Glossary of pensions terms and abbreviations

Abbreviation

Definitions

130/30 fund A 130/30 fund uses financial leverage by shorting poor performing stocks and buying shares that are expected to have high returns.  130/30 describes allowing a fund manager to short up to 30% of the portfolio and then using the funds to take a long position (ie just buying normally) in the shares that are expected to outperform. See short extension strategies, net long approach.  It allows, in other words, a conventional investment management firm to engage in a limited amount of hedging.

2&20 The standard fees for hedge fund managers (some charge up to 4&40); it means that the charges are 2% every year of the funds under management plus 20% of any gain.  Nice work if you can get it, but there are signs of complaints by investors, especially since there is no sharing of pain if things go badly.

401k plans A US defined contribution scheme where the employer sponsors a tax-registered (‘qualified’) plan in which employees allow the employer to deduct, on a regular basis, money from their salaries, tax free, to invest in stocks, bonds or real estate, mostly for pension purposes, but the funds of which can also be used for education or medical emergencies.

AAA rating The highest credit rating for a bond or company; the risk of default is (or was) considered to be negligible.  For a contrary view see the history of sub-prime lending (u-tube) or The Black Swan.  AA rated bonds (slightly higher risk) are used as the basis for valuing pension scheme liabilities in company accounts.

AAF 01/06 Guidance issued by the ICAEW to provide guidance to reporting accountants on undertaking an assurance engagement and providing a report in relation to the internal controls of a service organisation, issued in June 2006 and revised in June 2009 (replacing RAG21/94).

Abandonment Emotive and pejorative description of the increasing practice of employers making their previously sponsored schemes independent of their sponsor. The advantage to the employer is that the pension assets and liabilities are removed from the balance sheet, making commercial transactions easier. There is a tPR guidance note on abandonment.

Abatement Where a member’s public service pension is reduced when he is re-employed after drawing his pension because his new salary and pension should not be more than the member’s salary on retirement.

ABCP see Asset backed commercial paper.

ABI The Association of British Insurers is a trade association representing the vast majority of UK insurers (both general and life).  It has a decreasing influence in pensions policy but is active on institutional investment matters such as shareholder action and remuneration policies of quoted companies. It does not always agree with the NAPF which looks after the interests of company pension funds.

Absolute return An investment strategy the objective of which is a given level of long-term return rather than a return relative to a benchmark, index or inflation measure.  The argument of absolute returns advocates is that the pensioners need real returns, not a return which reflects for example a falling market.  Hedge funds usually adopt absolute return strategies; for pension funds the counter argument is that they involve excess risk, especially since no one guarantees the target can be achieved.

Absolute volatility How much an investment rises or falls (cf volatility, Mandelbrot).  People worry about volatility only if their time horizon is short; no-one remembers what the volatility is over 60 years.  It has become more important in recent years because regulators obsess about it; bonds are relatively less volatile than equities for example.

Accelerated accrual Where the scheme’s accrual rate is greater than (usually) one sixtieth of pensionable remuneration for each year of pensionable service. At one time there were HMRC limits on accrual rates.

Accounts, company See Company accounts.

Accounts, pension fund See pension fund accounts, whistleblowing.

Accrual bond See collateralised mortgage obligation

Accrual is the system under which benefits are earned year-by-year in a pension scheme. The more years you work, the more rights you accrue (or earn, perhaps).  At the moment it is important in pensions at the moment because it is the basis of the argument the UK government is using in the European Court to explain that pension rights in the UK do not magically appear once you reach retirement age, but are painfully acquired (and funded for) year-by-year.

Accrual rate Level at which benefits build up for each year of pensionable service in a defined benefit scheme.  See accelerated accrual.  The former HMRC restrictions on accrual rates no longer apply.

Accrued benefits The benefits for service up to a given time, and which may or may not be vested or preserved.  They can be calculated in relation to current earnings or projected earnings, and indexed or not.

Accrued interest Interest that has accumulated since the most recent coupon payment date on a bond or other fixed-interest security

Accrued rights Generally, these are benefits to which a member is entitled and include accrued benefits. See subsisting rights.

Accumulation Units The normal units bought as part of a unit-linked policy.  These will bear an annual management charge of say 0.75% or 1 %.  For older style contracts these will be the units purchased once the necessary amount has been invested in initial or capital units. For newer style contracts, all units will be accumulation units.  These units bear this name as any income accruing within the fund accumulates for the benefit of the investor rather than being distributed as income.

Acquisition expenses Those expenses incurred by the life company in the prospecting and establishment of its new business policies.  The total expenses of the life company are divided up into either acquisition or maintenance expenses.

ACT see Advance corporation tax credit.

Active investing involves continuous buying and selling of shares by the asset manager who needs to keep a frequent eye on market conditions.  It is expensive in dealing fees, and needs to avoid being treated as trading by HMRC who might then charge tax on any profits.

Active manager An investment manager who seeks to outperform an investment benchmark through, amongst other things, asset allocation, market timing, duration selection or security [company or bond] selection.  The mirror image is ‘passive manager’.

Active member An individual who has benefits currently accruing for or in respect of that person under one or more arrangements in the pension scheme.  (HMRC) Member of a scheme who is accruing benefits under that scheme in respect of current service.  See also deferred members’ and ‘pensioner members’.  In other words, a pension scheme member who has not yet taken any retirement benefits.

Active membership period The active membership period (1) begins with the date on which benefits first began to accrue to or in respect of the individual under the registered pension scheme or, if later, 6 April 2006, and (2) ends immediately before the benefit crystallisation event or, if earlier, the date on which benefits cease to accrue under the scheme.  (HMRC)

Active position (active money) Where a fund manager decides to invest more or less in a particular investment or class of investments than the investment represents in a benchmark or index.

Active return The return of a portfolio relative to its investment benchmark.

Active risk The standard deviation [risk] of active return.  This is also sometimes called the tracking error.

Actuarial assumptions The set of assumptions used by the actuary in an actuarial valuation or other calculations by the actuary (for example, rates of return, inflation, increase in remuneration, dividend increases, and mortality).

Actuarial certificate A certificate signed by the actuary in certain circumstances, for example to certify that actuarial equivalence requirements have been met as a result of an amendment to a scheme, to confirm there is a surplus, to confirm details of a bulk transfer or to confirm the conditions of the reference scheme test are met

Actuarial deficiency The amount which an actuary considers is necessary to be added to the assets to be sufficient to pay the benefits.  Since it depends on actuarial assumptions which can vary considerably (some of them based on regulatory requirements) it can vary enormously in practice.

Actuarial equivalence requirement The actuarial equivalence requirement applies in relation to a detrimental modification that is not a protected modification (ie a modification which would involve or might adversely affect subsisting rights but not a modification which involves converting defined benefit rights into defined contribution rights or reducing pensions in payment) and where the trustees determine that this test is to apply.  The actuarial equivalence test has three aspects: • information requirement: advanced notice of the change to be given to members by trustees.  This must indicate how it will affect the members and allow them to make representations on the proposal • actuarial value requirement: member’s subsisting rights after the modification to be equal to or greater than the actuarial value of his subsisting rights immediately before the modification• actuarial equivalence statement: statement by actuary certifying that actuarial value has been maintained.

Actuarial methods Actuaries adopt a variety of ways of calculating assets and liabilities, which can produce very different outcomes.  Some of them are mentioned in this list (eg projected unit credit) and there are standard definitions on the Institute and Faculty of Actuaries website.

Actuarial report Written report, prepared and signed by the scheme actuary, on developments affecting the scheme’s technical provisions since the last actuarial valuation.

Actuarial statement The Disclosure of Information Regulations 1996 (SI 1996/1655) require the scheme actuary to include an actuarial statement 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 report A scheme actuary is required by law to produce a detailed report at least every three years which features a formal, accurate valuation of the scheme’s technical provisions and its discontinuance valuation.  Once issued, trustees will normally initiate a review of contribution levels.

Actuarial valuation Written assessment, carried out by an actuary, to determine the ability of a defined benefit scheme to meet its future liabilities.  It is usually done to assess the funding level and to recommend a contribution rate based on comparing the actuarial value of assets and liabilities of the scheme.  Trustees must obtain an actuarial valuation at intervals of not more than one year, or, if they obtain an actuarial report for the intervening years, at intervals of not more than three years.  Following implementation of the statutory funding objective, the actuarial valuation will report on developments affecting the scheme’s technical provisions since the last actuarial valuation was prepared.

Actuary is a mathematician who by definition always gets it wrong. He estimates what he thinks the funds will earn over the next 20 years or so, what your salary will be over the next 30 years and, on the basis of these and other assumptions, calculates backwards how much money needs to be put in the kitty now.  Even though he can predict the future no better than an astrologer (according to one blessed judge) he is worth every penny of his substantial fees.  Calculations made by actuaries include matters such as premium rates, profit testing bonus payments, life expectancy, establishment of mathematical reserves etc.  Each with-profits fund has a with-profits actuary advising the company on overall management of the fund.  In addition each life company has an ‘Actuarial Function Holder’ which is an approved person under the FSA rules.  Actuaries that certify the reports of pension funds and insurance companies must be full members of the Institute of Actuaries and Faculty of Actuaries and hold a practicing certificate from the BAS.  The scheme actuary appointed by the trustees has a number of statutory responsibilities concerning scheme funding.  www.actuaries.org.uk; see also for actuarial reform www.hm-treasury.gov.uk/media/B/morris_final.pdf which imposed excessive control on actuaries following the collapse of Equitable Life insurance company.

A-Day 6 April 2006, when the ‘simplified’ pensions tax regime came into force under the Finance Act 2004, when HMRC attempted to introduce a single tax regime for all UK pension schemes.

Added years Where a member of a defined benefit scheme is credited with additional years of pensionable service, perhaps as a result for example of: • a transfer payment received from another scheme • an AVC payment• or an augmentation made either by the trustees or the employer on behalf of the member.

Additional expenses Costs involved for custodianship, auditing and registration of ownership

Additional State Pension The earnings-related state pension.  From 1978-2002 the State Earnings Related Pension Scheme (SERPS) and, from 2002, the State Second Pension (S2P).  It is a pension paid on top of your basic state pension.  Self employed people cannot build up an additional state pension.

Additional voluntary contribution (AVC) A contribution paid by a member of an occupational pension scheme to secure additional benefits.  Since A-day, occupational pension schemes are no longer obliged to (but may do so if they wish) offer members the option to make AVCs to their occupational pension scheme. AVCs enable members to buy additional or top-up benefits.  Before A-day member contributions of up to 15% of remuneration were generally eligible for tax relief, to include ordinary contributions, AVCs and FSAVCs.  Nowadays the 15% limit is replaced with a financial limit of annual earnings up to £40,000 (or £3,600 if higher) (2014) (see Annual allowance, Lifetime allowance).

Additional Voluntary Contribution was the extra contribution (not more than 15% of salary) which a member could pay into a scheme to buy extra benefits.  At one time members had a right to make such contributions, but compulsory provision for AVCs disappeared after April 2006.  Administration A statement of administration standards, with principles and checklist is promoted by an organisation ‘Raising Standards of Pensions Administration’ www.raisingadminstandards.com.

Administrator is an HMRC technical term to describe the person with whom the buck stops as far as they are concerned.  It is your job to ensure that is not you – and is someone like the pensions manager or insurance company.  See Scheme Administrator

Administrator Person or body responsible for the day to day management of the pension scheme.  The administrator maintains members’ records, calculate and pay benefits and manage contributions; cf ‘Scheme administrator’ which is an HMRC obligation.

Admission agreement Agreement used to admit a body as an ‘admission body’ under the Local Government Pension Scheme (LGPS) Regulations 1997 (SI 1997/1612).  Parties to the agreement must include the administering authority of the relevant LGPS pension fund, and the scheme employer which is transferring the employees (if different to the administering authority) and the admission body.

Admitted body status (ABS) ABS provisions were introduced in 1999 to enable contractors to take on local authority contracts to provide ongoing active membership of the Local Government Pension Scheme for those local government employees who transfer to the contractor.  Because of uncertainties in the way in which contributions and transfers are calculated contractors have found it difficult to price the cost of pension provision when bidding for contracts.

Adoption leave See family leave.

ADR Alternative dispute resolution (ADR) is any type of procedure or combination of procedures voluntarily used to resolve issues in controversy.  See dispute resolution; IDR.

Age discrimination see also Discrimination, Race, gender, sexual orientation, religion, belief, pregnancy, maternity.  By definition pension schemes discriminate on the grounds of age, so although it is normally against the law, there are complex provisions allowing it most of the time in pension schemes.  The rules came into force in December 2006.  Bloxham v Freshfields allows age discrimination in pensions provision where justifiable (see also DTI/DWP (now BERR).  A similar ECJ case suggests that governments can impose state retirement age limits in contracts of employment (see European Court of Justice Case, Palacios de la Villa v Cortefiel Servicios SA; The impact of the age regulations on pension schemes: guidance on Employment Equality (Age) Regulations 2006 and their impact on occupational and personal pension schemes, December 2006

(www.berr.gov.uk/files/file35877.pdf).  See also Flexible retirement.

Agency see Rating agency.

Agency trade A transaction carried out by a stockbroker or investment bank on behalf of the pension fund as agent rather than as principal.  The pension fund pays commission for the trade, some of which is used allegedly for independent research.

Age-related rebate Payments made by NICO to an appropriate pension scheme, COMPS, COMPSHP or COMBS for members who have contracted-out.  They increase with the age of the member.  See contracted-out rebate.

AGM see Annual general meeting.

AIM The Alternative investment market, a form of stock market designed for smaller and newer companies where the listing rules are easier and the costs of listing are lower (but the companies are riskier).

AIMR Association for Investment Management and Research (obs), see CFA Institute.  Now used only for plumbers.

Allocation percentages The percentage used as part of the allocation of a premium to buy units. An allocation percentage is used to broaden or narrow the bid/offer spread, so an allocation percentage of 101 % would narrow the bid/offer spread whilst a percentage of 99% would widen the spread.

Allocation Process by which a member gives up part of his pension in exchange for a pension payable to his spouse or dependant.  It is also known as surrender.

ALM see Asset liability modelling.

Alpha A measure of performance on a risk-adjusted basis.  Alpha takes the volatility of a fund and compares its risk-adjusted performance to an index.  The excess of return over the index or benchmark is the alpha, or added value.  It is the abnormal return over and above what would normally be expected in normal cases (by investing in a tracker fund for example).  It assumes that the manager has enough skill to outperform the market.

Alternative assets Alternative investments include real estate, hedge funds, private equity and commodities, ie they are not bonds or equities or cash.  They are bought in order to enhance expected return and diversity a portfolio.  Alternative assets are usually unquoted and therefore less liquid than equities and bonds.

Alternatively secured income see Alternatively secured pension

Alternatively secured pension (obs) Available from A-day as a type of income drawdown for members from age 75 who wish to defer their pension payments.  A variation on unsecured pension, to accommodate religious objections to risk pooling, it allows pensioners to receive an income from their pot of money by cashing units at intervals during the life of the fund.  However, income was limited to a maximum of 70% of a single life annuity based on a purchasing age of 75.  It involved payment of (taxable) income withdrawals direct from a money purchase arrangement to the member of the arrangement (who was aged 75 or over) and that met the conditions laid down in paragraphs 12 and 13 of Schedule 28 to the Finance Act 2004. (HMRC) see also Annuity

Alternatively secured pension fund (obs) Funds (whether sums or assets) held under a money purchase arrangement that have been 'designated' to provide a scheme member (who is aged 75 or over) with an alternatively secured pension, as identified in Finance Act 2004 Schdule 28 para 11.  Once sums or assets have been 'designated' as part of an 'alternatively secured pension fund' any capital growth or income generated from such sums or assets are equally treated as being part of the 'alternatively secured pension fund'.  Similarly, where assets are purchased at a later date from such funds, or 'sums' generated by the sale of assets held in such funds, those replacement assets or sums also fall as part of the 'alternatively secured pension fund' (as do any future growth or income generated by those assets or sums).  (HMRC)

American depository receipts [ADRs] Certificates issued by a US bank stating that a specific number of a non-US company's shares have been deposited with it.  These certificates are denominated in US$ and traded on US exchanges as if they were US securities.  See also Global depository receipt.

Analyst An individual who analyses investments such as companies to see if they are worth buying.  They are astonishingly well paid.  There are different kinds of analysts – equity analysts look at equities, quantitative analysts look at movement patterns in changes in investment values and there are many others.

Annual allowance charge A charge (usually at the rate of 40%) in respect of the amount by which the total pension input amount for a tax year in the case of an individual who is a member of one or more registered pension schemes exceeds the amount of the annual allowance for the tax year.  (HMRC) It is a tax charge that is levied on an individual who exceeds the Annual Allowance; mostly it is 40% of the excess of the annual allowance.

Annual allowance Relevant UK individuals are entitled to tax relief on their pension contributions up to a maximum of 100% of their UK taxable earnings or £3,600 is greater pa.  There is a restriction on the pace of accrual which is that if an individual’s pension provision from all of their pension schemes attributable to a tax year exceeds the annual allowance this gives rise to a tax charge on the excess over the annual allowance (£10,000 for 2014/15).  The tax charge on the excess is 40%.  The issue of checking whether a scheme member exceeds the annual allowance is the responsibility of the member. The Annual Allowance is the maximum pension contribution a pension scheme member is allowed each year without giving rise to a tax charge.  The annual allowance is such amount, not being less than the amount for the immediately preceding tax year, as is specified by order made by the Treasury.  (HMRC)

Annual Fee The basic charge for running a pension scheme

Annual general meeting Annual general meetings are in theory an important method of governance of companies in which pension funds invest; the rules are being simplified (Companies Act 2006).

Annual management charge (AMC) An annual administration charge payable to the provider of an occupational pension scheme, or the percentage amount being deducted from a fund value for investment and administration services.  It is sometimes the charge deducted from a unit-linked fund on a daily basis, normally as part of the unit pricing routine.  A typical level of charge is 0.75% or 1 %.  It is also the administration fee levied each year on a defined contribution scheme, a personal pension plan or a stakeholder pension scheme.

Annual percentage rate (APR) The cost of debt that is paid by borrowers expressed as an annualised figure, the calculation of which is set down by law.

Annualised return The average return over a given period scaled up or down to an annual figure. For example, if a fund has produced a return of 33.1 % over three years, on average the fund would have produced a return of 10% a year [1.10 x 1.10 x 1.10=1.331].

Annuitant The individual to whom an annuity is paid.

Annuity A policy (contract) from an insurance company that converts a pension fund or part of it into pension income.  Pension income is taxable.

Annuity protection lump sum death benefit A lump sum benefit paid following the death of a scheme member who died before age 75 and was in receipt of either a lifetime annuity or scheme pension under a money purchase arrangement, and which does not exceed the limits imposed through paragraph 16 Schedule 29 Finance Act 2004 (HMRC).

Annuity rate The rate at which a pension fund is converted into regular pension payments.  For example, a £6,000 annuity from a pension fund of £100,000 has a 6% annuity rate.

Annuity The payment of a regular income by a life company to an annuitant in exchange for a lump sum either for life or shorter periods.  Annuities are typically used for pensions and the individual receiving the annuity is known as an annuitant.  In the UK they can broadly be classified into two types: A compulsory purchase annuity which is bought from the proceeds of a pension fund and is taxable as earned income; or a purchased life annuity which is bought with an individual's own capital and is taxed at a lower rate than a compulsory purchase annuity.  There are three different types of pension annuities, commonly referred to as standard annuities, with-profits annuities and unit-linked annuities.  Standard pension annuities are the most commonly purchased and account for over ninety percent of the UK market.  The income from a standard pension annuity is guaranteed for the rest of the annuitant's life whereas the income from a with-profits or unit-linked annuity fluctuates depending on the investment performance of the underlying assets. There are various options which can be provided including: Annuity certain (where income is paid for a given period whether or not death of the individual occurs) deferred annuity (where income which does not commence until some future specified date) escalating annuity (income which increases annually by a given amount, for example 3%; the choosing of this option results in lower income compared with a level annuity over the initial years) immediate annuity (an annuity which starts to pay income soon after it has come into operation, for example at the end of the month following the payment of the lump sum) joint life annuity (income usually relevant to two people which continues until the death of the first person only) joint life and survivor annuity (income usually relevant to two people which continues until the death of the second person) level annuity (income which is paid at a fixed rate throughout the life of the individual) temporary annuity (income is paid either for a fixed period or until earlier death) impaired life annuity (in return for the life company being convinced that an individual's health is such that their life expectancy is significantly shorter than a standard life, the life company is prepared to pay a higher amount of income on the expectation that this will be for a shorter period than a standard life) bulk annuities (the buyout by a life company of the liabilities of a defined benefit (final salary) pension scheme; the pensions in payment are replaced by a series of annuities and the benefits of the participants not yet retired are provided by deferred annuities.  The annuity is in the EU nowadays invariably provided by an insurance company, the level depending on prevailing annuity rates, age when purchased and sex of the individual.  An annuity may be subject to increases, may be paid at stated intervals, and paid either until death or the end of a specified period.  Pension annuities in the UK under HMRC rules must commence by age 75.  Most jurisdictions (though not all) require pension arrangements to include provision for payment of annuities, because the point of a pension system is to protect against living longer than expected. There is a pervasive campaign against compulsory purchase of annuities, which is deeply misplaced and benefits people who have over-provided for retirement.  An annuity calculator is available on www.aspen-plc.co.uk. HMRC is determined to maintain the annuity requirement, a consultation document in February 2002 suggested as much, and the alternative to annuities (known as ASI (Alternatively Secured Income, or ASP, Alternatively Secured Pension) was severely emasculated in the Finance Act 2007 and removes the facility to pass ASI funds on death.  Quite right too.  Meanwhile there is a ban on the purchase of annuities for a scheme that seeks help from the FAS (www.dwp.gov.uk/lifevent/penret/penreform/fas/).  See also Flexible lifetime annuities; income withdrawal.

Anti-avoidance This is the term used to refer to Pensions Act 2004 provisions aimed at preventing employers from using corporate structures to avoid pension liabilities.  If the pensions regulator believes an employer is attempting to avoid their pension obligations under a defined benefit scheme, and consequently increasing the risk of a claim on the pension protection fund, he may issue the following: • contribution notice which can direct a person to pay a specified sum to the trustees of a pension scheme • restoration order which can direct the restoration of the position applying immediately prior to the occurrence of a transaction at undervalue.  The pensions regulator may also issue a financial support direction requiring a person or persons to put in place financial support for a pension scheme.

Anti-forestalling (obs) From 2011 HMRC attempted to impose additional limits on pensions tax relief on incomes over £130,000, known as ‘antiforestalling’.  The rules are astonishingly complicated (around 400 pages), breach all the principles of modern legislative drafting, breach the 2004/2006 consensus on pensions tax simplification, are most likely unworkable, and in any event are unnecessary, since pensions tax relief is fiscally neutral, and wealthier people do not gain (with the exception of the tax free lump sum on retirement) tax relief disproportionately.

Anti-franking Anti-franking legislation bans the offset of statutory increases in GMP (for example between termination of contracted-out employment and state pensionable age) against other scheme benefits, instead of being added to a member’s total benefits.  At one time it was a major issue; nowadays contracting out is dying, GMPs are all but dead and there are more important issues (such as funding). See Franking.

APP See Appropriate pension scheme.

