Glossary
The following definitions were adapted by those produced by The Pensions Management Institute and the Pensions Research Accountants Group in the Pensions Terminology publication. Some definitions have been adapted.
Provision by a scheme of an accrual rate greater than one sixtieth of pensionable earnings for each year of pensionable service.
The specific accounting bases adopted to present fairly the financial results and position of an organisation. For a typical large occupational pension scheme, these might include decisions on accounting of conversion of foreign currency, the valuation of investments and recognition of divided income, and the extent to which the cash basis is used.
The rate at which rights build up for each year of pensionable service in a defined benefit scheme.
The accounting principle whereby revenues and costs are recognised as they are earned or incurred, rather than when money is received or paid. This is in contrast to the cash basis.
The benefits for service up to a given point in time, whether vested rights or not. They may be calculated in relation to current earning or projected earnings.
A funding method in which the actuarial liability at the valuation date relates to: (a) the benefits for pensioners and deferred pensioners and their dependants, allowing where appropriate for future increases, and (b) the accrued benefits for members in service on the valuation date. Allowance may be made for earnings and service to be projected to the end of the control period and for revaluation thereafter in which case allowance may also be made for replacing members assumed to leave during that period.
The benefits to which a member is entitled, as of right, under an occupational pension scheme. These include accrued benefits. Depending on the context, accrued rights for an active member can be based on benefits as if the member had left service or could include a right to have benefits linked to future salary changes.
A statistical way of measuring the extent to which an investment portfolio is likely, over any period, to outperform or underperform the benchmark against which it is measured.
The set of assumptions as to rates of return, inflation, increase in earnings, dividend increases and mortality etc. used by the actuary in an actuarial valuation or other actuarial calculations.
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 a recommended contribution rate based on comparing the actuarial value of assets and the actuarial liability.
A prospective benefits funding method in which the recommended contribution rate is calculated as that which, if paid over the expected period of membership of active members, would provide for the excess of the present value of all their benefits over the actuarial value of assets.
1. The spreading of an actuarial surplus or deficiency over an appropriate period.
2. An accountancy term for the reduction in value of an asset, such as leasehold property, caused by the passage of time. If the cause is not solely related to time, the corresponding term is depreciation.
2. An accountancy term for the reduction in value of an asset, such as leasehold property, caused by the passage of time. If the cause is not solely related to time, the corresponding term is depreciation.
A series of payments, which may be subject to increases, made at stated intervals until a particular event occurs. This event is most commonly the end of a specified period or the death of the person receiving the annuity.
The splitting of the assets of a pension scheme between the various asset classes such as equities, fixed interest and cash. This will primarily reflect the long term needs of the fund, the “strategic view”, but may be adjusted to favour particular asset classes or markets which look attractive in the short term, the “tactical view”.
A process of selecting assets which are likely to generate proceeds broadly equal to the cashflow needed to meet the liabilities as they occur under different economic scenarios.
A prospective benefits funding method in which the actuarial liability makes allowance for projected earnings. The standard contribution rate is that necessary to cover the cost of all benefits which will accrue to existing members after the valuation date by reference to total earnings throughout their future working lifetimes projected to the dates on which benefits become payable.
The flat rate (not earnings related) state pension paid to all who have met the minimum National Insurance contribution requirements. The amount paid is increased if the recipient is married and a spouse or widow(er) may claim on the record of his/her spouse.
The difference between the price at which financial securities and units in a pooled fund can be sold (bid price) and bought (offer price). Contrasts with a single price where the buying and selling price is the same.
An unfunded occupational pension scheme which is accounted for by a provision in the employer's accounts.
The transfer of a group of members from one occupational pension scheme approved under Chapter I to another, sometimes with an enhanced transfer payment in comparison with an individual's cash equivalent.
The purchase by trustees of an occupational pension scheme, approved under Chapter I, of an insurance policy in the name of a member or other beneficiary, in lieu of entitlement to benefit from the scheme, following termination of the member's pensionable service. Sometimes also used to refer to the purchase of an insurance policy in the name of the trustees (a buy-in).
