Your definitive guide to the most common pensions terms (and jargon) in use today

pensions

 

Accumulation – the process of saving money into a Defined Contribution (DC) scheme, to build a retirement pot

Active member – a currently employed member of a pension scheme who is making regular contributions (or for whom the employer is making contributions) into the scheme

Alternatives – investment asset classes other than shares and bonds. Alternatives include property investment, commodities such as oil and gold, or even fine wine funds

Annual Management Charge (AMC) – the charges made for managing a fund each year. In a DC scheme, these will usually be paid out by the member from their pot

Annuity – a product from an insurance company that provides regular payouts, usually for life, in exchange for a lump sum. 

Assets – the investments held by a Defined Benefit (DB) scheme or an individual in a DC scheme

Asset allocation – the way in which asset classes within a fund are divided up between different types of investment and across different fund managers

Asset classes –  types of investments, such as shares, bonds or property 

Auto-enrolment – legislation that will require almost all employers to automatically place their staff into a pension scheme unless they opt-out 

Behavioural economics – ways to use human nature to support better savings habits. The save more tomorrow principle is one example of behavioural economics in practice

Benefit age – the age at which an employee can take their pension

Bond – a loan, usually to a government or company. The borrowed money is paid back at an agreed date, with interest

Bulk annuity – another name for a buyout or buy-in

Buy-in – the practice of converting the pensions of a part of a DB scheme’s membership into annuities

Buyout – the practice of transferring all of the assets and liabilities of a DB scheme to an insurer. The insurer is then responsible for paying the pensions of all members of the scheme and the employer has no further involvement with it

Capital – the value built up in a pension

Career average related earnings (or CARE) – a form of DB scheme that provides a member with an income calculated using average income across their career

Closed to future accrual – a DB scheme that no longer accepts contributions from any of its members

Closed to new members – a scheme, typically DB, but it could also be DC, that no longer accepts new members but still receives contributions from existing members

Colletcive defined contribution - legislation that gives employers flexibility in scheme design. It could enable them to offer pensions that combine elements of DB and DC

Consolidation phase – a phrase used by some pension scheme providers to describe the point in a DC pension saver’s life where they begin to take less risk with their investments. This is normally as they get closer to retirement 

Consumer Price Index (or CPI) – The official measure of inflation used by the UK government, and increasingly used by pension schemes for calculating annual increases to pensioners’ payments.

Contract-based pension (also described as a Group Personal Pension plan) – a company pension plan provided by an insurance company or fund manager. 

Contribution rates – the amount a member or an employer pays regularly into the pension scheme. This is typically a percentage of salary

Contribution structures – different ways to organise contributions

Data cleansing – improving the quality of data. This can be done as part of ongoing governance, or for one-off events, such as a buyout. Data cleansing would typically involve activities such as mortality screening

Decumulation – removing money from a DC scheme upon retirement

Default fund – a fund designed for members of DC schemes who don’t make a choice about their investments. Any scheme used for auto-enrolment must include a default option that meets the needs of its members

Default Retirement Age (abolition of) –  legislation passed that made it illegal to force an employee to retire at 65 (the then default retirement age)

Deferred member – an individual who no longer works for a company, but will still receive a pension from it. This is most common in DB schemes, but in some cases also applies to DC schemes

Defined benefit (DB) – a form of pension (typically final salary or career average), that provides retired members with income related to the length of their employment and salary level at retirement

Defined contribution (DC) – a form of pension that provides members with a lump sum when they leave the scheme, based on the value of the savings and investments they’ve made. This is not related to salary or length of service with the company. Defined contribution schemes can be either contract-based or trust-based

De-risking – the process of removing sources of risk from a DB scheme. This includes insuring the scheme against increases in life expectancy, or a buyout, which removes all the risk from employers

Diversification – spreading money across a variety of types of investment, so that if one asset class performs badly, others may compensate by performing well

Diversified Growth Fund – a form of investment strategy that uses a number of different asset classes and manages the percentage of each asset within the fund over time

Drawdown – one of the main retirement options for retiring scheme members. Rather than removing all their money from the scheme as a lump sum to buy an annuity, members can withdraw a certain amount of money each year and leave the remainder in the scheme. 