Appraisal value The value ascribed to a life company which is open to new business and is represented by the sum of the embedded value and the goodwill.

Appropriate date The earlier of (1) a nominated date falling in the tax year immediately after that in which the last pension input period ended, and (2) the anniversary of the date on which the period ended.  (HMRC)

Appropriate pension scheme (APP) A personal pension plan, stakeholder pension scheme or FSAVC scheme that has received an appropriate scheme certificate by HMRC, enabling its members to contract-out of the state second pension.  It is a prime example of newspeak; in almost all cases it would have been inappropriate for individuals to contract-out.

Approval (obs) Until A-day occupational and personal pension plans required approval from HMRC to benefit from favourable tax treatment for contributions, benefits and investment return.  Approval restricted the benefits that could be offered (for defined benefit schemes) and the contributions that could be paid (for defined contribution schemes or money purchase schemes).  After A-day, favourable tax status is given to registered pension schemes provided certain conditions are satisfied.  See discretionary approval.

Approved scheme A pension arrangement that was granted tax exempt status by HMRC prior to A-day.  See registered pension scheme.

APT see Arbitrage pricing theory.

Arbitrage pricing theory Some people believe that the returns from investments can be explained by economic factors (cf Capital asset pricing model).  A book called the Black Swan in 2008 suggested that many of these theories lack substance.

Arithmetic average The result found by adding a group of values together and dividing by the number of values in the group.  Also known as mean.

Arithmetic mean Average of a set of numbers calculated by adding the numbers and then dividing by the numbers in the set.

Arm's length bargain A normal commercial transaction between two or more persons (HMRC)

Arms Length Transaction A normal commercial transaction between two or more persons

Arrangement A contractual or trust-based arrangement made by or on behalf of a member of a pension scheme under that scheme.  A member may have more than one arrangement under a scheme. (HMRC)

Ask price The price at which a dealer will sell a security to an investor. Also known as offer price.

Assessment date Date on which the assessment period starts.

Assessment period From 6 April 2005, when an insolvency event occurs, the Board of the PPF will assess the scheme to determine whether the scheme should be brought into the PPF.  During this assessment period, the PPF will seek to establish: • whether the scheme can be rescued • whether the scheme can afford to secure benefits that are at least equal to levels of PPF compensation (if the PPF assumed responsibility for the scheme).  If neither of these criteria can be met, the PPF may assume responsibility for the scheme.  An assessment period will last a minimum of one year.  During an assessment period, the scheme trustees continue to be responsible for administering the scheme, no new members may be admitted, future contributions cease and benefits do not accrue.

Asset (1) Any item of value.  (2) The holdings of a fund, which may include stocks, shares, fixed-interest securities or cash.  (3) The main types of investment available: bonds, equities, real estate, commodities etc.

Asset allocation The apportionment of a portfolio’s assets between asset classes and markets. For example a UK pension fund may hold a combination of UK equities, overseas equities, fixed interest securities, property and cash, varying according to the trustees’ views on their investment objectives, the investment outlook and the attitude to risk.

Asset backed commercial paper (ABCP) An arrangement in which a pool or portfolio of assets is put together in a ‘special purpose vehicle’ (SPV) and then financed through short-term borrowing in money markets.  Following the collapse of sub-prime mortgages in the states in 2007/2008, such paper is not so popular.

Asset backed contributions (ABC) Marks and Spencer invented a system in 2007 in which the sponsoring employer of a pension scheme uses its income-producing business assets (eg property) to generate a revenue stream payable to its pension scheme, as an efficient and user-friendly way of dealing with any deficit in the scheme.  The advantages to the employer include (1) Immediate tax relief on the value of the asset and on subsequent income stream (2) No impact on the employer's balance sheet (3) The ability to spread deficit payments over several years (4) Retention of day-to-day control of the assets.  For the pension schemes the benefits include (1) An immediate deficit reduction (2) A secure income stream (3) The added security of a right to the underlying asset in certain circumstances, for example employer insolvency.  In practice the set-up costs made it useable only by larger schemes.  In 2011 the government announced some proposed changes to the system (1) to avoid the mismatch between tax and accounting rules and (2) to prevent employers obtaining tax relief twice.  For example the payment of instalments (such as rental payments) might be contingent, eg be dependent on the level of dividends by the employer. And because of the contingent element, the arrangements were accounted for in the employer's accounts as equity under FRS 25/IAS 32 and did not fall within the scope of the structured finance arrangement anti-avoidance rules contained in the Corporation Tax Act 2010.  An employer might therefore get tax relief twice, initially in respect of the value of the asset and then for each instalment of the income stream.  Policy required that ABC systems should continue (to help pension funds) but amendments are likely either (1) No upfront tax relief, so that tax relief would be available only when the trustees receive cash from the ABC or get full title to an asset which they can convert into cash.  This would affect ABC structures where trustees cannot sell the right to an income stream and would make the above example unattractive or (2) Tax relief reflects the “economic substance” of the transaction, the Government’s preferred choice, which aligns tax and accounting rules for the life of the ABC.  It would prevent double tax relief and allow HMRC to recover excess relief.  Upfront tax relief would still be available where company accounts show an ABC as debt rather than equity.  Although there would not be double tax relief, there would still be consecutive relief, eg relief for any upfront tax deduction for the value of the asset being made available, and subsequently relief for the balance of any income stream.

Asset class A type of asset that has certain characteristics (eg cash, equities or bonds).

Asset share A policyholder's equity share of a with-profits fund's assets.  The share is based on the policyholder's contribution to assets (the company's gross premiums minus cost of insurance, expenses and dividends for the classification to which the policy belongs).  This computation is derived from the actual experience of the insurance company instead of the assumptions initially used in calculating premiums and reserves.

Asset-backed security (ABS) Securities backed by the income stream of income producing financial assets.

Asset-liability modelling (ALM) A technique that projects possible future states of a fund’s assets and liabilities under a range of investment policies in order to assess the investments’ suitability in relation to the liabilities of the pension fund.

Attachment order A court order in divorce proceedings which provides for pension benefits to be used to pay either maintenance or a capital sum from a pension scheme direct to an ex-spouse on behalf of a member.  The payment only falls due when the member becomes entitled to payment of their benefit.  It was formerly known as ‘earmarking’.

Attribution analysis Decomposing the return achieved by a fund manager into its constituent parts [e.g. asset allocation and stock selection] to show where value was added.

Auction The method used by a central bank (eg Bank of England) to issue government bonds (gilts)

Auditor An auditor is responsible for auditing pension fund accounts.  In relation to pension schemes, the auditor helps the trustees obtain audited accounts and the auditor’s statement regarding payment of contributions within seven months of the scheme year end.  See scheme auditor.

Augmentation Amount of additional benefits provided in respect of a particular member, or category of members, of a scheme, usually funded by the employer and sometimes by the scheme.  This is paid in accordance with the scheme rules.

AUM Assets under management.

Authorised employer payment Authorised employer payments are payments made to sponsoring employers or former sponsoring employers as follows: (1) public service scheme payments, (2) authorised surplus payments, (3) compensation payments, (4) authorised employer loans, (5) scheme administration employer payments, and (6) any other payment prescribed by Regulations.  (HMRC)

Authorised lump sum Certain lump sum payments attract favourable tax treatment under the Finance Act 2004 if they meet certain conditions, these are known as Authorised lump sums.  They include the pension commencement lump sum, trivial commutation lump sum (see trivial pension), and refunds of short-service contributions (where the member has completed usually less than two years’ pensionable service but more than three months’ pensionable service in the scheme).

Authorised member payment Authorised member payments are made to a current or former member of a registered pension scheme and are: (1) pensions that comply with the pension rules in section 165 Finance Act (FA) 2004 or the pension death benefit rules in section 167 FA 2004 (current members only), (2) lump sum payments that comply with the lump sum rule in section 166 FA 2004 or lump sum death benefit rule in section 168 FA 2004 (current members only), (3) recognised transfers that comply with section 169 FA 2004 (current members only), (4) scheme administration member payments, (5) payments in accordance with a pension sharing order or provision, and (6) any other payment prescribed by Regulations. (HMRC). The only payments that a registered pension scheme is authorised to make to or in respect of a member are therefore: • pension payments permitted by the scheme rules (including death benefits) • permitted lump sums • recognised transfers • scheme administration member payments • payments pursuant to a pension sharing order • payments as prescribed by HMRC.

Authorised open-ended investment company A body incorporated by virtue of regulations under section 262 of the Financial Services and Markets Act 2000 in respect of which an authorisation order is in force under any provision made in such regulations by virtue of subsection (2)(l) of that section. (HMRC)

Authorised share capital The nominal amount of share capital a company is authorised to issue. This does not provide any indication of the worth of the company.

Authorised unit trust A unit trust that is subject to certain FSA regulations so that it can be marketed to the general public.

Auto-Enrolment see Automatic enrolment.

Automatic enrolment The principle underlying the establishment of NEST, by which the ‘nudge’ theory of social engineering is adopted.  The law (Pensions Act 2008) requires all employees to be automatically enrolled as a member of a pension scheme chosen by the employer by 2012-2016, but they have the right to opt out (with difficulty) if they wish.  See Richard H Thaler and Cass R Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness, 320 pages, Penguin, 2009, ISBN-13: 978-0141040011.  It is an arrangement where an employer automatically enrols an employer into a pension scheme.  The arrangement is to become compulsory from April 2012.

AVCs See additional voluntary contributions.  Average earnings See career average.

Average holding period The length of time on average an investment manager holds an investment.  If there is a low holding period then the manager might be suspected of churning the portfolio in order to earn fees, or be charged by the HMRC for tax for trading rather than investment (which is tax-free for pension funds).

Awards It’s quite an effort not to win one of the innumerable awards in the pensions field, and attending all the dinners (for which the awards are an excuse) would enhance even Nigella’s voluptuousness (it’s why she doesn’t go).  They include * Professional Adviser Awards * Professional Pensions UK Pensions Awards * Money Marketing Group Pensions E-Excellence Rating Awards *European Pensions Awards (www.europeanpensions.net/awards) *.  Professional Adviser Awards (www.professionaladviser.co.uk/awards) (Best UK equity growth group; best UK equity income group; best North American group; best Asia Pacific (excl Japan) group; best European (excl UK) group; best Japan group; best emerging markets group; best fixed interest group; best smaller companies group; best multi-manager group; best investment trust group; best VCT provider; best structured products provider; best funds supermarket; best wrap provider; best technology software group; best product provider website; best independent online avcs provider; best IFA network; best SIPP provider; best pensions provider; best life assurance provider; best annuity provider; best equity release provider; IFA personality of the year); Professional Pensions UK Pensions Awards 1st Floor, 2 Stephen Street, London W1T 1 EA (Pensions Personality of the Year; actuarial consultancy of the year; alternative investment manager of the year; currency manager of the year; custodian of the year; DC provider of the year; fixed interest manager of the year; group risk provider of the year; hedge fund provider of the year; independent trustee of the year; investment consultancy of the year; investment manager of the year; life assurance company of the year; multi-asset manager of the year; multi-manager of the year; pensions administration system provider of the year; pensions and benefits consultancy of the year; pension scheme accountants of the year; pension scheme administrator of the year; pension lawyers of the year; pension software provider of the year; pooled manager of the year; property manager of the year; public relations manager of the year; recruitment consultancy of the year; SIPP provider of the year; specialist manager of the year; sponsor covenant assessment provider of the year; specialist insurance and buyout provider of the year; and the Professional Pensions Pension Scheme of the Year Awards (Pension scheme of the year; pensions manager of the year; premier scheme of the year; large scheme of the year; medium scheme of the year; small scheme of the year; public sector scheme of the year; DC scheme of the year; DB communications award – private; DB Communications award – public; DFB communications award (£1 B - £2.5B); DB communications award (£250M - £1 B); DB communications award (up to £250M); best DC communication strategy; pensioner communications award – private; pensioner communications award – public; website design award – private; website design award – public; best promotion of AVCs; trustee development award; best benefits statement – private; best benefits statement – public; corporate governance award; best use of IT; best in-house administration; - private; best in-house administration – public; best use of SRI; best use of specialist investment manager. There are the Financial Adviser Service Awards which offers stars for life and pensions providers. See also SAIMA, Specialist and Alternative Investment Manager Awards (Cash manager of the year; currency manager of the year; emerging markets equity manager of the year; European equity manager of the year; eurozone fixed income manager of the year; eurozone fixed income manager of the year (government and non-government bonds); eurozone fixed income manager of the year (non-government); global bond manager of the year (aggregate); global equity manager of the year; global real estate manager of the year; hedge fund manager of the year (fund of funds); UK fixed interest manager of the year (amalgamated from top three in government, non-government and non-government sectors); UK equity manager of the year; UK property manager of the year; rising start of fund management (Professional Pensions magazine)).  Tables normally cost around £4000 for 10 seats.  There are also in the international sector, the IPE (Investment and Pensions Europe) Awards (www.ipe.com) with a wide range of prizes.  IPE also offer the IPE/TBLI ESQ Leaders Awards (environment social governance) and Global Pensions offers the Global Pensions Awards (www.incisivemedia.com or www.globalpensions.com.  Now there is also PIPA (Pension and Investment Provider Awards) (Pensions Week/Pensions Management.  And there are the European Pensions Awards (www.europeanpensions.net/awards).

Backwardation A position where the price for immediate delivery for an investment is higher than the price for the same thing in the future (contrary to the usual expectation).  In the commodity futures markets, a commodity is in ‘backwardation’ when later-maturing futures contracts are priced lower than those maturing sooner.  For example, this happens when producers sell the commodity in the futures market as a protection against falling prices.  See also contango, futures, spot rate.

Balance sheet An account showing the assets of a company and its liabilities.  Since the requirement for the inclusion of pension fund values and liabilities has been imposed balance sheets can give a very misleading portrait of a company’s value.

Balanced fund A fund invested in a range of asset classes, particularly equities and bonds.

Balanced manager A manager who operates a fund or portfolio which is invested across a range of different asset classes where the manager seeks to add value by choosing between those asset classes, and by choosing the right shares or bonds within each class.

Ballast An investment which is intended to give stability to a portfolio of investments and is less volatile than most.

Bank One of the following (1) a person within section 840A(1)(b) of the Income and Corporation Taxes Act 1988 (ICTA) (persons other than building societies etc. permitted to accept deposits), or (2) a body corporate which is a subsidiary or holding company of a person falling within section 840A(1)(b) of ICTA or is a subsidiary of the holding company of such a person (subsidiary and holding company having the meanings in section 736 of the Companies Act 1985 or Article 4 of the Companies (Northern Ireland) Order 1986). (HMRC)

Bank rate An interest rate set by the Bank of England intended to keep inflation low.  Other banks frequently set their own rates by reference to the base rate, now called bank rate, but in recent years LIBOR has proved more important a regulator of rates.

Bankruptcy Under the Welfare Reform and Pensions Act 1999, with effect from 29 May 2000, pension rights are protected from a trustee -in bankruptcy.  See insolvency event.

Barbell (investing) A bond investment strategy that concentrates holdings in both very short-term and extremely long-term maturities (see also dumbbell or barbelling).  The idea is that one part of the portfolio minimizes risk and the other achieves high yields so that on average, the investor can have the best of both worlds.  There are dangers in averages.

Barber The name of a famous European Court of Justice judgment on 17 May 1990 which required the application of equal pay law to pension schemes – requiring benefits to be levelled up.  Barber benefits or Barber window are those benefits between the date of the judgment and the date when the scheme equalised its benefits (Treaty of Rome article 141).

Barra A commercial risk-measurement system used by many asset managers to determine whether their portfolios are within the risk parameters allowed by their client mandates.  Now part of MSCI Barra (www.msci barra.com).

BAS see Board for Actuarial Standards

Base rate see Bank rate.

Basic State Pension The benefit provided at state pension age to those with a sufficient National Insurance Contribution record.  The state pension is broadly based on the amount of National Insurance contributions a person has paid, has been treated as having paid or has been credited with during a working life.  It is not related to earnings, unlike the state second pension.

Basis amount The basis amount is the base calculation for determining the maximum level of unsecured pension or alternatively secured pension (and the dependant equivalents) payable from a money purchase arrangement.  The basis amount represents the annual amount of lifetime annuity (or relevant annuity) income the unsecured pension fund or alternatively secured funds (etc) could purchase at the initial calculation and review points.  (HMRC)

Basis point Fancy term for 0.01 % (ie 100th of 1 %). 10 basis points (or 10bp) is therefore 0.1 %, and 100 basis points is 1%.  Also knowns as bps, bips and less often beeps.

BCE Benefit crystallisation event (HMRC)

Bear Someone who thinks the market, or a particular share, will decline.  A bear market is one in which most prices are falling.  Also used adjectivally, as in "bearish", "bear market" and so on.

Beauty Parade is a competition you can hold where you invite potential advisers to display themselves to best advantage, indicate how little they charge, and how special is their service.  It can be by post, or you can actually meet a short list.  They can involve huge expense for the contestants, and are surprisingly time-consuming and exhausting to judge.  You should not normally kiss the winner.

Behavioural finance People make investment decisions, and markets move, not always according to strict logic, but according to the way people behave (eg in investment bubbles).  A study of behavioural finance can offer understandings as to how markets move.

Belief discrimination see discrimination.

Benchmark A measure against which the performance of a fund is measured; it might be for example the FTSE 100.  Peer group benchmarks (ie comparing your fund against other similar funds) has fallen into disfavour following Myners, and funds if they do benchmark, nowadays use individualised or customised benchmarks.

Benchmark portfolio Theoretical portfolio of benchmark assets against which the performance of an actual portfolio is measured.

Beneficiary An individual who is eligible to receive benefits from the scheme, ie a person entitled to benefit under a pension scheme or who will become entitled on the happening of a specified event.

Benefit Crystallisation Event This is a defined event or occurrence that triggers a test of a member’s benefits against the available Lifetime Allowance.  There are eight such events.  They are broadly something which triggers the payment of pension benefits where the pension provider will compare a member’s benefits to the lifetime allowance.  This usually happens when someone retires or dies. As tax legislation permits an individual since A-day to receive a pension whilst continuing to work for the same employer, a term had to be invented as ‘retirement’ is not necessarily applicable.  The nine benefit crystallisation events are as follows: • funds are designated to provide a member with an unsecured pension • member becomes entitled to a scheme pension • a scheme pension already in payment to a member is increased beyond a permitted margin • a member becomes entitled to a lifetime annuity under a defined benefit scheme • a member reaches their 75th birthday under a defined benefit scheme without having drawn all or part of their entitlement to a scheme pension and/or relevant lump sum • a member reaches age 75 with an earlier designated unsecured pension fund which has not been secured by a lifetime annuity or scheme pension • a member becomes entitled to a relevant lump sum • a relevant lump sum death benefit is paid on the death of the member • a member’s benefits or rights are transferred to a qualifying recognised overseas pension scheme. The Finance Act 2004 intending simplification invented many terms including this which is the term for either drawing benefits in the form of pension, alternatively secured pension, lump sum or transfer to an overseas scheme.  When benefits are drawn in the form of a pension, Alternatively Secured Pension, lump sum or a transfer to an overseas scheme, HMRC require a test to be done each year against pension increase to ensure their limits are not breached.  It is an expensive and disproportionate way of controlling benefit levels.  See Crystallisation Event

Best execution A rule that requires asset managers working for pension funds to get the best price they can when they buy or sell for a client.  It is astonishing that a rule should be needed.  The rules are set out in the FSA Conduct of Business handbook.

Beta is a measure of the volatility or systematic risk of a security or portfolio in comparison with the market as a whole.  Sometimes called by techies the beta coefficient it is supposed to be calculated using regression analysis (don’t know either) but in simple English is the return you would have got investing in the market as a whole using no investment skills at all.

Bid price The price at which the trustees can sell a security (usually in a unit trust); the unit price that the life company uses to redeem units from a policyholder.

Bid/offer spread The difference between the bid and offer prices, typically of the order of 5% representing a charge levied by a life company or unit trust on each premium paid or unit bought or sold; the difference between the purchase (offer) and sale (bid) price.

Binary credit default swap A credit default swap, for a fixed monetary amount.

Black-Scholes Fischer Black and Myron Scholes invented some magic formulae which showed how investments, especially in a hedge fund and especially options, should be priced.  They won the Nobel Prize for their work, but it fell into disfavour after they were involved in the largest investment failure ever at the time (Long Term Capital Management lost $4.6B in four months, thought to be a virtual impossibility) (see Roger Lowenstein, When genius failed: the rise and fall of Long-Term Capital Management, 2000).

Block transfer The transfer in a single transaction of all the sums and assets held for the purposes of (or representing accrued rights under) the arrangements under the pension scheme from which the transfer is made, which relate to the member in question and at least one other member of that pension scheme.  Before the transfer the member must not have already been a member of the registered pension scheme to which the transfer was made for longer than 12 months before the date of transfer.  If the receiving scheme is a personal pension scheme any period of membership is ignored if the member’s rights under the personal pension scheme were solely contracted out rights.  To be a single transaction (1) all of the sums and assets must be transferred from the transferring scheme to only one receiving scheme.  Two or more partial transfers to two or more different schemes cannot be a transfer in a single transaction; and (2) the transaction must be made under a single agreement for a single transfer between the two schemes.  It is not necessary that all of the sums and assets are all physically passed from the transferring scheme to the receiving scheme on the same day - there may be legal or administration reasons why this is not possible.  However they should all be transferred in relation to the agreement to transfer and within a reasonable timescale (HMRC).

Blue-chip company A leading company that is well-established and is regarded as at a low-risk of failure (derived from the colour of high value poker chips).

Board for Actuarial Standards (BAS) Does what it says on the tin.

Bond A form of loan.  Typically, the investor should receive a regular coupon and the return of the principal originally lent when the bond matures. Note: Not all bonds are interest bearing [see zero coupon bonds], and not all bonds are fixed rate [see index linked, floating rate and stepped rate bonds].

Bond rating A measure of the risk associated with buying a bond produced by a rating agency eg Standard and Poors.

Bondholder An investor who has bought a bond.

Bonds A certificate of debt issued, eg, by a government or a company

Bonus issue When a company issues extra shares, free of charge to existing shareholders on a pro rata basis.

Book value The value at which something [e.g. a security] is recorded in a company's balance sheet [often the cost of buying it].  If securities have been acquired at different times, the book value will reflect the average buying cost.

Bottom-up A form of investment style which looks at the value of each individual investment – as opposed to ‘top-down’, which looks at sectors.  Many managers use both.  It is an approach to active investment management that gives priority to the selection of companies (with less emphasis on sector and country selection) to build up an investment portfolio.

Boutiques Smaller fund managers who specialise in particular areas of investment. Collections of boutiques (some operated by larger firms) are known as multi-boutiques’.

Box-ticking Often used in corporate governance, to emphasise that pension funds should look at the broad issues rather than detailed rules when deciding whether the companies they are invested in are compliant with guidance.  For example Sir Stuart Rose, chief executive of Marks and Spencer in 2008 argued that when he also became chairman (in breach of pension fund recommendations) the pension funds should not be box-tickers, but look at the reason he took both jobs at the same time.

Breakeven inflation The rate of inflation assumed by holders of index-linked gilts (UK government bonds) so that they can compare the return they get with the return they would get from conventional gilts.