A career average scheme where benefits are revalued by reference to an appropriate index during pensionable service.
A method of accounting under which the transactions are accounted for only at the time money is received or paid. This is in contrast to the accruals concept.
The amount which a member of a pension scheme may, under s94 Pension Schemes Act 1993, require to be applied as a transfer payment to another permitted pension scheme or to a buyout policy.
The value of rights to benefits under a pension scheme which are taken into account by the Court when a pension sharing order is made. Such value is based on the cash equivalent to which the member is entitled.
A document confirming that a person entitled to a pension is still alive.
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.
Factors used to determine the amount of pension which needs to be forgone in order to provide a given lump sum benefit.
An annuity which must be purchased on retirement for a member of an insured pension scheme.
An annuity payable to a person, if alive, on the death of another.
The use of a pension scheme which meets certain conditions to provide benefits (GMPs, protected rights or section 9(2B) rights in place of SERPS.
A pension scheme is contracted out where it provides benefits in place of SERPS and has been given a contracting out certificate or appropriate scheme certificate by the Inland Revenue. Members are contracted out if they are in employment which is contracted out by reference to an occupational pension scheme or have elected to contract out via a personal pension scheme or free standing additional voluntary contributions (FSAVC) scheme.
A pension scheme is commonly called contracted in where it is not contracted out i.e. it provides benefits in addition to SERPS.
A pension scheme is commonly called contracted in where it is not contracted out i.e. it provides benefits in addition to SERPS.
Technically bonds issued by companies but in practice all bonds other than those issued by governments in their own currency.
Used in FRS 17 to mean the increase in the present value of the scheme liabilities expected to arise from employee service in the current period.
An accrued benefits funding method in which the actuarial liability is based on earnings at the valuation date. The standard contribution rate is that necessary to cover the cost of benefits which will accrue in the control period following the valuation date by reference to earnings projected to the end of that period and non discretionary revaluation thereafter.
Used in FRS 17 to mean an event that reduces the expected years of future service of present employees, or reduces for a number of employees the accrual of defined benefits for some or all of their future service.
The statutory debt due from the employer to a defined benefit scheme (subject to exceptions) where, on winding up of the scheme or liquidation of an employer, the assets are insufficient to meet the actuarial liabilities calculated on a prescribed basis.
An annuity which commences from a future date.
An accrued benefits funding method in which the actuarial liability is based on the benefits that would arise if the scheme were to discontinue at the valuation date. The standard contribution rate is that necessary to cover both the cost of benefit payments in the ongoing scheme and the accrued benefits in the event of future discontinuance.
A person who is financially dependent on a member or a pensioner or was at the time of death or retirement of the member or pensioner. Scheme rules may define a dependant differently.
A generic term for financial instruments used in management of portfolios, such as futures contracts and options.
The retirement of a member with immediate retirement benefit before normal pension date. The benefit may be reduced because of early payment.
Used in FRS 17 to mean the average rate of return, including both income and changes in fair value but net of scheme expenses, expected over the remaining life of the related obligation on the actual assets held by the scheme.
A means by which a member can indicate a preference as to who should receive any lump sum death benefit.
A defined benefit scheme where the benefit is calculated by reference to the final pensionable earnings of the member, usually also based on pensionable service.
Since 1 December 2001, it is the statutory regulator of financial services in the UK replacing the functions of previous regulatory bodies such as the Investment Managers Regulatory Organisation and the Personal Investment Authority.
A scheme set up under the Financial Service and Markets Act 2000 to compensate investors up to a maximum determined from time to time.
A preserved benefit, strictly one not subject to revaluation.
A closed scheme where no further contributions are payable, no further benefits accrue and members are entitled to preserved benefits.
FRS 17 is mainly concerned with defined benefit schemes, but applies to all retirement benefits as well as pensions, for example medical care in retirement. Exemptions exist for the smallest entities.
It requires the scheme assets and liabilities to be valued on a “fair value” basis and the resulting surplus (or deficit) to re 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.
FRS 17 requires extensive disclosures in the notes to the company's accounts.
