Glossary

Accrual rate

 The rate at which benefits build up for each year of pensionable service in a final salary scheme.

Accrued benefits

These are benefits that have built up for service up to a certain date and are
calculated in relation to pensionable earnings.

Active member

A member of a scheme who is presently accruing benefits under that scheme in respect of current service.

Actuarial assumptions

The actuaries’ view of the future trends that will affect the scheme’s assets and liabilities.

Actuarial certificate

This is required to be given by the actuary in certain circumstances, e.g. if there is a surplus or if there is a bulk transfer.

Actuarial statement

The Disclosure of Information Regulations 1996 (SI 1996/1655) require the scheme actuary to include this in the annual report of a defined benefit scheme. It must include the amounts necessary to be paid into the scheme in order to protect the security of members’ rights and must state the actuarial method and assumptions used.

Actuarial Valuation

When an actuary checks whether a pension scheme can meet the cost of the benefits as they arise in the future. The valuation is normally carried out every three years and takes into account:

• the current investments
• estimated future investment returns (such as dividends on shares)
• meeting the cost of future benefits
• current amount of contributions from you and your employer
• the expected number of people who will be retiring and their ages and estimated times of retirement

Actuary

An actuary advises on financial questions involving probabilities relating to mortality and other contingencies. In relation to pension schemes, an actuary is a professional adviser who must be appointed by trustees under the Pensions Act 1995. The actuary assists the trustees (or managers) of a scheme on funding issues and conducts a regular actuarial valuation.Actuaries must be members of the Institute of Actuaries and Faculty of Actuaries.

Additional voluntary contributions (AVCs)

Members can make AVCs to their occupational scheme. This enables them to top-up their benefits.

Basic state pension

This is the state pension which is paid to all those who have met the minimum National Insurance contribution requirements and is not related to earnings, unlike the State Second Pension.

Beneficiary

A person entitled to benefit under a pension scheme or who will become entitled on the happening of a specific event.

Closed Scheme

This is a scheme which does not admit new members although benefits are still paid to existing members.

Commutation

Pension given up at retirement in return for a tax free lump sum. A retirement benefit estimate will normally show the effect of this option.

Contracted out/contracted in

A pension scheme is contracted out where it provides benefits in place of the State Second Pension in exchange for paying lower National Insurance contributions and has been given a contracting out certificate or appropriate scheme certificate by the HM Revenue & Customs.

Contributions

The regular amounts paid into a scheme by a member and the regular and lump sum payments made by an employer to the scheme.

Corporate governance

Corporate governance is the increasingly important principle that shareholders should take more than just a simple financial interest in their shareholdings. The rise of the institutional shareholder, especially the pension fund shareholder, has meant that the balance of power between shareholder and management has swung in favour of shareholders. Corporate governance principles are now often expressed in customer agreements, so that investment managers are required to consider shareholders’ votes (called “proxy votes”) when they can.

Deed of amendment

A legal document that amends the trust deed and rules.

Deficit

The amount by which the value of future liabilities is greater than the value of the assets of the scheme.

Early leaver (deferred member)

This is a person who ceases to be an active member of a pension scheme, but does not receive their pension immediately.

Equity markets

Stock markets throughout the world where you are able to buy and sell companies’ stocks and shares.

FRS17

Financial Reporting Standard 17, which sets down the way in which pensions must be reported in company accounts. It requires the scheme assets and liabilities to be valued on a “fair value” basis and the resulting surplus (or deficit) to be recognised as an asset (or liability) in the balance sheet of the reporting company. The components in the change in the net asset or liability over time are disclosed in its profit and loss account, with the exception of actuarial gains and losses, which are recognised in the statement of total recognised gains and losses. FRS17 requires extensive disclosures in the notes to the company's accounts. FRS17 becomes fully effective for accounting periods beginning on or after 1 January 2005.

Fully funded

The point when the value of the scheme’s assets meet its future liabilities. Fully funded scheme A scheme that has a 100% funding level. Funding level The funding level is the value of the schemes’ assets expressed as a percentage of the scheme's liabilities.

Governance

The management and control of a scheme.

Guaranteed Minimum Pension (GMP)

The minimum pension which a scheme must, by law, pay a member from State pension age. This is a condition of contracting out of the State earning related pension scheme. It applies to membership during the period from 6 April 1978 to 5 April 1997.

Liability matched benchmark

A rate of return expected from the assets that will match the change in the scheme’s liabilities.

Mortality

The expected average time over which a pension will have to be paid.

Myners review

The Myners review investigated the investment practice of pension schemes. The report, which was published on 6 March 2001, raised several concerns for pension schemes including the redefinition of the prudent man rule to raise it to a higher level, to change standard benchmarks, to review the measurement of investment performance and whether soft commissions should be permitted in the future.

Pension Protection Fund

A fund set up under the Pensions Act 2004 that will provide pension payments at a reduced rate, for pension schemes of insolvent companies.

Pensioner

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

Schedule of contributions

A formal agreement between the company and the trustees which states the level of contributions to be paid to the scheme by the company and the members in the future.

Scheme Actuary

This is the named actuary appointed by the trustees or managers of an occupational pension scheme under Section 47 of the Pensions Act 1995. Scheme deficit/surplus The difference between the assets and liabilities of the scheme as assessed by the actuary at a valuation, using a series of assumptions, that may give different results depending on the basis of
the assumptions.

Scheme maturity

The relative number of active members with future benefits to accrue, compared to the number of deferred members and pensioners with known benefits.

SERPS / Additional state pensions

This is the State Earnings Related Pension, an extra state pension that employed people could earn, up to 5 April 2002, by paying extra National Insurance contributions once their earnings reached the lower earnings limit. Earners could choose to contract out of SERPS by joining an appropriate occupational or personal pension scheme, which provides alternative and equivalent benefits. SERPS was replaced by the State Second Pension from 6 April 2002.

Statement of investment principles (SIP)

A Statement that has to be prepared by the Trustee according to the Pension Act 1995 regulations. It is divided into four areas:

• investment performance
• strategic asset allocation
• investment of section assets
• performance measurement

The aim is to provide security for future benefits and make sure that the schemes assets are safe.

State second pension (S2P)

Also known as S2P, the State Second Pension is the additional state pension, which replaced SERPS. There are two main differences with SERPS. First, all earners below the low earnings limit will have pension credits as though they were earning up to the low earnings limit. Secondly, it is a flat rate, rather than an earnings related scheme.

Surplus

The amount by which the value of the scheme’s assets is greater than its future liabilities.

Trustee

As a requirement of the Pensions Act 1995, all pension schemes must have a ‘trustee’. The ‘trustee’ is a person or people, who take responsibility for protecting the assets of the scheme and how it is run.

Valuation - see Actuarial Valuation

Winding up

The process of closing down a scheme. This is done either by transferring the assets and liabilities to another pension scheme or by buying immediate and deferred pensions from an insurance company. Assets are the value of the funds that the scheme holds and the liabilities are what the scheme needs to pay out. The process is strictly controlled and a scheme’s deed and rules set out the procedure that must bet follow.