Breakeven rate The yield difference between conventional bonds and index-linked bonds of the same maturity

Bridging pension This is a temporary pension paid by some schemes for (usually male) members who retire before State pension age to compensate for the inability to receive the state pension that an equivalent female member receives.  It is designed to fill the gap between retirement and the start of the basic state pension.  It ceases to be paid once the member reaches their State pension age.  Such pensions do not breach the equal treatment requirements (see European Court of Justice case Birds Eye Walls Limited v Roberts).

Broker/Dealer An individual or firm that acts as an intermediary between buyers and sellers usually for payment of a commission.  He/she may also buy securities to sell for a profit while fulfilling his/her role as dealer.

Bucket funds/bucket strategy A rather crude arrangement where investments are selected on the basis that they will be needed when mature, so that if money is needed to pay pensions, a series of bucket funds will mature on a series of dates when the money is needed.

Building society A building society within the Building Societies Act 1986. (HMRC)

Bulk transfer The transfer of the value of the rights of a group of members from one occupational pension scheme to another.  Sometimes the transfer payment is enhanced when compared to an individual’s cash equivalent.  Bulk transfers are often negotiated as part of corporate transactions.

Bull Someone who thinks the stock market or a particular share will go up.  Also used adjectivally, as in "bullish", "bull market" and so on.

Bulldog bond A sterling-denominated bond issued by an overseas organisation in the UK

Bullet (1) An investment strategy for bonds which involves concentrating holdings in one area of the yield curve.  (2) The payment of capital end at the end of the period of the loan

Bullet portfolio An investment strategy under which a manager holds a bond portfolio with maturities that are highly concentrated at one point of the yield curve.

Business plan A business plan is now strongly encouraged by the Pensions Regulator; it usually sets out the objectives of the scheme in areas such as administration, investment, funding, and communication, and is intended to focus the trustees’ minds on making decisions which best serve their members. It will set out the scheme’s objective, the main priorities and key specific actions and a timetable of regular events, such as training, accounting and reporting. Nonetheless, for most (especially the smaller) pension schemes, it is probably overkill.

Buy-back This is the payment of a state scheme premium to reinstate a member into SERPS or state second pension for the period a member was contracted-out. See deemed buy-back.

Buy-in Trustees buy annuities or another investment from an insurance company as an investment which is appropriate to pay the benefits expected. The trustees and the trust however remain – unlike in a ‘buy-out’.

Buyout (1) Private equity investment in which equity capital is used to buy an existing business so that the business is subsequently privately held.  (2) The purchase by a pension fund of its liabilities (ie pensions and other benefits) from an insurance company.  This is rare in practice because the costs of buying a pension from an insurance company are much higher (mostly because of regulatory costs) than providing it from a pension fund (which is one of the reason occupational pensions were invented in the first place).  But there are sometimes good reasons for doing so; the buy-out cost (or s75 cost) is the global cost of such a purchase, and must be disclosed on the annual report to members.  The choices available to trustees and employers are published in Lane Clark Peacock, Removing the pension scheme risk in the buyout market, a practical guide for companies and trustees to insurance-based buyout solutions, annual, http://www.lcp.uk.com/services/documents/buyout_removing_risk.pdf.  For non-insured buy-out solutions see www.optrusts.com.  Buyout involves the transfer of pension liabilities from the scheme or from the plan sponsor to an insurance company or industry-wide pension plan.  It is being driven by inappropriate accounting requirements which make it difficult for many companies to maintain DB plans on their balance sheets.  There are several surveys of the opportunities, including Lane Clark & Peacock, Removing pension scheme risk in the buyout market (December 2007) and AON, Quarterly Buyout Market Survey.

Buy-out cost see s75.

Buy-out policy Insurance policy purchased by trustees in the name of a member or other beneficiary when the member’s pensionable service is terminated.  The insurance policy provider pays the member’s benefits instead of the scheme trustees.  Also known as a section 32 policy.

Call option An option that gives the buyer the right [but not the obligation] to buy an asset on [and sometimes before] a given date at a price agreed today.  The seller [writer] of the option has the obligation to sell the underlying asset at that price if the option is exercised.

Call Specifically a payment on a specified date on a partly paid stock, to be paid by the holder of the allotment letter.  More generally, a requirement for an investor to make additional payments in order for an investment to be fully paid up.

Callable bond A bond on which the issuer has the option to redeem prior to the date of maturity

Cancellation notice When a life policy is issued, ie the application has been accepted by the life company, the applicant is offered the opportunity to change his mind.  A cancellation notice is sent direct to the customer explaining the contract he has entered into, and gives the applicant a period, normally two weeks or a month during which they can sign the cancellation notice.  If this is done, the applicant's policy is cancelled and their premiums are returned, less any investment loss that has occurred in the period.

Cancellation price The lowest possible bid price of units in a unit trust under FSA regulations, which is usually lower than the quoted bid price.  The cancellation price may be applied in the event of heavy selling.  Also applies to the repurchase of a company's shares by directors.

Cap [as in 'market cap', 'small cap' etc] Abbreviation of 'market capitalisation'.  Capital appreciation [or gain] An increase in an asset's price.

Capital asset pricing model [CAPM] CAPM is involves the application of a theory that the return a pension fund should expect from an investment is the result of the expected return on cash in the bank plus the extra return from the market as a whole in excess of that from cash, but adjusted for the sensitivity of the investment to general movements in share prices.  It also assumes that the market gets it right, and that the market reflects the true price of the investment, which most people know is incorrect.

Capital gains tax (CGT) Tax that is payable on the capital gain of an investment following its sale at a profit. UK pension funds are exempt from CGT.

Capital gains/losses The difference between an asset’s buying price and the price it is sold at. In bond markets, investors can generate returns by making capital gains as well as through regular coupon (interest) payments

Capital market The market for medium and long-term securities; includes the bank loan market Capitalisation issue See bonus issue.

CAPM see Capital asset pricing model

Capped withdrawal The annual withdrawal cap equal to 100% of comparable annuity (HMRC); ie the maximum amount which can be taken as income if no annuity is bought at retirement (cf Flexible withdrawal)

CAPS Combined Actuarial Performance Services [provided by Russell/Mellon CAPS]. One of the largest performance measurement and benchmarking services. Often used by trustees of pension funds to measure performance.

CAR see Customer agreed remuneration

CARE see Career average revalued earnings

Career average (see also Defined benefits) This is a defined benefit basis used to calculate retirement benefits using earnings throughout an employee’s career (rather than the more common approach of basing benefits on earnings near retirement).  Also known as average earnings.  See career average revalued earnings (CARE).

Career average revalued earnings (CARE) This is a defined benefit basis used to calculate retirement benefits using earnings throughout an employee’s career (rather than the more common approach of basing benefits on earnings near retirement).  The accrued retirement benefits for each year is revalued from the year of accrual to retirement age using an appropriate index.  See career average.

Carry A cost (which includes an opportunity cost) or benefit that accrues over time.  It might include for example the interest which is not received because the money was not left in the bank but invested in an investment.

Carry trade Where a pension fund borrows in one currency (where the interest is low) and invests in assets which are expected to produce a higher return than the cost of interest. Great if it works; if it doesn’t, can be very expensive.

Cash balance arrangement A type of money purchase arrangement.  An arrangement is a cash balance arrangement where the member will be provided with money purchase benefits, but where the amount that will be available to provide those benefits is not calculated purely by reference to payments made under the arrangement by or on behalf of the member.  This means that in a cash balance arrangement, the capital amount available to provide benefits (the member's "pot") will not derive wholly from any actual contributions (or credits or transfers) made year on year.  (HMRC) For example, the scheme may promise that on retirement, a specified amount will be made available to provide the member with benefits for each year of pensionable service. The specified amount might be an absolute amount, e.g. £5,000 per year of service, or might be a percentage of the member's salary for each relevant year of service.  Optionally, the scheme might also guarantee a rate of investment return on the specified amount.  The member knows what will go into the promised pot each year (regardless of any contributions actually made) and so can ascertain the amount that accrues in that promised pot each year.  It is possible that in a cash balance arrangement the promised pot builds up entirely notionally year by year, being funded only at the end. So, during the build-up phase, the amount in any actual fund held in respect of the member (whether more or less than the amount in the promised pot) is irrelevant.  And when benefits ultimately become due, the amount in the promised pot is funded and it is that amount that is used to provide benefits.  In a cash balance arrangement, some of the investment and mortality risk is transferred to the scheme (or, if there is one, the employer); the fact that all or part of the pot is guaranteed or promised means that the promised amount must be made available to provide benefits irrespective of the level of actual funds held.  (HMRC)

Cash balance arrangement These are arrangements providing money purchase benefits.  The amount that will be available to provide benefits is calculated not just by reference to payments made by or on behalf of the member.  For example, the scheme may promise that on retirement a specified amount will be made available to provide the member with benefits for each year of pensionable service.  The specified amount might be an absolute amount, eg £5,000 per year of service, or might be a percentage of the member’s salary for each relevant year of service.  Optionally, the scheme might also guarantee a rate of investment return on the specified amount.  The member knows what will go into the promised pot each year (regardless of any contributions actually made) and so can ascertain the amount that accrues in that promised pot each year.

Cash equivalent The amount which a member of an occupational pension scheme may require to be applied as a transfer payment to another permitted pension scheme or to a buy-out policy (as per section 94 of the Pension Schemes Act 1993).

Cash equivalent transfer value (CETV) Where a member’s benefits are to be transferred, they can be calculated as a CETV in accordance with a prescribed method (this is the minimum amount the trustees can offer).  This method is also used for calculating the value of benefits under a pension sharing order. Members also have a statutory right to a CETV in certain circumstances.  From 4 August 2003, trustees are able to reduce CETVs if the latest actuarial report reveals that there are insufficient funds to pay the full amount of cash equivalents in respect of all scheme members.

Cash fund Money held on deposit to which interest is added – like a building society account.

Cashflow matching Creating a portfolio of assets in which the payments received (interest, dividends) matches the payments (such as pension benefits) out.  Easy to say, not so easy to do.

Cashflow statement A statement in a company’s annual report which shows how much cash has been earned, and how it has been spent during the financial year. For most companies cash is more important than profits.

Cashflows The total amount of income – both interest and principal repayments – that are generated by a bond, listed in chronological order.

CAT standards Charges, Access and Terms. These are minimum standards laid down by the FSA relating to cost, access and terms that stakeholder pension schemes must comply with.

Category ‘E’ A fifth element to the basic state pension. It rather generously (or pointlessly) pays 25p a week to all pensioners over the age of 80.

Category A The part of the state pension based on the earner’s own earnings record.

Category B The part of the state pension based on the husband’s earnings record. It discriminates against men, ie husbands cannot use their wife’s earnings record to gain benefits.

Category C The third element to the basic state pension. It has been abolished.

CD Certificate of deposit, a note of receipt by a commercial bank for funds deposited. A CD pays a fixed amount of interest and has a set date of maturity

CDO See collateralised debt obligation.

CDS see Credit default swap.

Centralised scheme Scheme operated on behalf of several employers.

Certificate of deposit Certificates of deposit [CDs] are short-term, non-interest bearing bonds issued by banks and building societies.  CDs have a secondary market, the holder of a CD is often able to sell it to a third party in order to realise cash before the maturity date of the CD.

Certificate of schedule of contributions A scheme actuary’s confirmation that the payments detailed in the schedule of contributions are enough to meet the statutory funding objective.

CFA Chartered Financial Analyst.  An industry qualification awarded by The CFA Institute.  Requires three comprehensive exams and three years of industry experience.

CFPPFM Customer Friendly Principles and Practices of Financial Management.  The customer friendly version of the PPFM aimed at allowing a reasonable person to understand the processes involved in the management of a with-profits fund.

Chapter I Refers to Chapter I of Part XIV of ICTA 1988 which specifies the requirements that defined benefit schemes must meet in order to be approved by HMRC.  Defined contribution schemes may be approved under this legislation or under Chapter IV.  The approval requirement does not apply after A-day.

Chapter IV Refers to Chapter IV of Part XIV of ICTA 1988which specifies the requirements which a personal pension plan must meet in order to be approved by HMRC.  Occupational defined contribution schemes can be approved under this legislation or under Chapter I.  The approval requirement does not apply after A-day.

Charge over assets A mortgage on specified assets, designed to provide security for a pension fund in the event of a sponsor failure.  The sponsor can continue to use them, but cannot dispose of them without pension fund consent.

Chargeable amount The amount that crystallises for lifetime allowance at a benefit crystallisation event that is not covered by an individual's available lifetime allowance at that time, plus any 'scheme-funded tax payment'.  The chargeable amount is the amount on which the lifetime allowance charge arises. (HMRC)

Charity lump sum death benefit A lump sum benefit paid from a money purchase arrangement to a charity (as now defined in paragraph 1 Schedule 6 FA 2010, previously in section 506 Income and Corporation Taxes Act 1988) following the death of a scheme member (or a dependant of such a member) who is aged 75 or over which meets the conditions of paragraph 18, Schedule 29 to the Finance Act 2004.  Such a lump sum cannot be paid where there is still a surviving dependant of the member. (HMRC)

Chartism The study of historical market data to determine trends and to try to predict future movements.

Child maintenance All pension payments, whether private or occupational, are included as earnings for deductions from earnings orders; trustees will need to deduct the relevant amount from the member’s pension and pay it to the other parent.

Chinese wall Controls over communications put in place in financial institutions that offer a wide range of services designed to avoid confidential information being transferred to another part of the organisation which could lead to conflicts of interest.

CIF See common investment funds.

Civil partner An individual who has entered into a same-sex civil partnership under the Civil Partnership Act 2004.

Class A (or B or C) members Terms derived from HMRC former specimen rules that apply to members of occupational pension schemes approved under Chapter I who joined during specified periods prior to A-day.  There are different Inland Revenue limits for each class: • Class A members: members of occupational pension schemes established on or after 14 March 1989 and all new members of earlier schemes joining on or after 1 June 1989• Class B members: members of occupational pension schemes established before 14 March 1989 who joined between 17 March 1987 and 31 May 1989 • Class C members: members who joined occupational pension schemes before 17 March 1987. (obs)

Class action A legal action under which a group of people who have been adversely affected sue the perpetrator collectively.  Securities class actions are sometimes backed by pension funds who have together lost money in an investment due to fraud or misrepresentation.  At one time restricted to US investments, but now spreading throughout the world.

Clawback Initial commission on a regular premium contract paid on an indemnity basis is subject to an earnings period.  If the premiums are not maintained for the whole of the earnings period, the adviser is required to repay that portion of the initial commission that remained unearned when premiums ceased to be paid.

Clean fees Fund management fees that are all inclusive, to which there will be no extra charges added [e.g. custody, overseas transactions, administration, etc.]

Clearance procedure Procedure whereby companies and individuals can seek advanced clearance from the Pensions Regulator that proposed transactions will not fall foul of the anti-avoidance provisions set out in the Pensions Act 2004.

Closed scheme There are two types of closed scheme: • no new members or contributions payable, and no accrual of future benefits • no new members but contributions may still continue and benefits can be provided for future service.

Closed-end fund A collective investment vehicle that issues a fixed amount of equity capital to investors.  Purchases of the fund's stock must be balanced by sales by other investors.  Shares in closed-end funds are often dealt on a stock exchange.  Investment Trusts are examples of closed-end funds.

Closing value Amount that would be available for the provision of benefits if the member became entitled to benefits at the end of the pension input period.  The closing value can be subject to adjustments which are set out in the Finance Act 2004.

Cluster A cluster policy is a term used to describe a policy which is in fact a series or "cluster" of individual contracts.  In other words you could be paying £200 a month into a policy with XYZ Life but in fact what you have is a cluster of ten contracts at £20 each.  Each part of the policy or cluster is treated independently for tax and administration purposes.  The attraction of a cluster policy is that it allows greater flexibility.  Within a life assurance investment bond, policies can be encashed individually to ensure the optimum tax treatment, or assigned separately to different beneficiaries.  For a pension arrangement, clustering allows customers to phase their retirement by vesting individual policies over a number of years.

CMO See collateralised mortgage obligation.

Code of practice The Pensions Regulator is responsible for issuing codes of practice to provide practical guidance on compliance with legal requirements.  They are aimed at those involved in running and providing pension schemes and set out standards a well-run occupational pension scheme should have in place.  Codes of practice are available on the following topics: 1. reporting breaches of the law (whistleblowing) 2. notifiable events 3. funding defined benefits 4. early leavers – reasonable periods 5.reporting late payment of contributions to occupational money purchase schemes 6. reporting late payment of contributions to personal pensions 7. trustee knowledge and understanding  8. MNTs/MNDs – putting arrangements in place 9. internal controls 10. modification of subsisting rights.  A breach of a code of practice will not result in legal proceedings, but the breach will be admissible in evidence in any legal proceedings.  The Pensions Regulator has also issued guidance materials – see guidance from Pensions Regulator.

Codes of practice Increasing issued by regulators and others as an alternative to formal legislation; there are 12 codes issued by the Pensions Regulator.

Collar hedge An investment strategy obtained through a combination of put and call options.  This option-based strategy results in stabilising portfolio returns by obtaining protection against a major decline in portfolio value in exchange for sacrificing part of the portfolio's appreciation in a major rally.

Collateral Assets put up as security to protect a tender in case the borrower defaults.

Collateralisation The process by which a counterparty will transfer assets, linked to the value of a derivative, to another counterparty in order to mitigate credit risk.

Collateralised debt obligation (CDO) A term for a piece of paper which says the pension fund has a share in the owning debts of other people which are collateralised, ie there is security (eg a house) for the debt. See also collateralised mortgage obligation.

Collateralised mortgage obligation [CMO] A security backed by the revenue from mortgages.  The total revenue from a given pool of mortgages is shared between a collection of CMOs with differing cash flow and other characteristics.  In most CMOs, coupon payments are not made on the final tranche until the other tranches have been redeemed.  Interest is added to increase the principal value.  This tranche is called an accretion bond, an accrual bond or a Z bond.

Collective investment scheme A vehicle in which a number of investors pool their assets so that they can be managed collectively.  This usually suits small to medium sized investors wishing to invest in a broad spread of investments or larger investors wishing to gain exposure to a specialised sector.  Shares in a pooled fund are denominated in units that are repriced regularly to reflect changes in the underlying assets.  This allows investors to value their holdings and provides a basis upon which transactions in units can take place.  Unit trusts are examples of pooled funds.

COMB See contracted-out mixed benefit.

Combined Code (now UK Corporate Governance Code) see also Corporate governance. A code of principles to do with the way in which companies, particularly quoted companies, should behave in relation to their proper management, and which investors now like to see (formerly www.www.frc.org.uk/combinedcode.cfm).  It is so-called because it incorporates codes from a variety of proponents, including Cadbury, Greenbury, Higgs, Hampel, Turnbull and several others, which individually were limited but collectively had greater impact.  There is nothing wrong with (and no sanction for) breaching the Code, but companies that deviate are required by the London Stock Exchange to explain why, and may be taken to task at shareholder meetings by one of the activist organisations that protect institutional investors’ rights such as PIRC or RiskMetrics .

Combined Pension Forecasts (CPF) issued to pension scheme members by employers and pension providers to give individuals details of both their private and state pension forecast together. The service was suspended until Autumn 2008 until the computer could be rebuilt.  It is operated by The Pensions, Disability and Carers Service, part of the DWP.

Commercial paper An unsecured short-term debt instrument with a maturity of up to 270 days

Commingled fund Used to describe a common investment fund or an exempt unit trust.

Commission (1) Payment received for arranging a pension scheme; it is frequently deducted from the investments backing the pension in personal p[ension arrangements.  See also Soft commissions.

Commodities Raw materials such as crude oil, metals and agricultural products.

Common investment fund (CIF) This is the name of the vehicle created when several pension funds in a group pool together the investment management of the assets they hold.  Such pooling arrangements require HMRC approval although they do not then become a registered pension scheme, this is a status held by the occupational pension scheme making use of the CIF.  Each year, the provider of the CIF claims any tax credits on behalf of the trustees of the participating schemes.

Common stock The US name for ordinary shares.  Securities which represent an ownership interest in a company.  [If the company has also issued preferred stock, both have ownership rights.]

Commutation Where a member gives up some or all of his entire pension in exchange for an immediate lump sum payment.  It is also known as a cash option.

COMP See contracted-out money purchase.

Company accounts UK company accounts are required to cover pension expense.  The accounting standard FRS 17 is mandatory for accounting periods beginning on or after 1 January 2005.  For listed companies’ consolidated group accounts for periods beginning after 1 January 2005, IAS 19 must be used.  An individual company or a consolidated group of unlisted companies can choose to use either FRS 17 or IAS 19.

Comparative pensions UK pensions, especially state pensions, rank amongst the worst in the EU, and are unlikely to improve even when personal accounts come on stream, which is why private pensions are so important.  There are several studies of the comparative position, see eg Aon Consulting, European Pensions Barometer, Measuring the pressure on EU systems, annual (http://www.aon.com/uk/en/about/Publications/images/pensions-barometer¬report.pdf)

Complaints Procedure The formal grievance procedure for pension scheme members and beneficiaries.  See IDRP.

Compliance The current term for meeting the requirements of regulators.

Compound interest A method of accumulating interest, where interest is paid on both the initial investment and the interest received during the period.

Compound rate of return A total return figure calculated by multiplying returns for different periods.

Compulsory purchase annuity (CPA) Annuity that must be purchased on retirement for a member of an insured scheme.  See annuity; deferred annuity; open market option.

Concentrated portfolio A portfolio that holds fewer stocks than the benchmark, with the aim of achieving a higher performance target but with a commensurate increase in risk.

Concurrency The principle of being an active member of more than one pension scheme at the same time.  Prior to A-day, HMRC applied restrictions on the operation of concurrency in respect of approved schemes.  Following A-day no such restrictions apply in respect of registered pension schemes.

Conflict of interest Companies Act 2006

Connected Party Connected parties are certain relatives, trustees, partners and companies.  The following are defined by HMRC TCGA92/S286.  (1) A person is connected to an individual if that person is the individuals: (a) Spouse or civil partner, a relative of the individual, the spouse or civil partner of a relative of the individual, a relative of the individuals spouse or civil partner, the spouse or civil partner of a relative of the individuals spouse or civil partner. Relative is defined as brother, sister, ancestor or lineal descendant.  Relative does not cover all relationships, in particular, nephews, nieces, aunts and uncles.  (2) A company is connected with another person if that person has control of the company or that person and persons connected with him together have control of the company. (3) A person is connected to any person he is in partnership with, and the spouse or civil partner of any person he is in partnership with, and a relative of any person he is in partnership with.  Where a transaction takes place between a registered pension scheme and a connected party the transaction must be made at arms length terms.

Consent requirements The Pensions Act 1995 s67 outlines the consent requirements necessary if changes are made to an occupational pension scheme.  Under these requirements, if changes are made which affect a member’s or their survivors’ subsisting rights the member’s consent must first be obtained or the trustees must ensure that: • a written explanation has been given to the member and opportunity allowed for them to make representations • they have satisfied themselves that the actuarial value of the member’s benefits will be the same as or greater than their subsisting rights before the change • they have obtained a statement from the scheme actuary certifying the actuarial value of the benefits has been maintained (see actuarial equivalence requirement). Subsisting rights means any right to future benefits that has already been built up and any entitlement to a pension in payment. If member consent is required, trustees need to provide members with clear details so members can see the effect before and after the change.