It requires the scheme assets and liabilities to be valued on a “fair value” basis and the resulting surplus (or deficit) to re 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.
FRS 17 requires extensive disclosures in the notes to the company's accounts.
A scheme where the trustees have effected an insurance contrast in respect of each member which guarantees benefits corresponding at all time to those promised under the rules. Sometimes incorrectly used to mean insured scheme.
The provision in advance for future liabilities by the accumulation of assets, normally external to the employer's business.
The relationship at a specified date between the actuarial value of assets and the actuarial liability. Normally expressed as a percentage. The funding level may be calculated separately in respect of different categories of liability e.g. pensions in payment and additional voluntary contributions (AVC).
An approach used by the actuary in an actuarial valuation. The main categories of approach are described under accrued benefits funding method and prospective benefits funding method. A variety of methods can be used, but the method or methods used in a particular case should be adequately described in the actuarial report.
The timing of payments of contributions with the aim of meeting the cost of a given set of benefits under a defined benefit scheme.
Possible objectives of a funding plan might be that, if the actuarial assumptions are borne out: (a) A specified funding level should be reached by a given date; (b)The level of contributions should remain constant, or should after a planned period be the standard contribution rate required by the funding method used in the actuarial valuation.
Possible objectives of a funding plan might be that, if the actuarial assumptions are borne out: (a) A specified funding level should be reached by a given date; (b)The level of contributions should remain constant, or should after a planned period be the standard contribution rate required by the funding method used in the actuarial valuation.
The ratio of the actuarial value of assets to the actuarial liability.
Sterling bonds issued by the British government.
The right to apply the proceeds of an insurance policy to buy an annuity at a rate guaranteed in the policy.
The minimum pension which an occupational pension scheme must provide as one of the conditions of contracting out for post 6 April 1978 and pre 6 April 1997 service (unless it was contracted out through the provision of protected rights).
An investment fund that takes a higher than normal degree of risk, often using borrowed funds, in the hope of achieving a high absolute return
A strategy that aims to reduce potential losses in an investment. For example, transacting a foreign currency contract at an agreed future price to protect against currency fluctuations which might affect the value of an overseas investment.
An occupational pension scheme in which the benefit is calculated as the better of two alternatives, for example on a final salary and a money purchase basis. Or An occupational pension scheme which offers both defined benefit and defined contribution benefits.
An annuity which commences immediately or shortly after its purchase.
A system whereby pensions in payment and / or preserved benefits are automatically increased at regular intervals by reference to a specified index of prices or earnings.
A pension scheme where the sole long term investment medium is an insurance policy (other than a managed fund policy).
An annuity payable until the last of two annuitants dies. The amount of the annuity sometimes changes on the first death.
A compulsory document giving key information to prospective buyers of most life and pension investments, required by the regulator.
The retirement of a member, with immediate retirement benefit, after normal pension date. The benefit may be increased because of late payment.
Amounts which a pension scheme has an obligation to pay now or in the future. The amounts may not be immediately ascertainable and some liabilities may be dependent on the occurrence of future events.
The requirement under Pensions Act 1995 to increase, by 5% per annum or Retail Price Index (RPI) if less, pensions in payment under an occupational pension scheme approved under Chapter I (excluding additional voluntary contributions (AVCs) and free standing additional voluntary contributions (FSAVCs) ) and pensions in payment arising from protected rights under an appropriate personal pension scheme or an appropriate personal pension stakeholder pension scheme. It applies to pensions accrued in respect of service after 5 April 1997. These rules were later amended by the Pensions Act 2004 so that excess contributions made after 6 April 2005 only had to increase at Retail Price Index (RPI) capped at 2.5% instead of 5%.
A type of actuarial valuation where the actuarial value of assets is generally taken as either the market value or 'smoothed' market value of the assets and the actuarial assumptions used to calculate the actuarial liability are set consistently with this approach.
The price at which an asset might reasonably be expected to be sold in an open market.
An adjustment applied to a liability to reflect the difference between the market value and book value of assets.
