions required under the legislation introduced in April 2011, under the Pension Freedoms automatically moved to Flexi-access Drawdown.

FSAVC

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

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

FSCS

The Financial Services Compensation Scheme is an independent body, established under the Financial Services and Markets Act 2000 as the UK’s statutory compensation fund of last resort, for customers of financial services firms authorised by the FCA.

fund manager

An individual (or company) responsible for implementing a fund's investing strategy and managing its portfolio trading activities, appointed by the trustees (DB) or selected by the sponsoring employer (occupational money purchase) or by the individual member (personal pension).

Also known as investment manager.

See also wealth manager.

funding level

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

funding position

The absolute amount of any surplus or deficit in a DB scheme. The term may also be applied in individual retirement planning or other personal financial goals to describe the extent to which a quantified outcome or liability has been met by assets already contributed and invested.

funding target

The desired funding level (DB: usually 100%).

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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.

glide path

A framework or plan to reduce investment risk over time. It may apply to a DB pension scheme as it matures and its average liabilities become shorter (nearer) or to a DC pension as the point at which benefits will be taken (as an annuity, tax fee cash or drawdown) draws nearer.

See also de-risking and lifestyling.

GMP

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

Group Personal Pension (GPP)

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

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

guidance

In the case of work-based pension schemes, The Pensions Regulator issues guidance to help improve understanding of work-based pension schemes and to promote good practice. This guidance is intended to be helpful but is not a statement of law.

In the case of personal pensions, Pension Wise (provided by the Pensions Advisory Service) is a free and impartial government guidance service.

Under financial services legislation only authorised and regulated entities can make personal recommendations of specific investments (a term which includes a pension) and guidance is a term that is often used loosely to describe advice that is general rather than personal and specific.

See also Pension Wise

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IFA

See financial adviser.

income drawdown

See drawdown

index-linked gilts

Bonds issued by the UK Government for a fixed term, which have a fixed interest rate. Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted up or down in line with movements in the General Index of Retail Prices (RPI).

Often known as inflation-linked gilts or ILGs and in line with common usage in other countries may be referred to as ‘linkers’.

See also: gilts, corporate bonds.

index tracking

The process of replicating the returns on a given index. Also known as passive management.

indices

Measures of the value of a whole market (equities or bonds) or a sub-section of a market. It is computed either from the prices of selected stocks (typically a weighted average). Index constituents vary over time according to rules set by the owner or publisher of the index and so an index is not actually passive. Composite indices are constructed to combine different assets classes or markets, either rebalanced to fixed weights at certain intervals or drifting with changing market values of the original constituents. It is a tool used by investors and financial managers to describe the market or sector, and to compare over different periods the return on specific investments.

In passive management, the index is the composite the portfolio replicates or seeks to track within certain tolerances.

inducements

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

inflation

This is a measure of the change in the general level of prices of goods. In the UK it is measured chiefly by the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). Pension payments are often linked to inflation.

inflation risk

The risk that inflation, or the expectation for future inflation, increases, thereby increasing the value of inflation-linked liabilities. This can be managed by investing in inflation-linked assets, for example index-linked gilts or inflation swaps.

inflation-linked gilts

See index-linked gilts.

interest rate

Effectively, the amount paid by a borrower to a lender to borrow money. The interest rate can be fixed or variable and can be set for a very short (eg overnight) or for a very long (eg 50 years) period of time. It is normally expressed as a percentage of the amount borrowed, or this amount increased in line with some agreed measure.

investment manager

See fund manager.

investment portfolio

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

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journey risk

DB: The risk of a pension scheme’s funding position worsening in the short-term as a result of investment market movements.

DC: The risk to the sustainability of a given rate of draw as a function of the path of returns during decumulation.

Also known as path risk and sequencing risk.

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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.

Liability Driven Investment (LDI)

An investment approach which focuses on matching the sensitivities of a pension scheme’s assets to those of its underlying liabilities in response to changes in certain factors, most notably interest rates and inflation expectations.

lifestyling

An asset allocation strategy used mainly in DC pension plans 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.

lifetime allowance

The lifetime allowance is an overall ceiling on the amount of tax-privileged pension savings that any one individual can draw.

LPI

Limited price indexation. DB: The minimum annual rate of indexation which must be applied to pensions in payment or deferred pensions, where they relate to service after 5 April 1997. LPI is the lesser of the actual rate of inflation and either 5% or 2.5% depending upon the date when the service was accrued and whether the pension is in payment or deferred. However, schemes are can make increases in pension payments over and above LPI if they wish and their rules allow.

See also: RPI.

longevity risk

The risk that the members of a pension scheme will live longer than expected. DB: the chance payments from the scheme will be greater than budgeted for. DC: the chance an individual drawing from their pension draws at such a rate that they exhaust the fund before they die.

lump sum

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

See also: tax-free lump sum.