Eligible worker – an employee that meets the criteria for auto-enrolment (ie aged between 22 and state retirement age, and earning more than £10,000 pa)

Enhanced annuity – a form of annuity based on an individual’s lifestyle. Factors, such as smoking, are taken into account as these may shorten lifespans and therefore reduce the number of years over which the annuity is expected to last, resulting in higher regular payments.

Enhanced Transfer Value (or ETV) exercise – a form of de-risking that offers members a lump sum payment to exit a DB scheme. The lump sum is typically worth more than the equivalent value of their pension, but less than the cost to the employer of providing that pension for life 

Escalation – increase in retirement income each year by a set percentage in a DB scheme

Fiduciary duty – a legal responsibility to act in the best interests of pension fund members.  This most commonly applies to pension trustee boards

Fiduciary management – a technique used by DB scheme trustees to pass over some investment decision-making to a third party such as a consultant or fund manager

Final salary – a form of DB pension that provides an income to retired employees based on a combination of their salary at retirement and how long they have worked for the company

Financial education – educating employees on how to manage their finances, and thus enabling them to get the best out of their benefits

Fixed annuity – see Level annuity

Foundation phase – the term used by some pension providers to describe the first few years that a member pays into their pension

Fund – a way to invest money

Fund range – most DC schemes offer a range of fund choices for members in addition to a default fund. This is termed the fund range

Gilts – bonds issued by the UK government that are typically used by DB schemes and by DC lifestyling strategies for liability-matching

Glide path (defined benefit) – the process of establishing how a scheme will de-risk over time, possibly towards a goal such as a buyout

Glide path (defined contribution) – the process of moving a DC member’s investments into assets best suited to their chosen retirement options

GMP (Guaranteed Minimum Pension) equalisation – a requirement to ensure men and women are treated fairly in terms of their guaranteed minimum pensions 

Governance – management and oversight of the pension scheme

GPP (Group Personal Pension) – a form of contract-based pension provided by an insurance or investment company

Growth phase – a phrase used by some pension providers to describe the stage in a DC member’s life when they can take more risk with their investments to help their savings grow more quickly

Guarantee period – when an individual buys an annuity, it can include a period for which payments are guaranteed. If the individual dies during that time, a nominated person can continue to receive the income for that set period of time

Hybrid scheme – a scheme that has both defined benefit and defined contribution features

Indexation (pensions) – annual increases to pensioners’ payments based on either the retail price index or consumer price index

Investment governance committee – a board set up by an employer to provide some oversight of a contract-based DC scheme. 

Impaired life annuity – an annuity that takes health factors, such as diabetes or angina, into account. Because a person with an impaired life is not expected to live as long as a healthy individual, the regular payments from the annuity are likely to be higher

Joiners  – the term used to refer to members when they first join a pension scheme

Joining window – once an employee becomes eligible for auto-enrolment, the employer must auto-enrol him or her into a pension scheme within  a set time period

Joint annuity – an annuity designed to provide an income for a couple. The income will continue to be paid to a partner or spouse after the death of the annuity holder

Last man standing – a piece of pensions legislation that applies to multi-employer companies with DB schemes. It states the final solvent employer in a group becomes liable for all of the company’s pensions debts

Leavers – those leaving a pension scheme, either while they are still employed by the company, or when they cease employment

Level annuity/flat rate annuity/fixed rate annuity – an annuity that pays out the same amount of money throughout the life of the holder, with no indexation 

Liabilities – the cost of the pensions that a DB scheme must pay out over time

Liability matching – designing an investment strategy that takes into account the cost of the pensions that have to be paid out of a DB scheme

Lifestyling – the process of automatically moving a DC member’s investments out of high risk assets, such as shares, into lower risk assets, such as bonds, as they approach retirement

Longevity – how long an individual is expected to live

Mastertrust – an ‘umbrella’ DC scheme, which any employer can join. A master trust is run with its own trustee board, independent of the companies involved with the scheme and the company running the mastertrust.

Minimum contribution – the government has set a minimum employer and employee contribution level for auto-enrolment.