Valuing stock or other financial instruments in a portfolio against the current market price to determine the unrealised profit or loss to date.
1. The policy of selecting assets of a nature, incidence or currency similar to that of the expected outgoings. 2. An accounting term, meaning that revenue and costs are matched with one another or 'hedged' so far as their relationship can be established or justifiably assumed.
A defined benefit scheme with a high proportion of pensioners and a low proportion of active members where contributions may be less than the outflow of benefits.
A person who has been admitted to membership of a pension scheme and is entitled to benefit under the scheme.
A requirement under s56 Pensions Act 1995 (PA95) that, under a prescribed set of actuarial assumptions, the actuarial value of assets of a defined benefit scheme should not be less than its actuarial liabilities. Replaced by scheme-specific funding regime under Pensions Act 2004 (PA04).
A Directorate with the Inland Revenue National Insurance Contributions Office. It is responsible for ensuring that the pension rights of employees contracted out of SERPS are accurately recorded, maintained and safeguarded.
The earliest age at which a member is entitled to receive benefits (other than the GMP) on his/her retirement from employment to which the scheme relates ignoring any special provisions as to early retirement on grounds of ill health or otherwise. This is commonly interpreted to mean the earliest age at which a member has a right to take benefits without reduction.
The date at which a member of a pension scheme normally becomes entitled to receive his/her retirement benefits.
The age of a member of an occupational pension scheme at the normal retirement date as specified in the scheme rules.
The date (usually the date of reaching a particular age) specified in the rules of an occupational pension scheme at which a member would normally retire.
A scheme organised by an employer or on behalf of a group of employees to provide pensions and/or other benefits for or in respect of one or more employees on leaving service or on death or retirement.
The option to apply the proceeds of an insurance contract to buy an annuity at a current market rate from the same or another insurance company.
A decision by an employee to leave or not to join an occupational pension scheme of the employer.
A preserved benefit which is fully secured for an individual member under a contract of insurance under which premiums have ceased to be payable in respect of that member.
A scheme where all contributions have ceased but the assets of the scheme continue to be held by the trustees to be applied in accordance with the scheme rules.
An employer, some or all of whose employees have the right to become members of an occupational pension scheme. Usually only applied where more than one employer participates in a single scheme.
An accrued benefits funding method similar to the current unit method but with only partial allowance for projected earnings.
A person who is currently receiving a pension from a pension scheme.
A basis of valuation of a long term insurance policy for occupational pension scheme accounting purposes, based on an equivalent single premium.
The granting by a scheme of preserved benefits to a member leaving pensionable service before normal pension age under an occupational pension scheme approved under Chapter I, in particular in accordance with minimum requirements specified by the Pensions Scheme Act (PSA93).
Benefits arising on an individual ceasing to be an active member of an occupational pension scheme approved under Chapter I, payable at a later date.
Commonly used in scheme documentation for the particular participating employer in which is vested special powers or duties in relation to such matters as the appointment of the trustees, amendments and winding up. Usually this will be the employer which established the scheme or its successor in business.
Benefits and other liabilities which are given precedence in accordance with the priority rule when a scheme is wound up.
The provisions contained in scheme documentation setting out the order or precedence of liabilities to be followed if the scheme is wound up.
An accrued benefits funding method which compares the accrued actuarial liability with the value placed on the scheme assets for valuation purposes. The actuarial liability is based on service up to the valuation date and makes allowance for projected earnings. Used only in the context of the Pension Scheme Surpluses (Valuation) Regulations 1987 (SI 1987/412).
An accrued benefits funding method in which the actuarial liability makes allowance for projected earnings. The standard contribution rate is that necessary to cover the cost of all benefits which will accrue in the control period following the valuation date by reference to earnings projected to the dates on which benefits become payable. Also known as the projected unit credit method.
A funding method in which the actuarial liability at the valuation date is the present value of: (a) the benefits for current and deferred pensioners and their dependants, allowing where appropriate for future increases, and (b) the benefits which active members will receive in respect of both past and future service, allowing for projected earnings up to their assumed exit dates and, where appropriate, for increases thereafter, less the present value of future contributions payable in respect of current members at the standard contribution rate.