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maturity

For a bond, the length of time (eg 10 years) until receipt of the final interest payment and return of loan amount. It may also be applied to the length of time before a liability such as the payment of a benefit arises

member

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

Sometimes narrowly used to refer only to an active member.

See also: active member; deferred member; pensioner.

money purchase scheme

See DC scheme.

mortality rates

Statistics relating to the ages at which people die.

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non-contributory scheme

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

NPA

DB: Normal pension age.

NRA

DC: Normal Retirement Age

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ongoing funding measure

Also known as 'technical provisions', 'Part 3 measure' and 'scheme specific funding measure'.

DB only: The funding measure used for the purposes of Part 3 valuations. The 'technical provisions' are an estimate, made on actuarial principles, of the assets needed at any particular time to make provision for benefits already considered accrued under the scheme using assumptions prudently chosen by the trustees – in other words, what is required for the scheme to meet the statutory funding objective of a given date. The benefits include pensions in payment (including those payable to survivors of former members) and benefits accrued by other members, which will become payable in the future.

out-of-market risk

Normally used to describe the short-term risk of missing out on the return on a market whilst not being invested in that market. This usually arises when a personal pension plan is being transferred to another manager and is subject to normal or exceptional delays. It can also arise when a DB transfer to a personal plan is subject to delay and markets move from levels on which the decision to transfer was based.

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Part 3 deficit

The amount by which a scheme's liabilities exceed its assets using the 'Part 3' measure.

Also known as 'ongoing funding deficit' and 'scheme specific funding deficit'.

See also: technical provisions.

Part 3 measure

Also known as 'technical provisions', 'ongoing funding measure' and 'scheme specific funding measure'.

The funding measure used for the purposes of Part 3 valuations. The 'technical provisions' are an estimate, made on actuarial principles, of the assets needed at any particular time to make provision for benefits already considered accrued under the scheme using assumptions prudently chosen by the trustees – in other words, what is required for the scheme to meet the statutory funding objective of a given date. These include pensions in payment (including those payable to survivors of former members) and benefits accrued by other members, which will become payable in the future.

passive fund management

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

See also: active fund management.

pension conversion risk

The risk that the amount of pension a member can buy is adversely affected by changes in annuity rates or investment markets. Also referred to as annuity conversion risk.

Pension Freedoms

The commonly-used term to describe the changes in the tax rules in April 2015 giving people with personal pensions greater access to their pensions. Drawdown of pension income is taxed at marginal income tax rates. The tax-free lump sum continues to be available. In order to support their decisions, individuals have access to free and impartial guidance via the phone or face-to-face, Pension Wise, to help them make the choices that reflect their needs in retirement. There are six options available: leaving the pension fund untouched, purchasing an annuity, taking an adjustable income (Flexi Access Drawdown), taking cash in separate amounts (Uncrystallised Funds Pension Lump Sum), cashing in the whole fund in one go and mixing any of the six options.

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 amount of compensation is less than a member would have been entitled to under the rules of their original pension scheme and in certain circumstances may be considerably less. Though government-chartered its compensation terms are not guaranteed by the Government and if at some point in the future the PPF had insufficient funds to pay benefits then the level of benefits or increases can be restricted.

pension transfer

DB: the process of exchanging benefits due under the terms of a scheme for a cash sum, also known as the transfer value or Cash Equivalent Transfer Value (CETV). The transfer value may only be paid into a registered personal pension plan whereupon benefits may be taken in line with the options available to personal pensions.

DC: also known as pension switch, the process of transferring funds in one personal pension plan to another personal pension plan such as to access different investment opportunities, change the administration and investment management arrangements and their costs or change the options for taking benefits.

See transfer value.

Pension Wise

A guidance service promoted by the Government-sponsored Pension Advisory Service. It will, by appointment (telephone or face to face), explain the different ways you can take money you’re your personal pension, including the tax consequences. It will not make specific recommendations but will explain what you can do next to support a specific decision including how to go about taking advice from a suitably qualified and authorised financial adviser.

See also: guidance

pensioner

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

pensions administration

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

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

pensions administrator

See pensions administration.

pensions in payment

Pensions that are currently being paid.

pensions manager

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

See also: pensions administration.

performance

See return

personal pension

Personal pensions are defined contribution or ‘money purchase’ pensions that an individual either arranges or, in the case of workplace pensions, are organised for an employer for the benefit of its employees.

See also DC pensions, money-purchase pensions, Stakeholder pensions, SIPPs

platform provider

In the context of a defined contribution pension scheme, a platform is an investment structure established by a pension provider (eg an insurance company) which offers a wide range of investment funds. The platform provider is the firm that administers the platform.

portfolio

A collection of individual securities (company shares or individual bonds) or collective investment funds formed and maintained by a portfolio manager to earn investment returns. How they are composed will affect the returns earned, depending on what happens to the individual securities or funds of which they are composed.