Consolidation Where a company increases the nominal value of its shares and reduces the number of shares in issue by consolidating holdings. For example, five 5p shares might be consolidated into one 25p share.

Constant proportion portfolio insurance Constant proportion portfolio insurance [CPPI] is an investment strategy which aims to provide downside protection and upside potential by varying the allocation to cash and volatile assets as the value of the portfolio changes.

Consultation Legal requirement to consult members where there are material changes in the terms of a pension plan.

Consumer prices index [CPI] The main measure of domestic UK inflation.  It is used by the Bank of England in its monetary policy. The other widely used index is the retail prices index.  The general index of consumer prices published by the Office for National Statistics is now used as the benchmark for prices growth for the purposes of uprating most state benefits since April 2011 and in some cases is used in occupational and personal pension systems.

Contango A term relating to the commodity futures markets.  A commodity is in 'contango' when later-maturing contracts are priced higher than those maturing sooner.  This may occur when consumers buy futures contracts to protect themselves against price increases.

Contingent Asset Certificates

Contingent assets Assets explicitly set aside by the sponsor on which a pension scheme would have a claim in the event of an employer becoming insolvent, but which the trustees do not hold.  Contingent assets can include property charges, escrow account money and guarantees from other companies or banks.

Continued rights Prior to A-day, some members had the right to favourable tax regime provisions, in particular the regimes that applied separately to pre-17 March 1987 members, and pre-1 June 1989 members.  These rights were known as continued rights.  See class A (or B or C) members.

Continuous service Treatment by an occupational pension scheme (approved prior to A-day under Chapter I) of the pensionable employment of a member as continuous with a previous period of pensionable employment (within the same scheme or another scheme).  See continued rights.

Contract for difference An investment in which an investor benefits from the difference in price between two different assets without actually holding them directly, eg the sponsor’s share price and the whole equity index.  Sometimes relevant when exploring the use of contingent assets.

Contract note Written confirmation of the purchase or sale of an investment.

Contract-based scheme The opposite of a trustee-based scheme, whereby members establish a personal contract with the pension provider that has been selected by the employer. Stakeholder schemes and Group Personal Pension Plans are both contract-based schemes.

Contracted-out deduction (COD) The amount deducted from the additional State Pension to account for any Guaranteed Minimum Pension payable by an individual’s contracted-out private pension scheme (or schemes).

Contracted-out mixed benefit (COMB) This is the provision of defined benefit and money purchase benefits in separate sections in a scheme, which is contracted-out in relation to both sections.

Contracted-out money purchase (COMP) This is the provision of money purchase benefits in a scheme that is contracted-out.

Contracted-out rebate Amount by which the employer’s and employee’s national insurance contributions are reduced or rebated in respect of employees whose employment is contracted-out by virtue of their membership of an appropriate pension scheme or an occupational pension scheme.  This rebate is a flat rate rebate for COSR schemes and age-related for appropriate pension schemes, COMP, SHP and COMB schemes.  See age-related rebate.

Contracted-out salary-related (COSR) Occupational pension scheme that is contracted-out on a salary related basis by providing benefits that are broadly equivalent to or better than those specified under the reference scheme test.  Before 6 April 1997, a COSR scheme was contracted-out by reference to the provision of a GM P.

Contracted-out/contracted-in A pension scheme is contracted-out where it provides certain benefits in place of the state second pension.  These schemes pay lower national insurance contributions.  Members are contracted-out if they are in employment that is contracted-out by reference to either an occupational pension scheme or they have elected to contract-out using a personal pension plan.  A personal pension plan that is contracted-out is known as an appropriate pension scheme for these purposes.  A pension scheme is commonly referred to as contracted-in where it provides benefits in addition to SERPS or the state second pension.  Strictly speaking, such a scheme is better expressed as an integrated scheme because there is no procedure for contracting in to the state second pension.  See age-related rebate; contracted-out rebate.

Contracting out The ability to opt out of the Second State Pension (SP2) (formerly SERPS, and more formerly the graduated state pension scheme) and instead make additional contributions to a personal or occupational pension arrangement; it is normally the employer’s decision whether or not to contract-out so that members lose rights to the state second pension and build equivalent rights in a private pension system. Major changes in contracting out occurred on the following dates: 1961.04.06 1975.04.06 1978.04.06 1988.04.06 1997.04.06 2002.04.06 Some years ago, the government offered a bribe (incentive) to persuade people to contract-out and anticipated the cost would be about £750m – it actually cost around £8bn, say 2p on the income tax.  Contracting-out is no longer possible for defined contribution pension arrangements and is expected to be phased out completely in due course, with considerable advantages to government finances.

Contracting-in is the opposite of contracting-out.

Contracting-out certificate Certificate issued by HMRC where an occupational pension scheme satisfies contracted-out conditions.  It confirms that the active members of the employer named in the contracting-out certificate are to be treated as being in contracted-out employment and that national insurance contributions in respect of those active members are reduced.

Contracting-out rebate The amount given by the state to encourage employers to contract-out.

Contra-cyclical manager A fund manager who goes against the general trend in investment cycles, or against the 'herd', by buying stocks that are out of favour in the belief that they will recover.  Also known as a contrarian manager.

Contrarian An investor who takes a position in the market contrary to the majority.

Contribution holiday Period during which the employer’s (and occasionally the members’) contributions to an occupational pension scheme cease temporarily, usually because the scheme is in surplus.

Contribution notice The Pensions Regulator can issue a contribution notice (under sections 38-42 Pensions Act 2004), to an employer or a third party where it is of the opinion that the person was a party to an act or deliberate failure to act where the main purpose or one of the main purposes of the act or failure to act was: • to prevent the recovery of the whole or any part of a section 75 debt, or • otherwise than in good faith, to prevent such a debt becoming due, to compromise or otherwise settle such a debt, or to reduce the amount of the debt that would otherwise become due. A contribution notice can also be issued in the event of non-compliance with a financial support direction or a restoration order in respect of transactions at an undervalue.  See debt on the employer.

Contribution schedule See schedule of contributions.

Contributions – employer/member Monies paid into a scheme by an employer and/or member.

Contributory benefits The national system of contributory benefits paid in specific situations, such as retirement, and based on paid or credited National Insurance contributions.

Contributory scheme Occupational pension scheme into which the members, not just the employer, pay contributions.

Controlling director A director who, either on his own or with associates, owns or controls 20% or more of the ordinary shares of the employing company or has done so at any time after 16 March 1987 and within ten years of retirement or leaving service or pensionable service.  Special restrictions used to apply to controlling directors who are members of registered schemes.  A full definition was set out in the former HMRC Practice Notes (IR12).  Prior to A-day this was a term used to restrict benefits payable from approved schemes (obs).

Conventional asset Quoted equities, investment grade bonds and cash.

Conventional bond A bond where the coupon and principal are fixed [as opposed to an inflation-linked bond].

Convertible A debt instrument paying a fixed rate of interest which offers the holder the right to convert into the underlying shares of the company

Convertible Term Assurance Life assurance for a fixed term usually on a level basis.  At the end of the term the assured has the option of either taking out a whole of life assurance policy or an endowment for the same sum assured without the need for further evidence of health.  The premium will be a little higher than ordinary term assurance to cover the additional risk.

Convexity An additional measure of risk based on the relationship between bonds and yields. When used with modified duration, convexity provides a more accurate guide to the percentage change in price that would result from a fluctuation in a bond’s yield

Core portfolio A portfolio generally representing the bulk of a fund's assets.  The core portfolio will normally be invested in a controlled manner to provide stable returns.  The remainder of the fund's assets [often called the satellite portfolio] can then be managed in a more aggressive way, in search of higher returns.  This arrangement is called a core/satellite approach.

Corporate Bonds A form of debt issued by a company (also known as ‘credit’) seen as higher risk than government bonds, because of the greater risk that a company will default on repayment.  A high quality corporate bond is a bond issued by a company which has a high credit rating

Corporate governance This is the principle of shareholders taking 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 tended to swing in favour of shareholders.  Corporate governance principles are often expressed in customer agreements, eg investment management agreements which may require the investment manager to consider shareholders’ votes when they can.  Much of the grounds rules of corporate governance are set down in the UK Corporate Governance Code (formerly Combined Code) http://www.frc.org.uk/documents/pagemanager/Corporate_Governance/UK%20Corp%20Gov %20Code%20June%202010.pdf.

Corporate trustee Trustee that is a company rather than an individual person.  A corporate trustee is commonly used instead of a board of individual trustees.  Individuals are then appointed to act as trustee directors rather than as trustees in their own right.  A trustee board may be comprised of a corporate trustee in addition to individual trustees.  See trust corporation.

Correlation The extent to which two assets’ values rise and fall together.  One of the objects of diversification of investments is to try and avoid correlation, so that if bonds were to fall as an asset class, equities could be predicted to rise.  This does not always work, so that even wider diversification is now sought.  Covariance is a similar idea.

Corresponding Acceptance Relief from tax in tax years up to 5 April 2006 in respect of employer and/or employee contributions to an overseas pension scheme where HMRC approves that the scheme ‘corresponds’ to a UK pension scheme.

COSR See contracted-out salary-related.

Council Tax Benefit Income-related benefit to assist with the costs of Council Tax.

Counterparty The other party to a transaction.  For pensions funds there are increasing concerns that creative investments (such as swaps or other derivatives) may be made on their behalf by their investment bank advisers with organisations which may fail (were there to be a financial crisis) before they could fulfil their part of the bargain.  Counterparty risks are generally underrated and underpriced.

Coupon The interest payment on a bond

Covenant (1) legal safeguard put in place to protect bondholder’s interests (2) underlying promise of the employer to pay contributions to a pension scheme See also Employer covenant

CPI Consumer price index measures the prices of a fixed basket of goods and services bought by a typical consumer, used as one measurement of retail price inflation

Credit A corporate bond, ie money owed by a company.  Sometimes also called debt.

Credit default swap A swap that pays the difference between the market value of a corporate bond (of the sponsoring company perhaps) and the nominal face value of the bond in the event of the default of the bond coupon or capital payment; sometimes relevant in using contingent assets.  It is a way of insuring against the failure to pay of a corporate bond.

Credit rating A rating of how much investment risk is associated with a debt issue.  Ratings are provided by agencies such as Fitch, Moody's and Standard & Poor's.

Credit risk The risk that a bond issuer will default on their obligations.  A function of the credit quality of the issuer.  Government bonds of developed countries are assumed to have no credit risk.  Credit risk is usually associated with corporate bonds.

Credit spread The term used to describe the additional yield paid above that for equivalent dated gilts

Critical Illnesses Cover A specific type of protection business which pays out the sum assured on the diagnosis of one of a number of illnesses which are regarded by the medical profession as being life threatening.  The most common illnesses covered are heart attack, stroke, cancer, major organ transplant, coronary artery by-pass surgery, major organ transplant and kidney failure.  Many more illnesses than these are now covered in most policies.

Critical Yield For pension income withdrawal plans; the amount your fund must grow to keep paying your chosen income.

Cross-border schemes (see Pan-European schemes); see tPR see also Overseas pension schemes www.dwp.gov.uk/consultations/2007/Occupational-Pensions-Cross-Border-final-review.pdf

Crystallisation Event An event where pension benefits become payable i.e. annuity purchase, death, starting an unsecured pension etc, and at which time a test against the lifetime allowance is carried out.

Cum dividend Cum is the Latin prefix meaning with.  A share quoted cum dividend carries the right to a recently declared dividend. Cum scrip and cum rights have similar meanings. See also ex dividend.

Currency

Currency hedging The elimination or reduction of the impact of exchange rate movements on foreign currency holdings, typically by the use of forward currency contracts.

Currency risk The risk of incurring losses in the value of overseas investments as a result of movements in international exchange rates. Can also refer to the additional volatility caused by exposure to assets in foreign currencies.

Current Account Management A department of NISPI dealing with Scheme Cessation

Custodian A bank or institution that holds securities for safe-keeping and handles administrative arrangements such as collecting coupons and dividends.  See trust corporation.

Customer agreed remuneration Silly name for fees.  Used by independent financial advisers and regulators.

Customer Agreement is an agreement between the trustees and the investment managers, which is required by law.  Although it must state certain terms, the content of those terms is open to negotiation. Most customer agreements are very user-unfriendly.

Cyclical stock A security that is sensitive to movements in the economic cycle, i.e. it performs well in periods of falling interest rates, or strong growth; but poorly during an economic downturn.

D&B (Dun and Bradstreet) The agency that has been given the job by the Pensions Protection Fund of rating the financial strength of employer sponsors of pension funds.  It is possible to game their rules, so as to reduce the amount of levy payable.

Data cleansing The process of trying to ensure that the pension scheme records about members and their rights is in good order.  It is sometimes necessary to complete a data cleansing exercise if the company is in liquidation and records are often incomplete and insurance companies and other are reluctant to price their products in the absence of reliable information.

Data protection The principles for the processing and storage of personal information as set out in the Data Protection Act 1998.  Personal information required to run pension schemes is covered by the Data Protection Act 1998.  The handling and processing of information is regulated.  The holding and processing of computerised and manually stored data held for the purposes of pension administration requires registration by the processor.  Trustees cannot rely on the registration of the principal employer and must effect their own registration.  In addition, trustees must ensure that any third parties to which data is passed have adequate processing and security systems in place.  There are special rules requiring extra safeguards for the handling of sensitive personal data such as health records.  Only used in practice to discover the investment policies of local government pension schemes.

DAX Index A German index constituting the largest 30 companies listed on the Frankfurt Stock Exchange.

DCF see Discounted cash flow

Dealer An individual or firm that acts as an intermediary between buyers and sellers.  The dealer might also buy securities to sell for a profit.

Death benefit The death benefit is the amount payable under the policy in the event of a death claim.  This can be simply the sum assured, or the greater of the sum assured and the value of accumulated investments, or for a with-profits policy, the aggregate of the sum assured plus bonuses declared to date.

Death-in-service benefits Benefits paid to a scheme member (or his estate or dependants) on death while working in the company which is the sponsor of the plan.

Debenture In the UK this is a bond secured by a prior claim on the assets of the issuer or, in some circumstances, by specific assets of the issuer.  A debenture holder is entitled to appoint a receiver if necessary.

Debt (1) The debt is the amount payable to fund a scheme shortfall when an employer stops participating in the scheme (see Debt on the employer).  (2) Fancy word for bond (perversely also known as credit).

Debt on the employer (s75) Statutory debt due (under section 75 and section 75A of the Pensions Act 1995) from an employer to a defined benefit scheme.  The debt can be triggered on winding-up the scheme, on liquidation of the employer and on an employer leaving a scheme where it ceases to employ any scheme members.  The debt arises when the scheme assets are insufficient to meet the scheme’s actuarial liabilities.

Debt/Equity ratio A company's borrowings divided by the market value of its equity. It is a measure of the amount of gearing of a company, and an indicator of financial strength.

Decile One of the 10% bands in 100%.  A investment manager who is in the top decile is in one of the top 10% of funds.  It is one of the mysteries of statistics and fund performance that almost all funds are said by their managers to be in the top decile.

Decreasing Term Assurance Life assurance for a fixed period of time or specified age but where the sum assured decreases each year. At the end of the term the sum assured has decreased to zero and the policy comes to an end without value.  This type of policy is normally used to protect a capital repayment mortgage and is commonly known as mortgage protection assurance.

Decumulation Selling assets to pay benefits; an annuity is one form of decumulation.

Deed of adherence Deed admitting a new employer to an occupational pension scheme. It should contain an undertaking by the new employer to comply with the scheme provisions. Also known as a deed of participation, or deed of admission.

Deed of admission See deed of adherence. Deed of participation See deed of adherence.

Deed poll Personal pensions, especially SIPPs, can be established by providers in a number of ways – including by trust (like a workplace scheme) and by ‘deed poll’. A deed poll is a fancy name for a deed of declaration, and works like a contract rather than a trust. Since many are operated by insurance companies, they are subject to the restrictions on investments imposed on insurance companies, which is why there is a trend to the less controlled trust mechanism (see Suffolk Life, Trust based schemes and deed poll schemes, Fact Sheet, September 2007 www.suffolklife.co.uk/advisers)

Deemed buy-back This allows a person who has been a member of a contracted-out scheme to be fully or partly reinstated into the State additional pension (SERPS and/or State Second Pension) for the period during which they were contracted-out. Members of a defined benefit scheme are eligible for deemed buy-back if their scheme is in wind-up and the funds available to the individual member are lower than the actual amount required to buy the member back into the state system. This facility aims to ensure a member receives at least SERPS and/or state second pension benefits in given circumstances.

Deemed registration Since A-day, a scheme that was formerly an approved scheme was automatically registered with HMRC as a registered pension scheme, by the process of deemed registration. See registration.

Default Can be (a) the failure to pay interest or principal of a debt promptly when due, or (b) the failure to meet payments on a futures contract as required by an exchange.

Default risk The risk that an issuer will not be able to make future interest [coupon] or capital [principal] payments. Bonds issued by the governments of most developed countries are generally regarded as having an extremely low default risk [AAA].

Defensive An investment strategy is 'defensive' if it is designed to have a low level of risk [and probably will therefore also have a low expected return].

Defensive stock A stock which is expected to be relatively insensitive to market or economic downturn, for example a food manufacturer.

Deferred Acquisition Costs or Expenses An asset held on the balance sheet under IFRS accounts representing the amount of acquisition expenses which have not been taken through the income statement and is accrued on the expectation that it will be paid out of future margins earned from the business.

Deferred annuity Annuity that starts to pay out from a future date. Deferred maintenance order See earmarking.

Deferred member (1) An individual who has rights under a pension scheme and who is neither an active member, nor a pensioner member. (HMRC) (2) Member who is no longer an active member of the scheme (usually as a result of leaving the employment to which the scheme relates) but who is entitled to preserved benefits when he or she retires at some future date. Also known as a deferred pensioner.

Deferred pension Pension due to be paid to a deferred member.

Deferred Pensioners are people who have left the company usually to go and get a better, higher-paid job with a competitor. You may feel that they have forfeited your sympathy, but they are nonetheless beneficiaries under the scheme, and you must treat them in the same manner as you treat other beneficiaries. See also deferred member.

Deficit clearing period The length of time taken by an employer to discharge a pension fund deficit. See also Recovery plan.

Deficit Not enough money in a pension scheme – based on certain assumptions.

Defined Benefit (DB) Scheme An occupational pension scheme that provides benefits based on accrual rate, pensionable service and pensionable salary.

Defined benefits Benefits calculated by reference to a fixed formula, irrespective of the contributions paid or investment performance. The most common type of defined benefits are: • final salary • career average or career average revalued earnings (CARE). There is sometimes a debate amongst policymakers and lawyers about whether hybrid schemes (such as cash balance plans) are defined benefit or defined contribution. For regulators they are defined benefit; for accounts they are defined contribution.

Defined benefit lump sum death benefit Lump sum death benefit paid in respect of a member of a defined benefit scheme. It is usually calculated by multiplying a member’s salary by a specified figure, however, it may also be a fixed sum. Prior to A-day HMRC allowed up to four times salary to be paid (tax free if paid under discretionary trust). From A-day HMRC requires member payments to be authorised member payments. Tax law requires it to be paid within two years of the administrator’s knowledge of the death of the member who must not have reached age 75 at the time of death.

Defined Benefit schemes A private pension scheme where the pension is related to the member’s salary or some other value fixed in advance. Sometimes called a salary-related scheme.

Defined Benefits arrangement An arrangement other than a money purchase arrangement that provides only defined benefits. “Defined benefits” are calculated by reference to the earnings or the service of the member, or by any other means except by reference to an available amount for the provision of benefits to or in respect of the member, (thus making the definitions of money purchase and defined benefit arrangements mutually exclusive). A defined benefit arrangement is, typically, a ‘final salary’ scheme, that is, one where the level of benefits paid is calculated by reference to the member’s final salary and length of service with the employer. Contributions are often made to such an arrangement, and so there may be a pension fund or pot, but the benefits that may be paid are not calculated by reference to that fund or pot. (HMRC)

Defined benefits lump sum death benefit A lump sum benefit paid from a defined benefits arrangement following the death of the scheme member before the age of 75 (and within two years of that date of death), and as defined in paragraph 13, Schedule 29 to the Finance Act 2004. (HMRC)

Defined contribution A scheme that provides retirement benefits based on the build up of a 'pot' of money, accumulated through the investment of contributions paid by both the employee and the employer. It is a more contemporary term for what used to be called money-purchase arrangements, and defined contribution arrangements are a form of (usually) employer sponsored pension plan which makes no promises as to benefit levels, but simply provides for whatever contributions are made, together with any gains over the years, to be used eventually to buy retirement benefits. Depending on the accumulated values, and the costs of annuities at the time of purchase, the eventual benefits will vary. There are innumerable surveys of DC plans; they include eg Mercer UK Defined Contribution Survey (annual), Mercers (www.mercer.com). It disclosed that by 2007, 63% of all DC plans had been established since 2000. Benefits calculated by reference to contributions made by the member and/or the employer, together with any interest/investment returns. When the member retires, the resulting sum of money is used to buy an annuity. See also money purchase.

Defined Contribution schemes A private pension scheme where the individual receives a pension based on the contributions made and the investment return that they have produced. Sometimes referred to as money-purchase schemes.

Definitive trust deed and rules Document containing the rules that govern an occupational pension scheme.

Deflation Negative inflation, i.e. falling prices.

Demutualisation The legal process through which a mutual company becomes a proprietary company with shareholders. New shareholders subscribe for shares in the newco and the old owners, the with-profits policyholders, are given a one-off bonus for the loss of the stream of 10% of the surpluses which in future belong to the shareholders.

Department for Work and Pensions (DWP) The government department with overall responsible for the rules governing pension schemes and the administration of the state pension.