The benefits from a scheme contracted out on a money purchase basis deriving from at least the minimum contributions or minimum payments, which are provided in a specified form as a necessary condition of contracting out.
An annuity purchased privately by an individual. In accordance with s656 Income and Corporation Taxes Act 1988 (ICTA88), instalments of the annuity are subject to tax only in part.
The practice whereby one insurer insures with another risks it has accepted in order to offset the impact of part or all of the expected claims. Used loosely to describe the insurance taken out by trustees to offset the effects of excessive death benefit claims.
The application, particularly to preserved benefits, of indexation, escalation or the awarding of discretionary increases.
The index linking of earnings for calculating benefits.
An annuity which commences to be paid on the death of a specified person, normally to a spouse or a dependant.
The extra yield of an investment over the risk-free rate demanded by investors to compensate them for the higher risk.
A scheme in which benefits are related to earnings. It is a type of defined benefit scheme.
The detailed provisions of a pension scheme, brought into operation by a definitive trust deed or in some other formal way, for example by a trustees' resolution.
The financial year of an occupational pension scheme for which the audited accounts and the annual report are prepared. The Disclosure Regulations permit the scheme year to be between six and eighteen months when the scheme commences or winds up or when the scheme's financial year is changed.
See principal employer.
The additional pension provisions of the state pension scheme. This has been replaced by the state second pension from 6 April 2002.
PA95 Pensions Act 1995 raised the state pensionable age for women to 65, bringing it in line with men. This is being phased in over a ten year period between 2010 and 2020.
The state pension scheme introduced with effect from 6 April 2002 to replace SERPS to enhance the basic pension.
One of the four primary statements in company financial statements, together with the profit and loss account, balance sheet and statement of cash flows. The statement shows the components as well as the total of recognised gains and losses, where these have been earned but not realised. Where a gain is both earned and realised it will be disclosed in the profit and loss account. Under FRS 17, actuarial gains and losses are disclosed in the STRGL and not in the profit and loss account.
The cancellation of an insurance policy by the payment of a surrender value.
An annuity payable for a fixed period or until earlier death.
The option to apply the proceeds of an insurance contract to buy an annuity from the original insurer at its current market rate as an alternative to exercising a guaranteed annuity option.
A type of career average scheme where the pension is a specified fraction of the member's aggregate earnings throughout the period of membership.
A service run by the Pension Schemes Registry to help individuals locate their past pension rights OR a service run by the Inland Revenue to help schemes trace their deferred pensioners.
A payment made from a pension scheme to another pension scheme, or to purchase a buy out policy, in lieu of benefits which have accrued to the member or members concerned, to enable the receiving arrangement to provide alternative benefits. The transfer payment may be made in accordance with the scheme rules or in exercise of a member's statutory rights under Pensions Scheme Act (PSA93).
A pension which is so small that it can be fully exchanged for cash (commuted) without prejudicing the approval of the scheme by HM Revenue & Customs.
A legal concept whereby property is held by one or more persons (the trustees) for the benefit of others (the beneficiaries) for the purpose specified by the trust instrument. The trustees may also be beneficiaries.
An individual or company appointed to carry out the purposes of a trust in accordance with the provisions of the trust instrument (e.g. trust deed) and general principles of trust law.
Where a pension arrangement has assets less than required to meet liabilities.
A scheme where assets are not accumulated in advance of the benefits commencing to be paid.
Commonly used by actuaries to mean the funding method and/or actuarial assumptions.
The process of terminating an occupational pension scheme (or less commonly a personal pension scheme), usually by applying the assets to the purchase of immediate annuities and deferred annuities for the beneficiaries, or by transferring the assets and liabilities to another pension scheme, in accordance with the scheme documentation or statute (s74 Pensions Act 1995 (PA95)).
A measure of the annual income earned on an investment. Normally expressed as a percentage of its market price.
A graphical representation of the relationship between the yields of bonds over different maturity periods.