PPF

See Pension Protection Fund (PPF).

PPF levy

A levy on all occupational pension schemes eligible for protection under the PP, to fund the PPF, based on a combination of scheme-based and risk-based factors. The scheme-based element relates to the number of members in a scheme. The risk-based element takes account of the funding level of a scheme and the risk of insolvency for the sponsoring employer.

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

PPF measure

This is the level of assets requires to provide all of the members with benefits equal to those provided by the Pension Protection Fund (PPF). In this calculation the assumptions used are prescribed by the PPF.

Also known as the 'section 179' measure.

present value

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

See also: discount rate.

preserved benefits

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

protected rights basis

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

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real returns

The difference between the rate of return of an investment and a selected measure of inflation (eg RPI) over the same period. Real returns, also known as ‘deflated returns’, measure the change in purchasing power of an investment or portfolio.

See also: returns.

rebalancing

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

recovery plan

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

See also: schedule of contributions.

registered

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

return

The gain or loss of a security in a particular period. The return consists of the income and the capital gains earned on an investment, and it is usually quoted as a percentage. Returns may be calculated before (gross) or after (net) any charges incurred.

Cumulative return measured over multiple periods is commonly referred to as performance. Performance for a portfolio as a whole is normally compared with one or more benchmarks.

See also: performance, real returns.

risk

In broad terms, this is the chance that the actual outcome will be different from what was expected so risk exists wherever there is uncertainty about the outcome. Sources of risk vary depending on the context, in terms of what is being measured and the period over which it is measured. There are also different measures of risk more or less appropriate to the context.

A common context is the chance an investment's actual return will differ from the expected return, including the possibility of losing some or all of the original investment. Different versions of this risk are usually measured by calculating the standard deviation of the historical returns or estimating future probabilities by reference to the past.

risk appetite

The level of risk that a member or set of trustees is willing to take. A member is said to have a high risk appetite if they wish to invest more in risky investments.

risk premium

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

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

RPI / Retail Prices Index

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

See also: LPI.

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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 other benefits which could include an increased contribution by the employer to a pension scheme.

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

schedule of contributions

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

See also: recovery plan.

scheme actuary

See actuary.

scheme 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 specific funding deficit

The amount by which a scheme's liabilities exceed its assets using the 'scheme specific funding' measure.

Also known as ‘ongoing funding deficit’ and 'scheme specific funding deficit'.

See also: technical provisions.

scheme specific funding measure

Also known as 'technical provisions', 'ongoing funding measure' and 'Part 3 measure'.

The funding measure used for the purposes of Part 3 valuations. The 'technical provisions' are an estimate, made on actuarial principles, of the assets needed at any particular time to make provision for benefits already considered accrued under the scheme using assumptions prudently chosen by the trustees – in other words, what is required for the scheme to meet the statutory funding objective of a given date. These include pensions in payment (including those payable to survivors of former members) and benefits accrued by other members, which will become payable in the future.

section 32

A policy or contract specific to one member bought from an insurance company using funds from a registered occupational (not personal) pension scheme. The policy provides for an annuity at some point in the future – a deferred annuity contract. It can also be referred to as a 'buyout' policy, as the member's benefits rights have been 'bought out' of the registered pension scheme. Section 32 buyouts are normally used to preserve a higher entitlement to tax free cash.

section 143 valuation

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

section 179 valuation

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

SERPS

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

See also: S2P.

SFP

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

SIPP

Self Invested Personal Pension. A DC personal pension arrangement that acts as a ‘wrapper’ for a portfolio of investments selected and managed by the individual member or managed on their behalf by their financial adviser or wealth manager.

sponsoring employer

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

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

Stakeholder pension

A type of defined contribution personal pension meeting specific government requirements, for example limits on charges.

SMPI

Statutory Money Purchase Illustration. DC: An annual statement pension providers are required to provide showing an estimate under certain given assumptions of the pension members will receive, expressed in current money terms.

superannuation

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

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tax-free lump sum

Also known as tax free cash.

DB: 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.

DC: A sum of money expressed as a percentage of the fund (normally 25%) that may be withdrawn without being assessed to tax. Technically referred to by HMRC as Pension Commencement Lump Sum (PCLS).

technical provisions

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

The Pensions Regulator

See Pensions Regulator.