Dependant A person who was married to, or a civil partner of, the member at the date of the member’s death is a dependant of the member. Additionally, if the rules of the pension scheme so provide, the above test can be extended to apply not only at the date of the member’s death, but to extend to the point in time when the member first became actually entitled to a pension under the pension scheme. A child of the member is a dependant of the member if the child has (1) not reached the age of 23, (2) has reached age 23 and, in the opinion of the scheme administrator, was at the date of the member’s death dependent on the member because of physical or mental impairment, or (3) is covered by any of the transitional provisions described in RPSM10104042. A person who was not married to the member or was not in a civil partnership with the member at the date of the member’s death and is not a child of the member is a dependant of the member if, in the opinion of the scheme administrator, at the date of the member’s death the person was: (1) financially dependant on the member, (2) the person’s financial relationship with the member was one of mutual dependence, or (3) the person was dependant on the member because of physical or mental impairment. Further information on the concepts used in this definition can be found on page RPSM10104040. (HMRC)

Dependants' alternatively secured pension fund Funds (whether sums or assets) held under a money purchase arrangement that have been 'designated' after the death of a scheme member to provide a particular dependant of that member (who is aged 75 or over) with a dependants' alternatively secured pension, as identified in paragraph 25 of Schedule 28 to the Finance Act 2004. Once sums or assets have been 'designated' as part of a 'dependants' alternatively secured pension fund', any capital growth or income generated from such sums or assets are equally treated as being part of the 'dependants' alternatively secured pension fund'. Similarly, where assets are purchased at a later date from such funds, or 'sums' generated by the sale of assets held in such funds, those replacement assets or sums also fall as part of the 'dependants' alternatively secured pension fund' (as do any future growth or income generated by those assets or sums). (HMRC)

Dependants' alternatively secured pension Payment of income withdrawals direct from a money purchase arrangement to a dependant of a scheme member who is aged 75 or over, that meets the conditions laid down in paragraphs 26 and 27 of Schedule 28 to the Finance Act 2004. (HMRC)

Dependants' annuity An annuity paid by an insurance company to a dependant of a scheme member following the death of that member that meets the conditions laid down in paragraph 17, Schedule 28 to the Finance Act 2004. (HMRC)

Dependants' scheme pension A pension paid to a dependant of a member of a registered pension scheme following the death of that member, the entitlement to which is an absolute entitlement under the scheme and that meets the conditions laid down in paragraph 16, Schedule 28 to the Finance Act 2004. (HMRC)

Dependants' short-term annuity An annuity contract purchased from a dependants' unsecured pension fund held under a money purchase arrangement that provides that dependant with an income for a term of no more than five years (not reaching to or beyond their 75th birthday), and which meets the conditions imposed through paragraph 20, Schedule 28 to the Finance Act 2004. This definition covers replacement assets purchased after the initial 'designation' from such funds, or any capital growth from or income generated by assets held in the fund (whether held at the time of 'designation' or where replacement assets). (HMRC)

Dependants' unsecured pension fund Funds (whether sums or assets) held under a money purchase arrangement that have been 'designated' after the death of a scheme member to provide a particular dependant of that member (who is aged under 75) with a dependants' unsecured pension, as identified in paragraph 22 of Schedule 28 to the Finance Act 2004. Once sums or assets have been 'designated' as part of a 'dependants' unsecured pension fund', any capital growth or income generated from such sums or assets are equally treated as being part of the 'dependants' unsecured pension fund'. Similarly, where assets are purchased at a later date from such funds, or 'sums' generated by the sale of assets held in such funds, those replacement assets or sums also fall as part of the 'dependants' unsecured pension fund' (as do any future growth or income generated by those assets or sums). (HMRC)

Dependants' unsecured pension Payments of income withdrawals direct from a money purchase arrangement, or income paid from a dependants' short-term annuity contract purchased from such an arrangement, to a dependant (who is aged under 75) of the scheme member who established the arrangement and that meets the conditions laid down in paragraph 20 and 23 to 24 of Schedule 28 to the Finance Act 2004. (HMRC)

Depression A period of strongly negative economic growth and falling prices. Also known as recession.

De-registration HMRC may withdraw the favourable tax status granted to a registered pension scheme. This is known as de-registration. This is reserved for serious cases of abuse or where there is a breach of the registered pension scheme requirements. This incurs a tax charge of 40% of the value of the scheme fund.

Deregulation An independent review in July 2007 by Chris Lewin and Ed Sweeney at the request of the DWP suggested some material changes, but merely nibbled at the edges. The Government agreed to allow schemes to reduce inflation protection on future rights to a maximum of 2.5% pa (instead of 5%) and more principle –based regulation.

Derisking The process of buying investments more suited to the liabilities of the pension fund which reduces the risk of (for example) volatility of the price of investments, or of the changes in longevity. Total derisking can involve a ‘buy-out’.

Derivatives Financial instruments, such as futures and options, whose value is derived from that of underlying securities. Some say they are so-called investments which are one stage removed from reality. For example, instead of buying a share in Marks and Spencer, you might buy the right to buy a share in Marks and Spencer in three months time at a price fixed now and hope that the price will rise in the meantime. If the price falls you will still have to buy the share at a loss, with money you might not have at the time. For most pension funds they are not suitable, unless used in conjunction with some other strategy, such as the intention to buy an investment overseas. Take great care and special advice. Derivatives include Swaps, Futures and Options – they are not explained because you should normally keep away from them.

Designated bank account A bank account which is opened when the pension scheme is established and from which the scheme provider conducts the administration of the scheme.

Designated scheme Scheme chosen by an employer to offer as a stakeholder pension scheme to its employees. (obs)

Determination (Pensions Ombudsman) A decision by the Pensions Ombudsman is known as a determination and is final and binding on all parties. A determination can only be appealed on a point of law to, in England and Wales, the High Court, in Scotland, the Court of Session, and in Northern Ireland, the Court of Appeal.

Determinations panel The Determinations Panel is an independent panel of the Pensions Regulator, established under statute to carry out powers of the Pensions Regulator eg power to suspend a trustee, issue a freezing order, contribution notice, or financial support direction. Other powers, eg the power to issue an improvement notice, may be exercised by the Pensions Regulator’s staff directly. There are few than half-a-dozen decisions made by the Panel in the first few years of its existence.

Deterministic valuation A deterministic valuation uses one set of assumptions to calculate a single result (cgf stochastic valuation) especially when assessing scheme funding.

Detrimental modification Any modification to a scheme that would or might adversely affect any subsisting rights of any member or any survivor of a member of the scheme. See section 67.

Deutsche Börse German stock exchange.

Devaluation The formal reduction in the value of a currency against other currencies. This is opposed to depreciation, which is the reduction in the value of a currency through market movements.

Dilution A reduction in earnings per share and book value per share due to an increase in the number of shares issued. This can occur if convertible securities are converted or warrants or employee stock options are exercised.

Dirty fees Fund management fees to which 'extras' [often not explicit] are added, e.g. for custody, overseas transactions etc.

Disclosure of information Members (and other interested parties) are entitled to information in respect of their scheme. Some information must be provided automatically (eg scheme booklet, summary funding statement) while other information must be made available on request (eg cash equivalent transfer value).

Discontinuance basis Basis for valuing a scheme’s liabilities that involves assuming that the scheme has discontinued and that the liabilities have to be secured through the purchase of annuities or deferred annuities.

Discontinuance valuation A discontinuance valuation compares the realisable value of the scheme’s assets on forced sale with the estimated cost of securing all current earned benefits, often with an insurance company.

Discount rate The rate of interest used to find the present value of a future cash flow. If the discount rate used in a pension fund is a high one (ie the actuary thinks the pension fund will perform well in the future) the amount of money needed today is less. A discount rate reduces the current value of a future liability amount by recognising that investment returns or interest over time will help repay the liability. The discount rate used is often related to the assumed rate of return on bond yields.

Discounted cash flow [DCF] The process by which future cash flows (for example, dividends or interest payments) are adjusted to allow for the time value of money to arrive at a value in today's terms. In other words, what is the cost today of getting £100 in a year’s time (it will be less or more than £100, because of the interest that is gained or lost in that year). In a way it is the mirror image of compound interest.

Discretionary approval Only applicable until A-day, this is where HMRC used its discretionary powers under section 591 of ICTA 1988 to grant approval to a pension scheme which does not fully meet the conditions set out in section 590 of ICTA 1988 thus preventing it from qualifying for mandatory approval.

Discretionary client A client who gives an investment manager total authority to manage the assets against a specified benchmark. The manager has the authority to make decisions as if he was the beneficial owner.

Discrimination It is unlawful to discriminate on the grounds of sex, marital status, civil partner status, race, colour, nationality, ethnic or national origin, religion or belief, sexual orientation, disability and age. See age discrimination, equal treatment.

Disguised remuneration Legislation introduced from 6 April 2011 tackle arrangements involving trusts or other vehicles used to reward employees which set to avoid or defer the payment of income tax of National Insurance Contributions (NICs). The assignments covered include the provision of a [?] advantaged alternative to saving beyond the annual and lifetime allowances [available] in a registered pension scheme [HMRC].

Disinflation A reduction in the rate of inflation.

Dispute resolution Pension scheme disputes between the member and the trustees can be resolved using a range of different methods including internal dispute resolution, TPAS, which operates a network of volunteer advisers, the Pensions Ombudsman., the courts and alternative dispute resolution by way of arbitration or mediation.

Dispute resolution procedure DRP See internal dispute resolution.

Disqualification order Order made by the Pensions Regulator under section 29 of the Pensions Act 1995 disqualifying a person from being a trustee. See prohibition order.

Diversification Holding a range of assets to reduce risk. Legally required for pension funds (Pensions Act 1995), despite anything to the contrary in the deed.

Diversified growth funds A DGF invests in a variety of different assets classes within a single fund.

Dividend discount model A model used to estimate a security's value by adding all discounted future dividends of a company.

Dividend The proportion of company net profits paid out to equity investors.

Dividend yield The annual dividend on a share divided by the share price.

Divorce There are three main ways in which pensions are taken into account in divorce proceedings: • offsetting: this ensures that the distribution of other assets held by both parties takes into account the value of the pension held by one of the parties • attachment order: (formerly called earmarking) requires the payment to the former spouse part or all of a member’s pension (and/or lump sum) as and when they fall due • pension sharing orders: share the value of the member’s pension between the member and the former spouse, dividing it at the date of divorce and putting part or all of it in the former spouse’s name.

Double taxation This refers to the payment of tax twice, both at the point of payment and at the point of receipt where the payment is received in a country that is not the country in which it was paid. Countries may voluntarily enter into double taxation agreements to prevent tax being levied twice.

Downgrade When a bond's credit rating is lowered. This might be caused by an event such as a negative trading statement by the issuer, which in turn increases the risk that the issuer might be unable to meet its future payment obligations. If the downgrade reduces an issuer's credit rating to high yield status – funds which only invest in investment grade bonds may need to sell the bond.

Drawdown Known also as income drawdown/withdrawal or unsecured pension, it allows members below 75 to continue investing in their funds, whilst drawing a limited proportion as income.

Due diligence Checks that are carried out before a major transaction takes place, eg when placing assets with a new asset manager. It involves a detailed examination of information not all publicly available prior to a transaction eg an acquisition of one company by another.

Duration The [Macaulay] duration is a measure of the average time until a bond's cash flows occur, and of the sensitivity of its price to interest rate changes. Technically speaking, the Macaulay Duration is the sum of the time weighted discounted payments [coupons and principal] of a bond. Another way to think about duration is the average time period over which you will receive your payments. Hence, if two bonds have the same maturity, the bond with the higher coupon will have a shorter duration [the average time of repayment is less heavily weighted to the repayment of capital [principal] at maturity].

Duty of disclosure When completing a proposal form for a protection product, the applicant has a duty to disclose all facts relevant to the application, particularly in relation to health. Failure to do so can allow the life company to refuse to admit a claim and cancel the policy from inception on the grounds of non-disclosure.

Early leaver Person who ceases to be an active member of a pension scheme before his normal pension age and does not receive his pension immediately.

Early retirement Occurs when a member retires before his normal pension age and takes a pension before his normal pension age which may be reduced to reflect early payment. Retirement before age 55 is not permitted by HMRC except in the case of certain high risk jobs or in cases of ill-health. See ill-health early retirement.

Earmarking (obs) provides a spouse with a share of a pension scheme member's pension rights on divorce. The spouse's share is paid when the member draws their benefits. Now called ‘attachment’; alternative remedies include sharing and reallocation (‘offsetting’).

Earnings cap (obs) A limit on the amount of a member’s earnings that can be used for the purposes of determining contributions and benefit accrual. Prior to A-day, HMRC automatically applied an earnings cap to a member who joined an approved scheme established on or after 14 March 1989 and to all new members of existing schemes on or after 1 June 1989. This was increased annually in line with increases in the retail prices index. From A-day this restriction was removed, but may continue to apply through the operation of transitional regulations or where a scheme specific provision applying an earnings cap has been incorporated into a scheme’s rules.

Earnings For a company, the net profits available for distribution to shareholders. For a an individual and his renumeration.

Earnings per share (EPS) A common way of expressing company profits – dividing the profits after tax by the number of shares in issue. Earnings per share is the basis for the calculation of the P/E ratio.

Earnings period The period of a regular premium contract over which the initial commission is deemed to be earned. In the event that premiums cease to be paid during the earnings period, the unearned amount of initial commission will be subject to a clawback when the commission has been paid on an indemnity basis.

Earnings yield The earnings per share divided by the current share price. This is the inverse of the price/earnings [P/E] ratio.

EBITDA (Earnings before interest, tax, depreciation and amortisation) A crude measure of the success or otherwise of a company, to be used only in conjunction with a range of other measures.

Effective date The effective date, in scheme funding, is the date at which the scheme’s assets and liabilities are assessed, using information on the membership and economic conditions at the time. The choice of effective date may affect the valuation significantly.

Efficient frontier One of the concepts involved in modern portfolio theory (MPT) which suggests how to diversify a portfolio and estimate the risk of an asset. A system. It is a fancy way of saying that more diversification means less risk, which is what Chancery judges have been saying for three hundred years. The prove the obvious, adherents produce charts which balance show that the more risk the more reward (and the reverse); in theory there is an ideal balance.

Efficient market A market where the prices of assets fairly reflect all available information about those assets; as rare as the unicorn.

EFRBS see Employer-Financed Retirement Benefits Scheme

EFRP see European Federation for Retirement Provision

Embedded Value A key measure of the value of a life company representing the net assets of the company plus the PVFP.

Embedded Value Profits The change in the embedded value over the course of the financial year.

Emerging markets The investment markets of developing economies; they usually have crude or non-existent stock markets which makes investments harder to value and harder to buy and sell.

Employer Compliance Regime (ECR) (tPR)

Employer covenant A concept invented by the Pensions Act 2004 relating to the (1) ability of the employer to discharge any deficits in its sponsored plan, and (2) its willingness to continue to sponsor. Trustees when agreeing the schedule of contributions to the scheme from the sponsor take the strength of the covenant into account (the paradox being that if the covenant is weak, and the employer finds it difficult to pay contributions, that is just when such payments are critical). The strength of a covenant depends on future profits and cashflows as well as the available funds if the employer ceased trading. Such covenants are rated very crudely by Dun and Bradstreet for the PPF and by for example Standard & Poor’s as part of a charged for service that few subscribe to (see Standard & Poor’s, The Pensions Covenant, quarterly).

Employer-Financed Retirement Benefits Scheme (EFRBS) The current term for an unregistered (formerly unapproved) scheme, formerly FURBS, UURBS etc. Registered schemes are not currently attractive for high earners, since there is 30% tax on contributions in, plus 40/50% tax on the benefits received. EFRBS are more tax efficient than registered schemes. It needs to be notionally open to all employees (to avoid a 20% inheritance tax charge) but offers the advantage of no income tax or NIC on employer’s contributions, benefits taxed at the employee’s marginal rate, corporation tax relief when the benefits are paid and may pay other benefits (in some cases – see family benefit trusts) than normally permitted to registered pension schemes.

Employer-financed retirement benefits scheme This means a scheme for the provision of benefits consisting of or including relevant benefits to or in respect of employees or former employees of an employer. However, neither a registered pension scheme nor a section 615(3) scheme is an employer-financed retirement benefits scheme. (HMRC)

Endowment assurance Regular premium savings plans are constructed as an endowment assurance. The accumulated investments are payable on a fixed date (the "maturity date"), or in the event of death, the higher of the accumulated investments or the sum assured are payable. Endowments are often used in house purchase arrangements. The guaranteed death sum assured will usually be targeted at the same amount of the loan and that will also be the target maturity value based on the life company’s best estimate of growth through the life of the plan at its commencement, although there is no guarantee (for unit-linked or with-profits policies) that this will be achieved.

Engagement The way in which sensible investment managers discuss issues (ie problems) with the companies they invest in; ie they talk to them.

Enhanced indexing An investment strategy by which managers aim to add incremental performance to an index return. Techniques range from trading strategies, whereby managers seek to add performance in managing index constituent changes, to arbitrage between similar stocks and low risk active fund management based upon fundamental analysis.

Enhanced lifetime allowance The lifetime allowance for an individual covered by enhanced protection.

Enhanced protection If a member had exceeded or were likely to exceed their pension rights at 5 April 2006, they could safeguard them against a future tax charge. Enhanced protection is a transitional arrangement available to members of registered pension schemes to protect the benefits they accrued before A-day from the ‘recovery charge’, one of the taxes on pensions over the lifetime allowance. An individual may register with HMRC for enhanced protection whether or not the value of his pension savings exceed the standard lifetime allowance at A-day. This ensures that the lifetime allowance does not affect pension accrual prior to A-day. A member with enhanced protection may lose it in certain circumstances eg if a relevant benefit accrual occurs. A member must have registered with HMRC by 5 April 2009 to obtain enhanced protection. Enhanced protection allows the value of pre-A Day benefits to be linked to indexation or movements in future earnings or investment growth. Enhanced Protection removes the Lifetime Allowance Charge, subject to several important conditions. (see also Primary protection, Scheme specific protection, Enhancement factor.) (HMRC)

Enhanced Transfer Value (ETV) Exercises have been carried out to persuade members and former members to take their accrued rights away somewhere else. There are advantages in administrative savings for pension funds – but the cost in advisory fees (each member should really receive individual financial advice) and cash incentives may be too high. There is mixed feedback on the success of such exercises, and the PR has issued guidance on the practice. There was for a brief period a substantial tax advantage in surrendering pension in exchange for cash, but this no longer applies. (Steve Johnson, Blue-chips move to slash DB deficits, Financial Times 12 November 2007).

Enhancement factor (LAEF = Lifetime allowance enhancement factor) LAEF applies in relation to enhanced protection; to calculate a member’s enhancement factor, £1.5 million is deducted from the value of the individual’s rights on A-day and the result is then divided by 1.5 million, and multiplied by 100. This provides the percentage by which the lifetime allowance in force at the date of crystallisation of the individual’s benefits may be enhanced in order to determine whether any tax is payable. See Enhanced protection; Primary protection).

Enrolment, automatic see automatic enrolment EPB See Equivalent pension benefit.

EPS see Earnings per share.

Equal access Term used to describe the requirement under the Pensions Act 1995 that members of each sex have identical entry conditions to pension schemes.

Equal treatment Principle requiring gender equality with respect to contributions and benefits (sections 62 to 66 of the Pensions Act 1995).

Equalisation As income from a unit trust accrues between dividend distributions, it is added to the unit price. An investor purchasing units will thus be paying for some of the next dividend payment in the unit price; effectively turning capital into income [which is taxable]. Unit trust managers state an equalisation factor with each distribution to indicate the proportion of the total distribution that is not subject to income tax.

Equities Stocks and shares quoted on a stock market. see also Equity

Equity default swap An investment that make s payment if the sponsor’s share price falls eg to 70% of its initial value; sometimes relevant when exploring the use of contingent assets.

Equity out-performance Actuaries of pension schemes make an allowance for the fact that equities in the pension scheme’s portfolio will normally out-perform the investment returns of fixed-interest (ie gilts or bonds) – as they should if the economic theory of capitalism is correct. The benefit of the investment risk is incorporated in the discount rate or the assumptions underlying the recovery plan.

Equity release A way in which older people can use the value of their home to release cash. Fraught with issues.

Equity risk premium Pension fund investors should earn more for investing in equities than investing in bonds, because equities are riskier – the company can go bust. The amount of extra that they earn is called the equity risk premium. Over the years it has proved to be around 4%, and the history is published every year in the BZW Equity/Gilt Study (in the UK) and Ibbotson and Sinquefield (in the US).

Equity risk premium The additional expected return from equities above that available from cash or bonds to compensate for their higher risk. The equity risk premium [ERP] is a forward looking estimate of the degree to which equities are expected to outperform bonds.

Equity The shares in a company. Investors in equities are a company's owners and are entitled to its profits after other claims on the company have been met.

Equivalent pension benefit (EPB) Benefit that an employer must provide for an employee whose employment was contracted-out of the State Graduated Pension Scheme (between 1961 and 1975) (see National Insurance Act 1965 and the Social Security (Graduated Retirement Benefit) (No 2) Regulations 1978.

ERISA The Employee Retirement Income Security Act [1974]. US pension legislation, now sometimes used as a generic term to cover the whole US pension market.

Escalation The increments applied to an annuity in payment.

Escrow account Ring-fenced money which is allocated to a pension fund when certain conditions are met – or returned to the sponsor where other conditions are met. It is usually less tax-efficient than making contributions to the fund, but used now that it is hard to recover money from an over funded scheme. If the surplus rules were made more sensible, they would not be necessary, but the chances of that happening are slim to vanishing. Sometimes used as part of a contingent asset strategy.

ESG See Responsible investing.

Estate The inherited estate is the expression used to describe surplus assets in a with-profits fund. The estate has often built up over many years as a direct result of a long term policy of declaring less in bonuses than has been earnt in surpluses (smoothing) and forms part of the capital supporting the business.

Ethical investment A term given to an investment philosophy focusing on investing in companies according to some non-economic criteria such as ethical or religious beliefs. See also Responsible Investing.

EU member state Any of the following -Austria, Belgium, Bulgaria, Croatia, Czech Republic, Cyprus, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom. (HMRC)

EURIBOR The euro zone inter-bank offer rate for the euro. The rate at which banks offer to lend euros to other banks.

European Central Bank The European Central Bank [ECB] is responsible for setting monetary policy [interest rates] within the euro zone. It was established in June 1998 as an essential part of the adoption of a single European currency.

European Economic Area (EEA) investment portfolio manager This means an institution which (1) is an EEA firm of the kind mentioned in paragraph 5(a), (b) or (c) of Schedule 3 to the Financial Services and Markets Act 2000 (certain credit and financial institutions), or (2) qualifies for authorisation under paragraph 12(1) or 12(2) of that Schedule, or (3) has permission under the Financial Services and Markets Act 2000 to manage portfolios of investments. (HMRC)

European Federation for Retirement Provision (EFRP) A club of country-based associations of pension funds designed to be more effective in EU lobbying. The UK’s NAPF is a leading member. It operates out of Brussels with a small secretariat and budget and has so far focussed its efforts on representing the special interests of funded second-tier pension plans, as most commonly fund in the UK, Ireland and the Netherlands, although it has wider ambitions. www.efrp.org

European Pensions Directive Directive 2003/41/EC of the European Parliament and of the Council of the European Union of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (also known as the IORP Directive); imposes funding requirements on DB schemes, and provides for cross-border recognition of occupational schemes. It does not provide for cross-border tax relief, without which a cross-border scheme is impractical, but EU case law does require that. UK HMRC rules and tPR rules are almost certainly in breach of the Directive and EU tax requirements.

EV/EBITDA A method of valuing companies calculated by dividing a company's enterprise value [market value of equity plus net debt of the company] by its earnings before interest, tax, depreciation and amortisation. This measure relates short-term cash flow generation to market valuation.

Event report A requirement imposed by HMRC on administrators to report when certain events have occurred during the previous tax year; there are many such instances but in short comprise events relating to changes in the scheme or its membership numbers and events relating to movement of scheme funds. You need to use (HMRC) form APSS300, which has unhelpful notes attached. Penalty for error is up to £3000. (GAL)

Ex ante Ex ante is Latin for 'beforehand'. When there is uncertainty about the value of a variable before a process has taken place, the estimate of this variable is called 'ex-ante'. When the process is finished and the variable known, the formerly uncertain variable is called ex post [= 'after the fact'].

Ex dividend To clarify who receives the dividend on a share that is sold around the time the dividend is due, a date is fixed when a share goes ex-dividend. Anyone buying after this date will not receive the dividend. A share price will normally fall by the amount of the dividend on the day that it goes ex-dividend. Compare with cum dividend.

Ex post See ex ante.

Exchange traded A transaction between a counterparty and a recognised exchange that mitigates the credit risk inherent in an OTC transaction.