Money-purchase scheme – sometimes used to refer to a DC scheme

Mortality screening – a data cleansing technique to ensure pensions are not being paid to deceased employees or their dependants

Nominal retirement age – the anticipated age at which an employee will retire

Nominated beneficiary – the person (or organisation) that an employee wants to give their pension to, should they die before retiring

Occupational pensions – a pension offered by a employer to its employees  (as opposed to a personal pension, which is taken out by an individual outside the workplace)

Open market option – shopping around for an annuity or drawdown provider at retirement

Opting in/out – under auto-enrolment, employees must be given the ability to opt out of a company’s pension scheme. Employees cannot opt out, however, until after they have been automatically enrolled

Pension Increase Exchange – an exercise sometimes carried out with DB schemes, where a member gives up indexation increases to their pension in return for a lump sum

Pensioner members – members of a scheme who have retired and are now drawing their pension.

(The) Pensions Regulator – the body responsible for policing occupational pensions. It will also be responsible for enforcing auto-enrolment legislation

Platform (corporate) – a portal where pensions, workplace ISAs, sharesave schemes and possibly other forms of benefits can be offered in one place

Platform (fund) – a way of describing a ‘one-stop-shop’ where members can make fund choices within a DC scheme

Postponement – in certain circumstances, employers can choose to postpone the auto-enrolment of some employees. This could apply to temporary workers, for example. 

Pot – the term used to refer to the savings that an individual has accumulated within a DC scheme

Qualifying earnings – earnings in a year used for auto-enrolment calculations

Qualifying pension scheme – an occupational pension scheme that meets the criteria required for auto-enrolment

Quote guarantee period – the period for which an annuity quote is valid

Recovery plan – DB schemes that are in deficit must provide The Pensions Regulator with a recovery plan to demonstrate how they intend to meet their liabilities

RDR (Retail Distribution Review) – a new set of guidelines due to come into force in 2013 that will change the way companies and individuals receive and pay for advice 

Re-enrolment – if a member opts out after auto-enrolment they are automatically re-enrolled after three years. If they still don’t want to be a member of the scheme, they must opt out again

Retail Price Index (or RPI) – A measure of inflation that is published monthly by the Office for National Statistics. It is based on the cost of a shopping basket of items. Traditionally, it has been used as the measure for increases in payments for pensioners, but many schemes are now turning to CPI

Save more tomorrow – a form of behavioural economics where DC scheme members commit to paying more into their pension when they receive future pay rises

Single life annuity – an annuity that provides an income for one individual

SIPP (or Self-Invested Personal Pension) – a form of pension saving that gives individuals huge control over their investments. SIPPs may sometimes be offered as an add-on to a company pension.

Stochastic modelling –  financial modelling techniques that can help employees understand the effect their pension savings will have on their retirement finances

Target date fund – a type of investment strategy used by some DC schemes as a default fund. The fund identifies a member’s planned date of retirement and manages their investments accordingly

Technical provisions – the amount of money required to pay promised pensions from a DB scheme

Third party administrator (TPA) – some pension schemes outsource the administration of the scheme to a third party, rather than managing the process in-house

Trivial commutation – members of DC schemes who have very small pots (currently less than £30,000), can take all the money as cash

TUPE (Transfer of Undertakings Protection of Employment) – legislation to protect employees’ benefits when transferred from one company to another through, say, a merger or acquisition

Transfer Value Analysis – a calculation to find out the equivalent value of an employee’s DB pension if it were to be transferred out of the scheme and into a personal pension

Trustee board – all DB schemes and some DC schemes have a trustee board that is responsible for the management (governance) of the scheme, its investment strategy and for paying the correct pensions to the correct members

Uncrystalised pension fund lump sum – the method by which retirees can take cash sums from their pension at retirement. Members can either opt for a an up front tax-free lump sum of 25% of the total pot OR to get 25% of every withdrawal tax free

Underfunded – many DB schemes do not have sufficient funds to cover the projected liabilities of the scheme. Such schemes are said to be underfunded

Unit – funds are divided into smaller parts called units. Contributions into a DC scheme are used to buy units

Value – the value of a DC pension is given as a lump sum number. This does not equate to the income a member might receive if they buy an annuity

Workplace savings – a broad term used to incorporate all forms of financial savings related to the workplace, including pensions, workplace ISAs and share save schemes