TPAS

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

transfer specialist

An individual adviser approved by the Financial Conduct Authority (FCA) to advise individuals on transfers from occupational pension schemes with safeguarded benefits, including DB schemes, on behalf of a firm that is authorised and regulated by the FCA to advise on and arrange transactions.

transfer value

See Cash Equivalent Transfer Value.

total expense ratio

The Total Expense Ratio (TER - sometimes known as ‘ongoing charges’) is another way of expressing the costs and charges that apply to an investment fund or pension scheme. The TER will always include the Annual Management Charge (AMC) but may also include other fees and charges such as legal and audit costs, custodial fees and investment administration fees which have been applied. However, and despite the name, the TER does not include all the costs that an investor has been charged. It does not include the transaction costs incurred when buying and selling investments or the taxes associated with those transactions. Nor does the TER capture other costs such as those associated with entering or exiting from a fund or a scheme.

trust deed

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

See also: trust document; trust rules.

trust document

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

See also: trust deed; trust rules.

trust rules

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

See also: trust deed; trust document.

trustee

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

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volatility

This is a measure of the variability of the returns an investment generates. The greater an asset’s volatility, the greater the expected changes (up and down) in price, and the greater the uncertainty the investor will have as to the value of the investment in future. Volatility is measured using statistical measures such as standard deviation.

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wealth manager

An individual or firm providing a professional service that typically combines financial and investment advice, tax services, retirement planning and legal or estate planning, often for one set fee. Some wealth managers also provide banking services.

winding up

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

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

winding up lump sum

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

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yield

A measure of the annual income earned on an investment.

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

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

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

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Find out if transferring your pension is right for you
Email a question info@fowlerdrew.co.uk.

Achieve a higher pension income potential
Greater flexibility on
your pension
Get more out of your pension, tax free
Leave more of your pension for your loved ones
Can I leave my pension for the next generation?
In a defined contribution arrangement any capital remaining undrawn at death can be passed on to nominated beneficiaries. If you die before age 75 these payments are normally entirely tax free. If you die after age 75 then your nominated beneficiaries can draw on the inherited pension fund and be taxed at their marginal rate of income tax. Contrast this with a defined benefit scheme which typically only offers a reduced and fully taxable pension to a qualifying spouse or civil partner.
Can I get more out tax free if I transfer?
The different basis for calculating the capital value of a defined benefit scheme will normally, but not always, mean that less Pension Commencement Lump Sum (PCLS) is available when compared to taking a CETV and investing it into a Defined Contribution pension. Under current legislation the PCLS is paid tax free.
Can I take benefits before my scheme allows?
The earliest that you can take pension benefits from any pension scheme is currently age 55. Most defined benefit schemes have a normal retirement date of 60 or 65. It may be possible to take benefits sooner but these will be reduced to reflect their earlier payment. A defined contribution plan offers complete flexibility – benefits can be taken at anytime after age 55 and you need not take all benefits at once.
I want more flexibility from my pension
For many the attraction of a defined benefit pension is the relative certainty it provides. A known income is produced each year and on death a percentage of this income will normally be paid to any surviving spouse or civil partner. These schemes also tend to provide a reasonable degree of inflation protection. For others, the very prescriptive nature of defined benefit pensions may not be appealing. Many people seek the flexibility to be able to vary the amount of pension income they take each year; perhaps because it acts as a top up to other income or simply because their spending requirements vary from year to year. Others will have no need for a spouse’s pension. Others may have no requirement to spend the pension at all and would prefer simply to leave it to the next generation. If flexibility is valued then a defined contribution pension may be more suitable.
If I die will my spouse receive less?
Defined benefit pensions normally offer a continuing pension to a surviving spouse or civil partner. The continuing pension is typically half of the pension that was paid to the member prior to death. This pension is liable to income tax. Therefore, the amount received will depend upon how long the surviving spouse lives following the death of the member, and the total amount received from a defined benefit scheme will depend upon the combined longevity of the couple. With a defined contribution scheme a spouse will inherit any unspent pension capital. Since any unspent capital under a defined contribution arrangement can be passed on, either to a spouse or to other nominated beneficiaries, the longevity of the member and their spouse is less of an issue although if you live a long time there will always be the risk of running out of capital.
I am in poor health
Since a defined benefit pension will pay a pension only for as long as you live, your date of death will dictate the total amount of benefit you will receive from the pension. The amount you receive will not be increased to take account of poor health. On death a pension may be payable to a surviving spouse or financial dependent. If you transfer to a defined contribution scheme you may be able to purchase an annuity which reflects your state of health and therefore provides a higher guaranteed income. Alternatively, if you elect to draw from the pension plan then any unspent capital can be passed on at death.
I am comfortable with investing
Transferring out of a defined benefit scheme involves taking on investment, inflation and longevity risks otherwise borne by the defined benefit scheme. The resulting financial outcomes may be worse than if you had remained a member of the defined benefit scheme. A Transfer Value Analysis Report will show the range of financial outcomes you can expect based on your risk tolerance. For a transfer to be suitable you will need to be prepared to accept investment risk which means that you must value the potential extra spending in retirement and you are prepared to accept the possibility of a reduction in sustainable spending compared to the defined benefit scheme.
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