Exchange traded fund (ETF) A vehicle that is traded on a stock exchange and whose performance is designed to track a given market index. Exchange traded funds [ETFs] represent a low cost, highly liquid 'form' of index investing; see also Exchange traded.

Exclusion clause This is a clause in pension scheme rules providing protection for trustees by excluding liability for breach of trust. See indemnity clause; exoneration clause.

Execution services The services directly (and not incidentally (like research)) used by an asset manager in buying or selling shares.

Executive pension plan (EPP) Scheme sold by insurance companies that is used to provide benefits for senior employees. Each insurance policy is earmarked to provide benefits for a single member.

Executive scheme An arrangement for the provision of benefits to directors and/or senior employees. These may be registered pension schemes, or, in respect of periods prior to A-day, they may or may not have been subject to approval.

Exempt unit trust A unit trust that is specific to pension funds and charities and enjoys the same tax advantages as the assets of a directly invested pension fund.

Exercise price The price at which an option holder has the right to buy or sell the underlying asset. Also known as the strike price.

Ex-gratia benefit Benefit provided by the employer that he is not legally obliged to provide.

Exoneration clause Trustees have an obligation to act in accordance with the scheme provisions contained in the definitive trust deed and rules, relevant legislation and trust principles. While breach of any of those obligations is something trustees can be held liable for, an exoneration clause in the trust deed may reduce the trustees’ liability. Generally an exoneration clause states that, despite any breach, trustees cannot be held liable. An exoneration clause may be conditional, for example they may be stated to apply only where trustees act on professional advice. See exclusion clause.

Expected return The anticipated average future return. The actual return will generally differ.

Expense Deductions Unit deductions made typically on a monthly basis representing the charge made by the life company to cover the cost of maintaining the policy.

Expression of wish Notification by a member to their pension scheme of how they wish their lump sum death benefits to be paid This enables a member to indicate to trustees a preference as to who should receive any lump sum death benefit paid under discretionary trust. However, trustees are not bound to follow the member’s wishes. This non-binding mechanism is adopted to avoid liability for inheritance tax. Also known as ‘nomination letter’.

Ex-spouse An individual to whom pension credit rights have been or are to be allocated following a pension sharing order, agreement or equivalent provision. (HMRC)

Extreme events Although extreme events cannot happen, they often do, and quite frequently; they are the reason investment managers give for underperformance. Cf fat tails, Mandelbrot, LTCM, value-at-risk; Murphy’s Law; if it can go wrong it will, etc etc. They are perfectly described in Nassim Nicholas Taleb’s famous book Black Swan which explores rare high-impact events.

Facultative reassurance The reassurance of policy risks on an individual basis, normally used on a one-off basis to lay off a large or exceptional risk.

Family benefit trusts A family benefit trust is a form of employee benefit trust (EBT) and can be drafted as an EFRBS. While an EFRBS is primarily intended to provide retirement benefits, an FBT is more normally used to provide benefits to an employee’s family after the death or retirement of the employee.

Family Income Benefit A type of term assurance that pays benefits as an income rather than a lump sum, which is ideal for family protection.

Family leave Type of family leave Ordinary maternity leave, ordinary adoption leave and paternity leave Pensionable service Continues as though the employee is still at work Contributions Member contributions based on actual pay, whereas employer contributions are based on notional pay Additional maternity leave, additional adoption leave If contributions are paid then see above. Although it does not have to be treated as pensionable, any service relating to this period must be treated as continuous Parental leave Legislation unclear here. Given the short length of time involved, it can be cost effective to treat employees as still at work

FATCA Foreign Accounts Tax Compliance Act is a US law that requires UK pension funds to certify that none of their members is a US resident, and if they are, who they are and how much their pension rights are. In due course it is possible that they will be exempt, but in the meantime trustees and others may be subject to a draconian tax on their US investments and be in breach of EU data protection law if they divulge this information. The hope is that the US will eventually repeal the law; in the meantime it is a severe impediment to holding US investments.

Fiduciary A person, or entity, who acts for the benefit and on behalf of another person or group of persons. A fiduciary holds a legally enforceable position of trust.

Fiduciary management Delegating some or all of the work of pension fund trustees, eg the making of investment management decisions, to a third party; see also ‘implemented consulting’.

Final pensionable earnings The member’s earnings used to work out his pension in a scheme providing final salary benefits. Also known as final pensionable salary.

Final pensionable salary See final pensionable earnings.

Final remuneration This is a term referring to the limit on the amount of earnings that may be used to calculate benefits. Prior to A-day, approved schemes were required to define final remuneration in the scheme rules. Post A-day benefits are not required to be calculated by reference to final remuneration. See earnings cap; remuneration.

Final salary Benefits calculated by reference to salary at date of leaving, irrespective of the contributions paid or investment performance. (See defined benefits)

Final salary scheme An occupational pension scheme that provides benefits based on accrual rate, pensionable service and pensionable salary. The most common type of defined benefit scheme in which benefits are based on a fraction (commonly 1/60th) of the member’s final pensionable salary at retirement for each year of pensionable service.

Financial Assistance Scheme (FAS) The FAS was established in May 2004and is intended to provide financial assistance to people whose defined benefit scheme wound up with insufficient assets to satisfy in full the scheme liabilities, but are not protected by the PPF. It applies only where the wind-up of the scheme took place between 1 January 1997 and 5 April 2005, and where the employer became insolvent before 28 February 2007 (www.dwp.gov.uk/fas and www.dwp.gov.uk/lifeevent/penret/penreform/fas)

Financial assumptions Financial assumptions relate to future market conditions; they include assumptions for future inflation, salary increases and discount rates. Cf valuation assumptions.

Financial Conduct Authority (FCA), previously known as the Consumer Protection and Markets Authority (CPMA), is a future (2013) agency formed as one of the three successors to the unlamented Financial Services Authority. The agency will regulate financial firms providing services to consumers and maintain the integrity of the UK’s financial markets. It will focus on the regulation of conduct by both retail and wholesale financial services firms. The head of the FCA will be Martin Wheatley, formerly chairman of Hong Kong's Securities and Futures Commission. The original name of Consumer Protection and Markets Authority (CPMA) was changed after the Treasury Select Committee pointed out that the name could mislead consumers. See also Financial Policy Committee (FPC) and Prudential Regulation Authority (PRA).

Financial Ombudsman Service (FOS) An independent, levy funded body that considers complaints between consumers and financial firms.

Financial Policy Committee (FPC) is an official committee of the Bank of England, parallel to the existing Monetary Policy Committee, responsible for monitoring the economy of the United Kingdom. It focusses on the macro-economic and financial issues that may threaten long term growth prospects. It replaces (together with the Financial Conduct Authority and the Prudential Regulation Authority) the FSA in 2013. The committee, to be headed by the Governor of the Bank addresses any risks it identifies by passing on its concerns to the Prudential Regulation Authority.

Financial Reporting Exposure Draft No 20 (FRED 20) Issued in November 1999 this sets out proposals to change the way pension fund assets and liabilities are reflected in the company accounts of the sponsoring company. It led to FRS 17 which now replaces SSAP 24.

Financial Reporting Standard 17 (FRS 17) This sets out the way 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) on the balance sheet of the reporting company. The components in the change in the net asset or liability over time are disclosed in the 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 accounts. See company accounts; International Accounting Standard 19 (IAS 19).

Financial Services Authority (FSA) The body which regulates the financial industry in the UK and paid for by the industry; fortunately being abolished in 2013 and replaced by the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) which may or may not be better. The new bodies will probably preserve the mindset of the FSA which will be a shame.

Financial support direction The Pensions Regulator has the power to direct an employer or a person ‘connected’ or ‘associated’ with it (such as a holding company) to put financial support in place for a scheme providing defined benefits within a specified time (section 43 of the Pensions Act 2004).

Fiscal policy The management of the economy by use of government spending and taxation.

Five Year Review HMRC rules state the scheme administrator, your provider, must review the minimum and maximum amount you can take from your income withdrawal plan each year.

Fixed income Bonds and related investments. Fixed interest See fixed income.

Fixed interest/Fixed income securities An interest-paying security, where the interest is calculated as a constant specified percentage of the principal amount and paid at the end of specified interest periods, usually annually or semi-annually until maturity.

Flexible apportionment arrangements (FAA) Introduced in October 2011 amendments to the Employer Debt Regulations, attempted (again) to make the legislation more flexible for corporate groups engaged in restructuring exercises and corporate transactions. The amendments made only relatively minor improvements to the legislation. The Occupational Pension Scheme (Employer Debt) Regulations 2005 were designed (amongst other things) to ensure that members' benefits are properly funded when their employer ceases to participate in a defined benefit pension scheme. Since their introduction, various attempts have been made to make the legislation more flexible for corporate groups. In April 2010 'general' and 'de minimis' easements were introduced, which provided that no employer debt arises where two employers merge in a corporate restructuring, provided certain conditions are met. In practice, these easements are rarely used. The October 2011 changes introduced a new 'flexible apportionment arrangement' giving greater flexibility over the timescale within which employers can take advantage of a 'grace period' (in respect of which no employer debt is treated as having arisen). A flexible apportionment arrangement offers (in theory at least) corporate groups another mechanism for apportioning pension liabilities between group companies, where a company within the group is due to exit a defined benefit pension scheme. The system is similar to a scheme apportionment arrangement (SAA) (one of the existing options for apportioning liabilities between group companies). In particular, a FAA normally requires trustees to be satisfied when an exiting employer ceases to participate that the ‘funding test’ has been met (to ensure that the security of members' benefits is not reduced); the liabilities of the exiting employer can only be apportioned to another group employer that participates in the Scheme. The key additional flexibility under a FAA (when compared to a SAA) is that: (1) when the employer ceases to participate, there is no need to certify the amount of the debt which is being apportioned (because the 'receiving employer' assumes all the exiting employer's scheme liabilities); and (2) if two FAA's were entered into shortly after each other, the trustees have the flexibility to agree that the 'funding test' need not be carried out again (on the basis that they understand the financial strength of the 'receiving employer' from the first FAA). The changes are relatively trivial, but highlight the damage to corporate restructuring that the complex and inflexible s75 structure involves. Employers now have up to 2 months (as opposed to 1 month) to notify their scheme's trustees that they wish to benefit from a 'grace period' where they cease to employ any active members in the scheme, but plan to do so again within the next 12 months; and trustees have the discretion to extend an employer's 'grace period' from 12 months to 36 months.

Flexible lifetime annuities Flexible annuities were not uncommon before A-Day, but their continuance was in doubt after pensions tax simplification. Later legislation later permitted them (SI 2006 No 568).

Flexible retirement This is the ability to continue working for an employer but simultaneously draw some or all of the pension benefits from that employer’s scheme. From A-day, previous HMRC restrictions were removed so enabling this facility to be offered. To take advantage of flexible retirement, scheme rules must allow it. see also Age discrimination. A DWP consultation paper was published in October 2007.

Flexible withdrawal There is no cap on the amount of money that can be taken out of a pension scheme where the individual has a minimum annual pension income of £20,000 (including state pension) (HMRC) see also Capped withdrawal). The flexible withdrawal facility does not apply to schemes with fewer than 20 members, much to the fury of those members.

Flexicurity EU jargon for the aim of balancing employment security with the need to be able to sack people to allow employment competitiveness

Floating rate note [FRN] A bond whose coupon varies with [short-term] interest rates. Floating rate bonds are generally issued by banks or companies whose earnings are closely tied to interest rate fluctuations as a way of more closely matching interest payments to earnings.

Flotation The first issue of shares to the public in a company new to the stock market. Also known as an Initial Public Offering [IPO].

Forestalling see anti-forestalling

Forfeiture Term describing termination or suspension of all or part of the benefits payable under a scheme. Forfeiture can take place in limited circumstances set out in sections 91 to 94 of the Pensions Act 1995. Most occupational pension schemes, and an increasing number of personal pension plans, include forfeiture clauses, also known as spendthrift clauses or protective trusts. If a member becomes bankrupt, his rights are forfeited and the money goes to the trustees who look after it until he is discharged from bankruptcy – when the trustees can give it back. Forfeiture clauses should be distinguished from set-off or lien clauses (which are sometimes called forfeiture clauses) where a member loses pension rights if he does something against the interests of the employer.

Former approved superannuation fund Any fund which immediately before 6 April 1980 was an approved superannuation fund for the purposes of section 208 Income and Corporation Taxes Act 1970, that (1) has not been approved for the purposes of Chapter 1 Part 14 Income and Corporation Taxes Act 1988 since 5 April 1980, and (2) has not received any contributions since 5 April 1980. (HMRC)

Former civil partner An individual to whom pension credit rights have been or are to be allocated following a pension sharing order, agreement or equivalent provision. (HMRC)

Forward [agreement] An agreement to buy or sell an asset at a future date at a price agreed today. Forwards are similar to futures. However, forwards are not exchange-traded.

Franking Practice of using occupational pension scheme rights (which were not indexed) to pay for the index linking of GMPs. This meant that any inflation linked improvement to the GMP led to the corresponding reduction of any non GMP benefits. The legislation to prevent this is known as anti-franking legislation. New rules applied from 2000 to members leaving a scheme after 1 July 2000 so that they receive at least the greater of the pre-6 April 1997 accrual or GMP plus post-5 April 1997 benefits.

Fraud compensation fund (FCF) A fund designed to compensate members of pension schemes where loss arises as a result of an offence (such as theft or fraud) committed after 6 April 1997. It is managed by the board of the PPF and financed by a fraud compensation levy payable by all schemes eligible for this compensation (not just PPF eligible schemes). There are therefore three pensions compensation funds: the FAS, the PPF and the FCF.

FRED 20 See Financial Reporting Exposure Draft No 20.

Free standing additional voluntary contribution (FSAVC) These are AVCs made to arrangements sitting alongside an approved scheme or, since A-day, to registered pension schemes. Historically, FSAVC schemes were used by trustees to meet the pre A-day obligation to give members access to an AVC facility where the approved scheme does not offer an AVC facility.

Freezing order The Pensions Regulator can issue a freezing order when it is considering winding-up a defined benefit scheme. It must be satisfied that it is necessary for member protection and that there is an immediate risk to the interests of the members or the assets of the scheme. The effect of a freezing order is that benefits cease to accrue and the scheme cannot be wound-up (except by order of the Pensions Regulator). However, other conditions may be included eg no new members may be admitted, or no transfers may be made. It will normally last for three months but it can be extended by the Pensions Regulator for up to six months.

Frozen scheme A closed scheme to which no further contributions will be paid, and no further benefits accrue. FRS 17 See Financial Reporting Standard 17.

FSAVC See free standing additional voluntary contribution.

FSAVCS A registered pension scheme that was originally approved by the Board before 6 April 2006 as a retirement benefits scheme by virtue of section 591(2)(h) Income and Corporation Taxes Act 1988, established by a pension provider or the trustees of an approved centralised scheme for non-associated employers to which the employer does not contribute and which provides benefits additional to those provided by a scheme to which the employer does contribute. (HMRC)

FTSE An index of stocks and shares (Financial Times Stock Exchange)

FTSE/NAPF Pensions Index An index of pension values which never grew beyong its embryonic stage.

Fully insured scheme Scheme in which trustees have taken out an insurance policy in respect of each member which guarantees that each member will receive benefits corresponding at all times to those promised under the rules. Not to be confused with an insured scheme.

Fund specific benchmark An investment benchmark set with reference to a fund's particular objectives.

Fundamental analysis An assessment of a company's share value and potential for future cashflows and profits based on accounting, economic, and business information [hence fundamental factors].

Funded unapproved retirement benefits scheme (FURBS) Prior to A-day, these were mainly top up pension schemes created to provide retirement benefits for executives in excess of those permitted from an approved scheme. They were granted limited tax relief by HMRC. Post A-day they were largely replaced by employer-financed retirement benefit schemes.

Funding level Comparison of a scheme’s assets and liabilities. Determined as part of an actuarial valuation and usually expressed as a percentage. The funding level will vary depending on the actuarial assumptions so that a scheme could be 100% funded on the statutory funding objective basis, but at a lower level on a discontinuance basis.

Funding target The funding target is the value that should cover future payments from a scheme. The figure ignores future contributions and benefits earned in the future and is often the same as the technical provisions.

Funding update A funding update reports the results of an interim valuation calculation. Most schemes are required to have annual funding updates. The Pensions Regulator also refers to funding updates as actuarial reports.

Funds A collection of assets managed in accordance with an objective for the mutual benefit of all the investors. The investors' share in a unit-linked life or pensions fund is represented by the number of units within the fund that they have been allocated by the life company.

FURBS See funded unapproved retirement benefits scheme. (now obs)

Futures An arrangement to buy or sell a commodity or financial instrument at an agreed price at a future date on pre-agreed terms.

Futures contract An agreement, traded on a financial exchange, to sell or buy a specific amount of a commodity or security at a specific price and time. Unless the contract is sold to another party before settlement date, participants in the contract are obliged to buy or sell the underlying asset. Distinguished from options, in which the options buyer chooses whether or not to exercise the option at the exercise date.

Futures margin When a future is purchased, a deposit ['the initial margin'] is paid to the future exchange. This normally represents a few percent of the value of the contract and helps in protecting the exchange against defaults. As the value of the contract changes additional payments may be requested ['the variation margin'].

GAAP Generally Accepted Accounting Principles.

GAD tables The Government Actuary's Department Tables on a single life basis. (HMRC) GAD The Government Actuary’s Department. (HMRC)

GARP Growth at a reasonable price: a description of the approach some fund managers use to identify potential share purchases. A mixture of 'growth' and 'value' style.

Gearing From an accounting point of view, the amount of a company's total borrowings divided by its share capital. High gearing means a proportionately large amount of debt, which may be considered more risky for equity holders. However, gearing also entails tax advantages. In investment analysis, a highly geared company is one where small changes in sales produce big swings in profits. Gearing consists of financial and operational gearing. Leverage is the corresponding US term.

Gender discrimination

Generic advice

Genetic testing As part of the process of underwriting, life companies have agreed to abide by a moratorium drawn up by the ABI which specifically precludes them from asking for any genetic testing to be performed. If however the applicant has previously undergone a genetic test and the results are known by the applicant, then the life company is within its rights to ask to be made aware of those test results and take them into consideration when assessing the risk.

Genuine Diverse Commercial Vehicle (GDCV) Indirect investments held through a GDCV will not be subject to tax charges when held as a scheme investment by an investment regulated pension scheme.

Gilt [-edged] Name sometimes given to government bonds issued by the Irish, South-African and UK governments.

Gilt repos The practise of selling gilts and simultaneously entering into an agreement to repurchase them at a fixed time and price. A technique used to fund temporary cash shortfalls, to fund long gilt positions, or to gear portfolios by borrowing against gilts. Buying gilts with a resale agreement is called a reverse and is a means of lending cash on a collateralised basis.

Gilt strips Investors can buy separately either individual coupons or the ultimate principal repayment due on a specific gilt. These separate elements are referred to as principal or coupon strips and are identified by the payment date. The separation process is achieved by 'stripping' the gilt. A key benefit is that the duration of a strip is equal to its term, thus making it easier for pension funds to find securities to match fixed liabilities. See also strips.

Gilts A UK Government issued and guaranteed bond. They are marketable sterling government bonds issued by the DMO on behalf of the UK Government as part of its debt management responsibilities. They are issued to finance the borrowing requirement and to refinance maturing debt,and incidentally to help pension funds manage their liabilities. (www.dmo.gov.uk)

Global depository receipt (GDR) Securities relating to ownership of a foreign company's shares. The securities are issued in markets [other than the company's home market] by a bank that holds shares in the company, and traded as though they were securities local to those markets.

Global Investment Performance Standards (GIPS) This is an American system of measuring investment performance that is gaining credence in the UK, especially as multinationals seek to compare the performance of their pension funds. GIPS were introduced by a US organisation, the Association for Investment Management and Research, and modified versions are now being adopted by the UK and other countries (especially Germany, Australia and Switzerland). GIPS allow measurement in one country to be recognised for accounting purposes in another country. See United Kingdom investment performance standards (UKIPS).

Global tactical asset allocation (GTAA) A multi-asset class strategy that makes high-frequency allocation shifts between asset classes and regions using only a fraction of the total portfolio.

GMP See guaranteed minimum pension.

GMPs Stands for guaranteed minimum pensions and has the same meaning as in the Pension Schemes Act 1993. (HMRC)

GN11 certificate obs Certificate issued by the scheme actuary to the trustees confirming that the cash equivalent has been calculated in accordance with legislative requirements and guidance notes (in particular GN11).

GN11 obs This is a guidance note for actuaries on the calculation of cash equivalents. It is published by the Board for Actuarial Standards.

GN16 obs This is a guidance note for actuaries on transfers without consent. It is published by the Board for Actuarial Standards and sets out considerations to be taken into account, and information to be given to trustees, when providing a certificate for a transfer without consent.

Goode Report The report of the Pensions Law Review Committee chaired by Professor Sir Roy Goode and published in September 1993; the implementation of its recommendations led almost directly to the destruction of DB pension schemes in a prime example of the law of unintended consequences.

Goodwill The value attributed to the fact that the company is continuing to write profitable new business. It is often calculated as a multiple of the value of new business written in the most recent financial year.

Governance The organisational structure and approach to exercising control over an occupational pensions scheme by its trustee board. See also corporate governance.

Government Actuaries Department (GAD) A government department that provides actuarial advice and guidance to the government and public sector schemes.

Government bond A bond issued by a government.

Graduated pension scheme A state earnings-related scheme that started on 3 April 1961 and terminated on 5 April 1975. It was possible for members to be contracted-out in respect of this. Contracted-out benefits by reference to it are known as equivalent pension benefits (EPBs). It was replaced by the State earnings related pension scheme (SERPS). See state second pension.

Graduated Retirement Benefit An increase in state pension based on graduated National Insurance contributions paid between 1961 and 1975.

Grandfathered Corresponding Acceptance (GCA) Ability to claim tax relief after 5 April 2006 on terms similar to MMR where the individual and company claim relief in the 2005/06 tax year.

Gross Before deductions of, e.g. tax or investment fees. Gross redemption yield See yield.

Group personal pension scheme (GPP/GPPS) Collection of personal pension plans with the same provider in which employees of an employer participate. Each member has a separate policy with the provider but contributions from employer and/or employees are collected together by the employer and paid directly to the provider. Often GPPs will be branded and packaged to resemble an occupational pension scheme provided by an employer. However, unlike trust based occupational pension schemes, GPPs are contract-based schemes like any personal pension plan, set up between the provider and the individual. GPPs are commonly regarded as vehicles that avoid much of the regulatory burden of trust based schemes. Arrangements administered on a group basis under a personal pension scheme which are available to some or all of the employees of the same employer or some or all of the employees of employers which are in the same group of companies. For this purpose a ‘group’ is formed by a company and all of it’s ‘75% subsidiaries’. If any of those ‘75% subsidiaries’ have ‘75% subsidiaries’ the group includes them and their ‘75% subsidiaries’ and so on. ‘75% subsidiary’ is defined in section 838 of the Income and Corporation Taxes Act 1988.This is intended to be an objective test according to the facts. The key to the test is simply as to whether in operating the arrangements the personal pension provider has decided that administration on a group basis is appropriate.If there is in any doubt, the individual should be able to obtain confirmation from the personal pension provider that the arrangements involved are "arrangements administered on a group basis”. (HMRC)

Growth stock A stock that is expected to achieve above average earnings growth. Growth stocks normally have a high P/E ratio relative to the market as a whole, as investors are willing to pay a premium for future higher earnings.

Growth style/investment A portfolio focusing on growth stocks.

Guarantee Credit An element of Pension Credit available to men and women who have reached the qualifying age (which is linked to women’s State Pension age). It tops up income to a ‘standard minimum guarantee’. This level may be increased for people with caring responsibilities, severe disabilities or certain housing costs, such as mortgage interest.

Guaranteed annuity Annuity payable for life but guaranteed for a given period of years, typically 5. The annuity is paid until the person receiving it dies. If the annuitant dies before the expiry of the guarantee period, the annuity is then paid to his dependants for the remainder of the guarantee period or in certain circumstances the balance may be paid as a lump sum.

Guaranteed annuity rates These are minimum conversion factors to be used by a provider when an annuity falls to be secured. Many pension policies issued before 1988 offered guarantees on the terms at which the cash values of the policy could be converted into pension at retirement. Subsequent falls in annuity rates made these guarantees valuable for policy holders and onerous for issuers (such as Equitable Life).

Guaranteed Insurability Options Guaranteed Insurability Options are options built into a protection contract allowing the policyholder to increase the level of cover subject to a certain limit without evidence of health when a particular event has happened. Examples might be marriage, birth, retirement, increase in IHT liability.

Guaranteed minimum pension (GMP) GMP is the benefit provided to an employee who was contracted out of the state earnings related scheme between 1978 and 1997. It is a defined benefit payable from state pension age; the aim was for the GMP to be at least the amount that the member would have received from SERPS, although they are not equal. It is the pension that an occupational pension scheme must provide as one of the conditions of contracting-out for pre 6 April 1997 service (unless it was contracted-out through the provision of protected rights). (see Pension Schemes Act 1993 and the Occupational Pension Schemes (Contracting-out) Regulations 1996). GMPs continue to remain a material element of many members’ benefits, and schemes which provide these benefits must continue to comply with the legislation. GMPs can be reduced by a pensions sharing on divorce order and must provide a one-half survivor’s benefit. GMPs in payment are increased at a different rate to that of the main scheme pension (3% or RPI if less) for GMPs accrued since 1988/89. GMPs accrued before this date are not subject to statutory increases. GMPs are unequal between men and women since they come into payment at different ages (60 for women, 65 for men). The Pension Act 2007 provision that allows GMP benefits to be converted into normal scheme benefits has not yet been brought into force. The minimum pension a contracted-out salary-related scheme must provide as one of the conditions of contracting out before 6 April 1997.

Guidance from Pensions Regulator The Pensions Regulator produces guidance to help improve understanding of work-based pension schemes and to promote good practice. This is aimed at helping trustees, employers and others understand what the law requires. The Pensions Regulator also produces guidance to describe his approach on particular matters or to explain changes in the law. The following guidance materials are available: • trustee role • employer role • codes-related guidance • trustee toolkit.

Hampton HMT sponsored independent review

Hedge fund A fund that seeks to generate investment return by using non-traditional investment strategies, utilising mechanisms such as short selling, gearing, programme trading, arbitrage, and tools such as options, futures, swaps, and forwards [derivatives in general].

Hedging An operation to secure an investor against a potential loss or to minimise a potential risk by offsetting the exposure to a specific risk by entering a position in an investment with the exact opposite pay-off pattern. The term is often applied to the currency markets (currency hedging). It involves reducing the risk of unfavourable movements in commodity or security prices, or exchange or interest rates, by engaging in offsetting transactions.

Her Majesty’s Revenue and Customs (HMRC) The merged departments of (1) Inland Revenue, (2) National Insurance and (3) Customs and Excise, struggling to overcome its opposing culture streams of Customs (which has historically been confrontational) and Revenue (which was supposed to treat taxpayers as customers). Its misery is accentuated because it is now responsible for tax credits and Personal Accounts which pay money to people, rather than take it off them, arrangements which need different systems and cultures.

High Income Excess Relief Charge (HIERC) a tax charge proposed in 2010 and abandoned (alnong with anti-forestalling rules) by the incoming Conservative administration on pensions in relation to incomes over £130,000 pa.

High yield bond/junk bondf A bond whose issuer has a credit rating of BB+ or lower (ie below BBB-) with S&P, or Ba1 or lower with Moody's. They are also known as junk bonds or sub-investment grade bonds.

HM Revenue and Customs (HMRC) A government department, successor to the Inland Revenue and Customs & Excise, that handles the tax approval of pension schemes and taxation of contributions and benefits.

HMRC Her Majesty’s Revenue and Customs. Home reversion See equity release

Housing Benefit Income-related benefit to assist with the costs of rent (to a private landlord or in respect of a council dwelling).

Hurdle rate The minimum rate of return required before a prerequisite profit is made or a performance fee is paid.

Hybrid arrangement An arrangement where only one type of benefit will ultimately be provided, but the type of benefit that will be provided is not known in advance because it will depend on certain given circumstances at the point benefits are drawn. For example, a hybrid arrangement may provide the member with other money purchase benefits based on a pot derived from the contributions that have accrued over time, but subject to a defined benefit minimum or underpin. If the benefits provided by the money purchase pot at the point benefits are drawn fall below a certain defined level, for example 1/60ths of final remuneration for every year worked, that higher defined benefit will be provided. So the benefits will be either other money purchase benefits, or defined benefits. When benefits are drawn, if the benefits actually provided are other money purchase or cash balance benefits then the arrangement will become a money purchase arrangement. And if the benefits provided are defined benefits then the arrangement will become a defined benefits arrangement. (HMRC)

Hybrid Products An alternative to lifetime annuity, without the investment risks of income withdrawals, and with a regular income and some guarantees.

Hybrid scheme Occupational pension scheme offering both defined benefit and money purchase benefits. IAS 19 See International Accounting Standard 19.

IDR See internal dispute resolution.

IFA The Independent Financial Adviser channel represents the largest distribution channel available to a life company. To meet the need of clients, an independent financial adviser is able to select products from the whole of the market. This choice might be influenced by many factors including price, flexibility, service, brand, financial strength, range of funds etc. IFAs are remunerated either by charging their clients fees or, more normally, by being paid initial and renewal commission by the life company.

IFRIC 14 A former international accounting standard, IAS19, set a limit on the amount of pensions surplus that could be included on a company’s balance sheet to that amount that could be reasonably returned (eg by way of actual return, or future contribution holidays). This was usually less than the full value (unlike any deficit, which always kept its full value). In practice accountants found it hard to value the amount. From January 2008, the IFRC 14 standard applied (covering quoted companies) which allows a higher amount to be shown where there is an unconditional right to return of surplus. Lawyers now need to be involved to work out what the rules are on return of surplus (www.iasb.org).

IFRS accounts International Financial Reporting Standards accounts represent a standard way in which pensions and life company accounts have to be presented. In life funds, some amount of value is ascribed to future margins deemed to arise within the in-force book of business and a certain amount of expenses is deferred each year. Ordinarily, the results are more positive than the statutory results used in the FSA returns but not as positive as the embedded value results favoured by the actuarial community. In pension funds, the rules are more complicated.

Ill-health early retirement Ill-health early retirement takes place where a member retires on medical grounds before his normal pension date. The benefit payable to the member in such circumstances may or may not exceed that payable on early retirement in other circumstances.

Illiquid/ Non liquid asset An asset which cannot be readily converted to cash e.g. property. Impaired annuity see impaired life annuity

Impaired Life Annuity An annuity on enhanced terms if an individual is suffering from poor health, such as as high blood pressure, diabetes, heart condition, kidney failure, certain types of cancer, multiple sclerosis and chronic asthma.

Implementation shortfall See T-Standard.

Implemented consulting A service offered by pensions consultants under which they take the investment management decisions on behalf of the trustees. Cf ‘fiduciary management’.

Improvement notice The Pensions Regulator may issue an improvement notice to a person they believe has breached legislative requirements. This is a notice issued by the Pensions Regulator directing certain actions, or to refrain from certain actions. The improvement notice must contain information relating to the breach in question and, in terms of the steps which the person must take to remedy the breach, specify the timescale for compliance. Civil penalties may apply if the improvement notice is not complied with. See anti-avoidance, contribution notice, freezing order.

In specie transfer The transfer of an asset other than cash from another pension scheme.

Incapacity A physical or mental condition that prevents a member from continuing to work owing to his ill-health or disability. It is usually defined in the scheme rules and can vary greatly from scheme to scheme. Where a member retires under normal minimum pension age, his pention can only be paid if he meets the statutory definition of ill-health.

Income constrained A charity's asset allocation is income-constrained if the need to generate a particular level of income from its investments influences its asset allocation.

Income drawdown See income withdrawal. Also known as an unsecured pension. Allows a pension scheme member to continue to invest a fund whilst drawing a limited income. Available to under 75s only.

Income stock Shares which have a higher than average dividend yield or those where a relatively high proportion of the total return is derived from dividend income. Typical examples of income stocks are utilities.

Income withdrawal This is a facility introduced by the Finance Act 2004 that enables a member of a defined contribution scheme to draw an annual income from their pension monies not yet used to secure a pension ie an unsecured pension, while leaving the rest invested. For members aged 75 and over this arrangement may continue as an alternatively secured pension. It is also known as income drawdown. Fewer than 10% of the population currently opt to take income withdrawal, generally the more affluent members of pension schemes, and paradoxically since they are likely to live on average around 11 years longer than poorer people, the people who should really opt for an annuity. The former unsecured pension (USP) and alternatively secured pension (ASP) are now replaced by the income withdrawal rules which provide (1) no minimum amount of income must be withdrawn; individuals can leave their pension fund untouched for as long as they like (2) the maximum is 100% of the single life annuity that someone of the same age and sex could buy (based on GAD rates); the maximum must be reviewed every three years until age 75 and annually thereafter (3) tax free cash lump sums can be paid after age 75, even if they take no income (4) the individual must show a secured pension income of £20,000 pa (from a state pension, a company pension or a personal pension). Most people probably get around £7,000 from their state pension, so they need to show around £13,000 elsewhere (ie around £250,000 in capital terms).

Income-related benefits Benefits calculated by reference to a person’s income that provide a minimum weekly amount, and allow targeted support for savers, carers and disabled people and to help with housing costs and Council Tax. Also referred to as ‘means-tested benefits’.

Indemnity clause An indemnity clause provides that any liability a trustee may incur is reimbursed by the pension scheme or the employer. They are only effective if the scheme or the employer is able to pay. They provide less protection for trustees than an exclusion clause which prevents any trustee liability arising. See exoneration clause.

Indemnity initial commission The initial commission on a regular premium contract is earned and paid evenly over the earnings period. Alternatively a discounted value of the initial commission can be paid up front when the policy issues. In the event that the premiums are not maintained throughout the earnings period, the amount of the unearned initial commission will be clawed back.

Indemnity insurance This is insurance specifically to cover liabilities trustees may incur for breach of trust, legal expenses, and other exposures. It is usually effected with a provider with the premium paid either by the employer, or from the scheme assets (the latter would require a specific provision in the rules to allow this).

Indenture A written agreement between the issuer of a bond and bondholders that specifies maturity date, interest rate, convertibility, and any other options.

Independent trustees Individual trustee or corporate trustee independent of the employer and members. They are trustees who are not connected with the employer or the fund’s advisers. They are increasingly common these days to help other trustees avoid any pressures arising from conflicts of interest.

Index A market containing all the stocks of a particular asset. For example, the FTSE All Share Index contains all the public limited companies listed on the UK equity market issuing shares.

Index fund A passively managed fund. Index linking See indexation.

Indexation (see Limited Price Indexation)

Indexation (passive management) (1) A passive management approach designed to mimic the investment performance of a specific market index. A portfolio may be indexed either by buying every security in the index in the same proportion as the index [known as replication], or by selecting a smaller number of securities that together reflect as accurately as possible the characteristics of the index [known as sampling]. (2) A mechanism to increase pensions in payment and/or preserved benefits by reference to increases in a specified index of prices or earnings.

Index-linked gilt (ILG) A bond issued by the UK Government [gilt] whose interest [coupon] and capital [principal] payments are linked to the UK retail prices index [RPI]. Note: Many pension fund liabilities are wage inflation linked, and/or consumer prices index-linked. Earnings have historically grown faster than prices, and the CPI normally rises slower than RPI, so the asset is not a perfect match for such liabilities.

Individual pension account (IPA) This is a pooled investment vehicle designed as a tax wrapper for groups of smaller investment vehicles, such as unit trusts and OEICs. They are a means of investing pension assets in unit and investment trusts in accordance with the member’s choice and can be changed according to the individual’s preferences over a working lifetime. IPAs are not pension schemes but can be used by occupational pension schemes or personal pension plans for investment purposes.

Individual retirement account (IRA) American personal savings plan which provides tax advantages for saving money for retirement. IRAs come in several forms such as traditional IRAs and Roth IRAs. In general, contributions by the employee may be fully or partially deductible, and earnings and gains are not taxed until paid out, if at all. The exact benefits depend on the type of IRA, and the employee’s circumstances.

Individual’s lifetime allowance From A-day tax relief on pension savings is subject to a lifetime allowance and an annual allowance. An individual’s lifetime allowance is usually the standard lifetime allowance, however subject to certain conditions, an individual may apply for this to be enhanced. See enhanced lifetime allowance.

Inducement offers see enhanced transfer values

Industry average benchmark See peer group benchmark.

Industry-wide scheme Centralised pension scheme for non-associated employers in the same industry.

Inflation A measure of the rate of increase in general prices, e.g. the movement over time in the consumer Prices Index [CPI].

Inflation-linked government bonds Government bonds whose payments are linked to inflation.

Information ratio A measure of investment manager skill. The ratio of an investment manager's average active return to active risk. [Variations on this definition also occur.]

Information requirement From A-day, this refers to information that must be provided to HMRC automatically, either by prescribed persons, and scheme administrators to members and others, or, by members and others to scheme administrators.

Inheritance tax A tax on property arising on death. Most pension benefits are immune.

Initial commission The financial reward to a financial adviser for a customer taking out a new policy. It is payable at the start of the contract for a single premium policy and throughout the earnings period for a regular premium policy. It is ordinarily expressed as a percentage of the premium.

Initial margin The returnable collateral deposited by a futures market participant when opening a position. It is also required of the writers of options.

Initial or Capital Units Features of an older style of unit-linked product design. Premiums paid in the first one or two years bought initial or capital units which bore a higher level of annual management charge than the accumulation units. These are a cunning actuarial device for extracting charges in an opaque way early on to recover the initial expenses of setting up the contract.

Initial public offering [IPO] The first public sale of a company's equity (shares) resulting in a quoted stock price on a securities exchange.

Inland Revenue Limits This refers to HMRC’s restrictions on the accrual and payment of benefits prior to A-day. The initial granting and maintenance of tax exempt status for a scheme was conditional on complying with (among other things) these limits. From A-day, Inland Revenue Limits may continue to apply through the operation of transitional regulations, or if they have been specifically written into the scheme rules.

Insider trading Trading in shares when in possession of price sensitive information that is not known to the market. This is illegal in most countries.

Insolvency event Where a defined benefit scheme is in deficit, subject to certain conditions, that deficit becomes a debt payable by the employer to the trustees under section 75 of the Pensions Act 1995 where an insolvency event occurs. Examples of insolvency events for these purposes (as defined in section 121 of the Pensions Act 2004) include: • the company going into administration, • a voluntary arrangement being entered into with creditors, or • a resolution is passed for the voluntary winding up of the company.

Insolvency This can be defined by two alternative tests (section 123 of the Insolvency Act 1986): • cash flow test: a company is solvent if it can pay its debts as they fall due, no matter what the state of its balance sheet (Re Patrick & Lyon Ltd [1933] Ch 786) • balance sheet test: a company which can pay its debts as they fall due may be insolvent if, according to its balance sheet, liabilities (including contingent liabilities) exceed assets.

In-specie transfer A direct transfer of a basket of stocks from one manager's portfolio to another without disinvesting and reinvesting.

Institutional investor An investor such as a pension fund, insurance company or charity. Institutions for Occupational Retirement Provision see European Pensions Directive

Insurable interest Insurable interest exists when one party has a close and/or dependent financial relationship to the other. Common examples of insurable interest are spouses' interests in each other's life, a company's interest in its key persons, director shareholders' interest in the lives of the other director shareholders in a close company and the interest of anyone who is financially dependent on a particular person in the life of that person.

Insurance company Either (1) a person who has permission under Part 4 of the Financial Services and Markets Act 2000 to effect or carry out contracts of long-term insurance, or (2) a European Economic Area (EEA) firm of the kind mentioned in paragraph 5(d) of Schedule 3 to the Financial Services and Markets Act 2000 (certain direct insurance undertakings) which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule) to effect or carry out contracts of long-term insurance. (HMRC)

Insured scheme A scheme in which the trustees take out an insurance policy for each member that guarantees that each member will receive all the benefits that the scheme rules provide.

Inter-bank rates The rates at which banks bid for or offer funds to each other in a particular market.

Interest rate swap A swap in which typically a fixed set of cash flows are exchanged for a set of cash flows linked to short-term interest rates.

Interest The return earned on funds which have been loaned or invested [i.e. the amount a borrower pays to a lender for the use of his/her money].

Internal dispute resolution (IDR) IDR is a means of dealing with member grievances in connection with their pension scheme with the objective of avoiding external interference. It was introduced as a legal requirement for occupational pension schemes by the Pensions Act 1995 in April 1997. Scheme trustees are required to operate a (at one time two-stage) system to allow members and others to complain: first (usually) to the scheme manager or administrator; and secondly, if dissatisfied, to the trustees (or perhaps the chairman). Following IDR, a member may submit his claim to TPAS or the Pensions Ombudsman. The 2007 Pensions Act amended the provisions of the Pensions Act 1995 to allow schemes to adopt a single-stage dispute arrangement. It is up to trustees to determine whether they wish to opt for this type of arrangement. See also Dispute resolution.

Internal rate of return [IRR] The average return on an investment over its life based on its current price and its future cash flows.

International Accounting Standard 19 (IAS 19) This specifies the calculation basis of pension cost that should be recorded in the company profit and loss account, and what pension liabilities should be shown in the company balance sheet. Generally, it requires assets and liabilities to be valued regularly so that values in the accounts are not materially different from an up-to-date scheme valuation. Like FRS 17, assets must be measured at fair value and liabilities are measured using the projected unit method.

International benefits Benefits which usually are awarded to individuals who come from one country, for a company based in a second country, for work done in a third country. These individuals are known as TCNs – third country nationals.

In-the-money A term usually used when referring to traded options. If current market prices make it beneficial to exercise an option, the option has value and is therefore 'in the money'. With call options it is where the exercise price is below the current price of the underlying security. With put options it is the reverse.

Investment bonds Single premium investment products provided by a life company. These can be for a fixed term or for whole of life. Normally they carry a nominal amount of life cover, typically 101 % of the value of units. Income can be taken on a regular basis if required. They are often written in trust for IHT purposes. Onshore bonds bear life company taxation on both income and gains and therefore their benefits are free of tax for a basic rate tax payer. Higher rate tax payers suffer marginal rate tax on the proceeds. Broker bonds are a variant of a bond designed to increase the remuneration of the broker. Ordinarily the assets of the bond would be invested in a fund (broker fund) managed by the broker on which were charged management fees for the benefit of the broker. The performance of these funds was in general poor and broker bonds were perceived as very poor value products for the investor. These would fail the Treating Customers Fairly test in today's marketplace. Off-shore bonds are written by off-shore companies (typically based in the Isle of Man or Dublin). No tax is borne by the life company and hence the investor benefits from deferring their tax liability on their investment. These bonds typically invest in funds that are therefore described as "gross roll-up funds". Personal Portfolio Bonds are a special type of off¬shore bond attractive to expatriate investors. The off-shore life company provides a life policy which acts as a "wrapper" into which all sorts of assets may be placed. Typically these will include equities, fixed interest investments, property and collective investment schemes, but may also extend to unquoted shares and even commodities.

Investment consultant An adviser on investment strategy and/or the selection of investment managers.

Investment Governance Group (IGG) A group established by HM Treasury and chaired by the Pensions Regulator to oversee the development of best practice and guidance in investment governance and the application of the Myners principles.

Investment grade Bonds rated AAA to BBB

Investment management agreement Agreement between an investment manager and the trustees of a scheme that sets out the basis on which the manager will manage a portfolio of investments for the trustees. A standard agreement is published by the Investment Management Association which has been agreed with the NAPF, which should save pension funds from having to pay substantial legal costs to check every agreement, but it is not yet in general use, partly because the IMA for unfathomable reasons of their own make it difficult to get copies.

Investment only Refers to the provision of DC pension services where the investment manager only offers investment management services as opposed to bundled, where the investment manager also manages the administration and member communication aspects.

Investment style A portfolio's exposure to [or an investment manager's preference for] large or small cap stocks, and to value or growth stocks.

Investment trust A closed-end, incorporated fund established to produce income through investing in other companies. They have a fixed number of shares, trade like stocks or exchanges and are regulated by the UK Investment Company Act of 1940.

Investments Assets of a pension fund; cash is not (in law) normally regarded as an investments.

IORP Institutions for Occupational Retirement Provision see European Pensions Directive

IPAs See individual pension accounts.

IPO see Initial public offering.

IRA See individual retirement account.

ISA/PEP A tax-favoured savings account introduced on 6 April 1999 which replaced PEPs and TESSAs. ISAs are not an investment in their own right; they are a tax-free ‘wrapper’ in which an individual can shelter investments. People aged 16 or over, living in the UK, can open a cash ISA. People aged 18 or over, livning in the UK, can invest a maximum of £11, 800, up to half (£5, 940) of which can be in cash in tax year 14/15 per year in each tax year. Until 5 April 2004 ISAs benefited from a 10% tax credit on UK equities. Stock and share investments which can be held in an ISA include unit trusts, open ended investment companies (OEICs), investment trusts, ordinary shares, preference shares and fixed interest corporate bonds. PEPs in existence at 6 April 1999 may continue to be held outside an ISA with the same tax advantages. Income from ISA investments is tax free and do not need to be reported on tax returns. ISAs are also exempt from CGT. ISAs are a sensible alternative to pension provision for the lower-paid, because they offer the same tax-neutrality as pensions – but with the advantage they can be spent at any time.

ISIN International Securities Identification Numbering system advocated by the G30. The ISIN code is a unique 12 digit code given to a security and is used worldwide.

ISMA International Securities Markets Association.

Issued share capital The portion of a company's authorised capital that has been issued by the company.

Issuing house This is the name given to financial institutions, often merchant banks, that act as intermediaries between companies seeking capital and the investors prepared to supply it.

J-curve effect The return pattern from a successful private equity fund as it matures. This return pattern occurs because there is no market in which to benchmark the value of private equity investments and they are often held at cost until it is possible to provide an objective valuation.

Joint life Protection contracts can be established on the basis of more than a single life. Joint life policies can be written on the basis of either the first of the two to die (often linked to covering a mortgage) or the last of the two to die (often used for IHT planning purposes).

Junk bond See high yield bond.

Keyperson A keyperson is someone in a company who makes a considerable contribution to the company’s market position. This might be a sales director for example who makes a significant personal contribution to the company's turnover through his own business contacts. If he were to die prematurely or be forced to stop working due to illness the company would find it difficult to replace him quickly and suffer financial loss as a result. A company is able to take out a life policy on the life of a keyperson for a sum assured to be payable on the death or critical illness of the keyperson.

Lapse A policy lapses or comes to an end as a result of non-payment of the premiums at the end of any grace period.

Large cap stock A stock with a market capitalisation that is among the largest within a market eg the capitalisation of one of the top 100 companies in the UK as represented by the FTSE 100 index.

LDI see Liability driven investment.

LEL see Lower Earnings Limit.

Letter of credit Bank guarantee that will make a payment under certain circumstances such as company insolvency or credit downgrade. Used as part of a contingent asset strategy.

Level Term Assurance Life assurance for a fixed period of time or until a specified date. This is usually expressed in years or to a certain age. At the end of the term the policy will normally cease without value. Some companies provide the facility for the sum assured to keep pace with inflation (indexed) by an automatic increase each year without the need for further evidence of health. The premium will also increase.

Leverage (1) When an investor has more than a 100% exposure to a market, or part of a market, typically resulting from the use of debt or derivatives [futures and options (2) The US term for gearing.

Levy determination The bill delivered by the PPF for levy payable by a fund; it is in practice hard to challenge, and successful challenges are not unknown but are rare. The system seems to work according to some form of rough justice, and gaming of the system is essential for well-run funds.

Levy Various annual levies must be paid in respect of pension schemes. The main ones are the pension protection fund levy and the fraud compensation fund levy. Further details are set out at the front of this handbook.

LGPC The Local Government Pensions Committee, a committee of councillors constituted by the Local Government Association (LGA), the Welsh Local Government Association (WLGA) and the Convention of Scottish Local Authorities (COSLA).

Liabilities A scheme’s liabilities are it future benefit payments and expenses. The scheme is in deficit if the current value of its liabilities is more than the assets, or in surplus if the liabilities are less. See ‘trustee liability’ and ‘technical provisions’ .

Liability-driven investing (LDI) Liability-driven investing (LDI) is an investment philosophy which aims to help defined benefit pension schemes establish a risk framework from which they can measure investment risk and set investment strategy. Some consider that pension scheme trustees always tried to reflect the nature of their liabilities with the assets they bought, and that LDI is nothing new. There also some who believe that most LDI is flawed, since it attempts to perfectly match assets and liabilities, whereas such assets are not usually available, and in any event there is poor understanding of whether for example the practice of matching the liabilities of pensioners with bonds (rather than equities) is sensible when such payments may now have to be made for thirty years or more.

LIBID London Inter-Bank Bid Rate, the rate at which major London banks offer to take funds on deposit from other banks.

LIBOR London Inter-bank Offer Rate. The rate at which major London banks offer to lend funds to one another.

Lien clause Rule that allows an employer to recover from a scheme money due from an employee as a result of the employee’s criminal, fraudulent or negligent act or omission. These rules are restricted by sections 91 to 94 of the Pensions Act 1995.

Life Academy Formerly the Pre Retirement Association and now publisher of an annual lecture.

Life Assurance Premium Relief (LAPR) For a life policy effected after the 19th March 1968, but before 13th March 1984, provided the policy was a qualifying policy, its premiums were eligible for income tax relief (LAPR).

Life company fund A pooled fund that is operated by a life company. Such funds are similar to unit trusts except that investors own a life assurance policy rather than units.

Life expectancy Life expectancy is calculated by a number of bodies, including the ONS and IoA. There is a death clock at www.deathclock.com for personal use, and some insurers produce scary statistics showing we are all going to live longer than we think (see eg Paternoster Projects 50% of 30-year-olds may live to age 100, www.paternoster.uk.com, press release 24 October 2007). See also longevity, mortality. The GAD (2007) calculated in December 2007 that the average life expectancy of men reaching 65 in 2007 was 12 months greater (at 20.7 years) than had been calculated 2 years prior. A man born in 1942 who reaches the age of 65 could on average expect to live 30.6 of his adult life in receipt of the state pension – and for a man born in 1991 this rises to 31% even though he will not receive his pension until age 68. There are also local life expectancies published by ONS. Some suggest that some of us may live to 1000 years (www.mfoundation.org).

Life of Another An application for life assurance can be made by a person who is not to be the life assured. In this case the application is referred to as one of life of another. The insurance company will need evidence that the applicant has an insurable interest in the life assured before accepting the application. A common example of this would be a wife making an application to insure her husband. There is obviously an insurable interest and in the event of a claim the proceeds are paid outside the deceased's estate directly to the policyholder. In this case the deceased's wife. The wife is the policyholder and owns the policy.

LifeMetrics A proprietary toolkit for measuring and managing mortality and longevity risk, enabling the risks to be measured in a standardised way (www.jpmorgan.com/pages/jpmorgan/investbk/solutions/lifemetrics).

Lifestyling An investment strategy where a member's investments are switched automatically as they get older to more secure holdings, such as cash.

Lifetime allowance charge A charge to income tax that arises on any chargeable amount generated at a 'benefit crystallisation event'. The rate of charge is either 25% or 55%, depending on whether the 'event' giving rise to the charge was the payment of a lump sum or not. The scheme administrator and member are jointly liable to the charge, except where the chargeable amount arises following the death of the member. Here, the recipient of the payment giving rise to the charge is solely liable. (HMRC)

Lifetime allowance enhancement factor (LAEF) see Enhancement factor.

Lifetime allowance excess lump sum This is a lump sum payment. It is made in lieu of the amount of the member’s benefit that exceeds the lifetime allowance. It is subject to tax at 55%.

Lifetime allowance (LA) The maximum value of fund a pension scheme member can accumulate without incurring a tax charge. It is the overall maximum amount of pension savings that any one individual can accumulate in a Registered Pension Scheme without being subject to the Lifetime Allowance Charge. The exact figure will be whatever the 'Standard Lifetime Allowance' for the tax year concerned is or a multiple of this figure if protection has been granted. Post A-day there are no limits on the benefits payable from registered pension schemes. However if an individual’s total benefits from all the registered pension schemes in which they have accrued rights exceed a given amount, known as the lifetime allowance, then a tax charge will be levied on any payments in excess of the lifetime allowance. The 2014/15 lifetime allowance is £1.25m, reduced from £1.5m. It has been misbegottenly devised under a Treasury misapprehension that pension contributions are tax-privileged. The exact figure is whatever the 'standard lifetime allowance' for the tax year concerned is or a multiple of this figure where certain circumstances apply. (HMRC). See Enhanced lifetime allowance.

Lifetime allowance test see Lifetime allowance

Lifetime Annuity A policy issued by an insurance company that converts all or part of your pension fund, into pension income that is paid to you for life. The income is taxable. An annuity contract purchased under a money purchase arrangement from an insurance company of the member's choosing that provides the member with an income for life, and which meets the conditions imposed through paragraph 3, Schedule 28 to the Finance Act 2004. (HMRC). For the purposes of the Finance Act 2004 this is a level, increasing, or relevant linked annuity provided by an insurance provider. It must be payable until either the member’s death or, if later, the expiry of any guarantee period (up to 10 years), and the member must be given the opportunity to choose it.

LIFFE The London International Financial Futures and Options Exchange Market for trading in derivatives.

Limited price indexation (LPI) Requirement under the Pensions Act 1995 to grant annual increases to pensions in payment under an occupational pension scheme. Increases had to be at least in line with increases in the RPI, subject to a 5% limit ie limited price indexation (LPI). LPI did not affect AVCs and FSAVCs. LPI only applied to accrued benefits in respect of service (for defined benefit schemes) and contributions paid (for defined contribution) after 5 April 1997. The Pensions Act 2004 changed this. For benefits accruing after 6 April 2005, defined benefit schemes only need to provide increases to pensions in payment at the lower of the increase in the RPI and 2.5% per annum. There is no legal requirement for pensions from occupational defined contribution schemes and personal pension plans to increase in payment where contributions were paid on or after 6 April 2005. However, these provisions are not overriding, and scheme rules may require amending if they provide differently.

Liquidity risk premium [LRP] In order to overcome investors' desire for liquidity, less liquid assets must offer a higher return ['premium'] to compensate for reduced flexibility.

Liquidity The ease with which a particular bond can be traded, related to the size of market for that bond

Listing The FSA has taken responsibility for the listing of companies to the "official list". Inclusion in this list represents an endorsement from the FSA that the company has met minimum standards. It remains the responsibility of the London Stock Exchange [LSE] to admit a company's securities to trading on the exchange. Being "listed on the LSE" is therefore not the same as being "officially listed".

Loan stock Another name for a bond normally used in connection with those issued by non-government bodies such as companies.

Loans Occupational pension scheme resources may not at any time be invested in an employer-related loan. In accordance with section 40 of the Pensions Act 1995, employer-related loans are: • loans to the employer or any such person • shares or other securities issued by the employer or by any person who is connected with, or an associate of, the employer • employer-related investments eg a guarantee or security for obligations of the employer. This does not apply in respect of small self-administered schemes (SSASs) and self-invested pension plans (SIPPs). There are also separate restrictions on loans to employers, members and connected parties that apply to all registered pension schemes in accordance with sections 171 and 179 of the Finance Act 2004.

Local Government Pension Scheme (LGPS) One of the largest schemes in the UK, the LGPS is governed by the Local Government Pension Scheme Regulations 1997 and is exempt from many of the legal requirements applying to occupational pension schemes (including member-nominated trustees, the statutory funding objective, and the pension protection fund) but not the internal dispute resolution requirements. See admission agreement; public sector pension scheme; public sector transfer arrangements. Details are set out in a number of places, see eg GMB, Benefits in the New Local Government Pension Scheme, February 2008 (www.gmb.org.uk) and Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 SI 2007 No 1166 (amended by SI 2007 No 1488) as from 1 April 2008. For Scotland, see Scottish Public Pensions Agency (www.sppa.gov.uk) and http:/timeline/lge.gov.uk for a set of time-lined regulations.

Lognormal distribution A variable is lognormally distributed if the logarithm of the variable has a normal distribution.

Long An investor is ‘long’ when the exposure to a given asset is greater than the level considered neutral. This is usually with a view to selling it at a higher price at a later date.

Long/short fund A hedge fund comprising a mixture of long and short positions in the same asset class or market.

Longevity/longevity risk The fact that people increasingly live longer. While a good thing, it unfortunately also means increased pension liabilities. The potential for further increases in life expectancy present a non-quantifiable risk for pension schemes as the pension is paid until death.

Long-term (1) In the Eurobond market, refers to initial maturities longer than seven years. (2) Under standard accounting practice, refers to long-term debt with a remaining maturity greater than one year.

Low earnings threshold This is an annually revised amount used to determine if employees on low earnings should be deemed to be earning at least the low earnings threshold, and so earn state second pension credits. In the case of low earners, individuals earning less that the low earnings threshold, but more than the lower earnings limit will be treated for state pension purposes as if they had earnings equal to the low earnings threshold. Further details are set out at the front of this handbook.

Lower Earnings Limit (LEL) The limit where earnings start to count for benefit purposes. The limit is below that of the Primary Threshold, the start point for employees to pay NICs. It is the minimum level of weekly earnings on which a person is treated as paying National Insurance contributions for benefits purposes. A person receiving contribution credits or paying flat rate voluntary or self employed contributions is treated as having earnings at the LEL for each weekly credit or contribution. The LEL is linked to the standard rate of basic pension; once the Pensions Act 2007 reforms apply, the link is broken as the basic pension starts to be increased in line with average earnings.

Lower Earnings Threshold In relation only to the State Second Pension (qv) is (1) the level of earnings up to which state second pension accrues at a 40% rate and once simplification operates under the Pensions Act 2007 the S2P accrues at a flat rate and (2) the amount of earnings a person is deemed to have if they earn above the QEF (qv) but below the LET or they are accruing state second pension because they are a carer or are sick or disabled.

LTA see Level Term Assurance.

Lump sum death benefit This is a cash payment arising on the death of a member. Prior to A-day the maximum amount payable tax free (under discretionary trust) was four times a member’s salary. Since A-day there is no limit on this benefit, but a 55% tax charge will apply to payments in excess of the lifetime allowance. Since A-day it can only be paid if the member dies prior to age 75. See pension protection lump sum.

Lump sum The percentage of accumulated pension benefits a member can take as a tax-free lump sum upon retirement. The tax-free lump sum paid to a member of a pension scheme when their benefits come into payment.

Maintenance expenses Those expenses incurred by the life company in maintaining all of its in force policies. The total expenses of the life company are divided up in either acquisition or maintenance expenses.

Mandate The agreement between a client and investment manager laying down how the fund is to be managed. May include performance targets by reference to a benchmark.

Mandatory approval Relevant only prior to A-day, this was automatically granted by HMRC to schemes that satisfied the requirements of section 590 of ICTA 1988. These schemes could not provide a pension of more than 1/60th of final remuneration for each year of service which in turn could not be exchanged for cash of more than 3/80ths of final remuneration for each year of pensionable service. See registered pension scheme.

Marathon Club A group of pension funds and others interested in managing pension funds as if the long-term really did matter (www.marathonclub.co.uk)

Market capitalisation The total value of a company or market. For a company, the number of shares multiplied by their market price. For a market, the sum of the market capitalisations of the constituents of that market.

Market inefficiency A condition in which current security prices do not reflect all the publicly available information about a security, such as when some investors do not effectively analyse the available information.

Market maker A dealer or trader who is required to consistently quote both bid and offered prices or yields for an issue of securities and is obliged to trade on those prices.

Market neutral An investment strategy [particularly associated with some hedge funds] that aims to produce returns that are independent of fluctuations in market returns.

Market price The price at which an asset changes hands in an open market.

Market risk/Systematic risk The risk which is common to an entire class of assets or liabilities. It is the level of risk in the market that cannot be eliminated by diversification.

Market Value Adjustor/Reduction A device used by with-profits funds to reduce the surrender value of a policy before maturity to reflect the depressed level of the underlying assets of the fund.

Market Value Reduction (MVR) A reduction to a with profits policy that could apply if it is cashed it in before or after its maturity date or other date(s) as specified in the policy.

Market value The market value of an asset held for the purposes of a pension scheme is to be determined in accordance with section 272 of the Taxation of Chargeable Gains Act 1992 and section 278(2) to (4) Finance Act 2004 (where dealing with a right or interest in respect of money lent directly or indirectly to certain parties). (HMRC). It is the price at which an asset might reasonably be expected to be sold in an open market.

Markets in Financial Instruments Directive (EU) (see MIFID)

Mark-to-market The process by which a derivative is valued, based on the daily closing prices of underlying variables.

Maternity leave See Family leave.

Maturity (1) For a bond, the time at which the principal of the bond is repayable and it ceases to exist. (2) For a pension fund, broadly the average age of the membership and the time until benefits are payable. (3) The event of a life policy reaching the end of its term. For an investment policy this will result in the accrued value of the plan being payable, whereas for a protection policy such as a term policy it will result in the policy lapsing without value.

Maximum approvable benefit Maximum benefit allowed by HMRC under an approved scheme. This has been obsolete from A-day.

Maximum employer contributions There is no limit on the amount that employers can pay into occupational pension schemes, however restrictions on the spreading of tax relief over a given number of years depending on the value of the contribution may be imposed by HMRC.

Maximum member contributions Since A-day, there has been no limit on how much a member can pay into a pension (including AVCs). If these payments exceed the annual allowance, they will be taxed.

Maxwell A businessman and politician who died in 1991 after falling off his yacht. His death exposed large losses in the pension funds of his businesses and the government commissioned a report (the Goode Report, 1993) into a reform of pensions law. It is largely due to that episode that pensions law is now so grotesquely over-regulated.

Mean See arithmetic average.

Means-tested benefits See ‘Income-related benefits’.

Median The result found by arranging the values in order of size and picking the middle-ranking value. In a symmetric distraction, the mean and median are identical.

Mediation A form of dispute resolution which is private, and usually much quicker and cheaper than going to court or even using TPAS, which itself offers a form of mediation. Mediation involves the use of a trained mediator who attempts to explore with the parties whether there is a form of compromise which is possible. The NAPF and the APL both offer specialised pensions mediation services.

Medium bond or Medium dated bond A bond with a term to redemption of between 5 and 15 years.

Medium Term 1] In the Eurobond market, refers to maturities of two to seven years. 2] In the Euro-money markets, refers to maturities in excess of one year.

Megarry judgment The judgment of Sir Robert Megarry VC in Cowan v Scargill [1984] 2 All ER 750, (1985) Ch 270 the decision which underlies the law of investment decisions by pension trustees

Member An individual who is either an active member, a pensioner member, a deferred member or a pension credit member of a pension scheme. (HMRC)

Member Nominated Directors (MNDs) see Member Nominated Trustees

Member Nominated Trustees (MNTs) Most (but not all ) schemes must permit up to one third of the trustee board to be trustees. There are no rules as to how such trustees are appointed by there are regulations (Occupational Pensions Schemes (Member-nominated Trustees and Directors) Regulations 2006 SI 2006 No 714 and a Code of Practice issued by the Pensions Regulator. Such trustees are not expected to be experts, but should have some basic training. An MND is a director of a corporate trustee who is selected by the members of an occupational pension scheme under the member-nominated trustee legislation as set out in the Pensions Acts 1995 and 2004 and governed by a code of practice. An MNT is a trustee selected by members of an occupational pension scheme.

Member Person who has joined a pension scheme and is entitled to benefit under the scheme.

MFR (minimum funding requirement) Before it was repealed by the statutory funding objective, section 56 of the Pensions Act 1995 specified that the funding level of a defined benefit scheme should not be less than its actuarial liability. A prescribed set of actuarial assumptions were used to calculate the MFR. Schemes could be fully funded on the MFR basis but hugely in deficit on other bases eg buy-out. MFR was replaced with effect from 30 December 2005 by the statutory funding objective, however, transitional provisions apply until schemes have had their first actuarial valuation under the new regime.

Mid-cap Used to describe collectively those companies of medium-sized market capitalisation.

MIFID The Markets in Financial Instruments Directive is an EU directive that incorporates a revised set of investment regulations within the EU as from 1 November 2007. Occupational pension schemes, as ‘a client who possesses the experience, knowledge and expertise to make its own decisions and properly assess the risks it incurs’ are designated as professional clients of investment managers and enjoy a slightly lower standard of care than retail investors.[INSERT FROM PAAG Oct 31]

Migrant Member Relief (MMR) Ability to claim UK income tax and corporate tax relief for employee and employer contributions to Overseas Pension Schemes.

Migration risk The risk that a bond will be downgraded to a lower rating by one of the independent ratings agencies, reflecting its likelihood of default. As a bond migrates its price falls.

Minimum Funding Requirement [MFR] A requirement introduced in the Pensions Act 1995 in an attempt to ensure that pension schemes have sufficient assets to meet their liabilities. It is now being replaced with scheme-specific funding requirements as set out by the Pensions Regulator.

Minimum income guarantee (MIG) Minimum income that the state guarantees a pensioner will receive. See pension credit.

Minimum pension age From minimum pension age, members can enjoy their pension scheme benefits. They must take these benefits between the ages of 55 and 75. It is the earliest date at which a member can take retirement benefits, other than on grounds of ill health.

MNT See member-nominated trustee.

Modern portfolio theory The blanket name for the quantitative analysis of assets based upon their expected return, expected risk [standard deviation] and their correlations. According to MPT, investors should only invest in portfolios [constituting of the previously analysed assets] which generate the highest return at any given level of risk.

Modification of existing rights see s67

Modified duration A measure of bond price sensitivity to changes in yield.

Monetary policy The management of the economy by the use of interest rates and money supply.

Money laundering Anti-money laundering rules should have little place in pension funds; the opportunities for money laundering are much constrained and no self-respecting gangster would use a pension fund to carry it out (although the Teamsters’ Union pension fund in the US was in the 1960’s run by the Mafia, and performed very well, especially after it built most of Las Vegas). The pointlessness of it has not prevented the authorities from insisting that ‘professional’ trustees (ie either paid, or employed by the company and a trustee as part of their job) are registered and approved by HMRC (so that if you are going to money launder, be an unpaid trustee, who does not have to register). The incomprehensible and ambiguous details are on www.hmrc.gov.uk/mlr/index.htm

Money market The market for short-term fixed income instruments [typically with less than one year to maturity].

Money purchase arrangement An arrangement is a money purchase arrangement if, at that time, all the benefits that may be provided to or in respect of the member under the arrangement are cash balance or other money purchase benefits. (HMRC)

Money purchase benefits Benefits provided under a pension scheme, the rate or amount of which is calculated by reference to an amount available for the provision of benefits to or in respect of the member (whether the amount so available is calculated by reference to payments made under the scheme by the member or any other person or employer on behalf of the member, or any other factor). (HMRC)

Money Purchase Scheme A pension where your contributions are invested in, for example, the stock market. The size of your pension fund depends on how much is invested and how well those investments do. At retirement some, or all, of the fund may be used to buy an annuity or unsecured pension or alternatively secured pension.

Money purchase See defined contributions.

Money weighted rate of return The calculation of the actual return achieved over a period, based party upon cash in – and outflows of the fund. It is therefore not suitable for comparative analysis of investment managers' performance, since external cash flows are usually beyond the managers' control. See also internal rate of return.

Moral hazard See Anti-avoidance; contribution notice; financial support direction, restoration order.

Morbidity The health statistics used in the pricing of contracts such as critical illness cover.

Morris Review A review of the issues facing the actuarial profession issued in March 2005. The profession accepted its conclusions without real debate and the consequences (heavy regulation, duplication of organisations) are regrettable, especially since they add to the tendency to increase overheads with little added protection, and inhibit actuaries from expressing personal views and opinions (www.hm-treasury.gov.uk/independent_reviews/morris_review)

Mortality assumptions Mortality assumptions predict the rate at which scheme members die before or after retirement. They are usually based on information from UK pensioners and assured lives; in cases involving larger schemes, the actuary may adopt assumptions more appropriate to its own membership eg an employee working in manufacturing may have a lower life expectancy than a white-collar employee).

Mortality cleansing The process of screening a pension fund’s records to identify deceased members, and to avoid paying benefits to dead people.

Mortality deductions Unit deductions made typically on a monthly basis representing the charge made by the life company to cover the cost of the life cover provided. It is calculated as the "sum at risk" divided by the probability of death in that month.

Mortgage-backed securities [MBS] Investments backed by the income stream from a pool of mortgages.

MSCI Morgan Stanley Capital International, which issues amongst other things certain investment performance indexes.

Multi-asset management A single manager is responsible for several asset classes and is measured against a peer group or customised benchmark which specifies a fixed asset allocation. [The manager may or may not have discretion to vary the allocation around this benchmark.]

Multi-employer schemes

Multinational Cross-Border Pooling Products (MCBPPs) An MCBPP is a US construct that allows the pension plans of a multinational, which may be located in different international jurisdictions, to pool their investments into a single entity for investment purposes. (see US Department of Labor, Employee Benefits Security Administration, Advisory Opinion 1008-04A, 10 April 2008 (www,dol.gov.printerfiendly/PrinterVersion.asp).

Multinational pooling Multinational pooling is the linking together of group insurance contracts, effected in two or more countries, by subsidiaries of a multinational corporation, for the purpose of combining claims experience under these contracts. In practice it enables employers, for a cost, to provide cross-border employee benefits (including pensions) and gain tax relief that might otherwise be available. In the EU pan-European pension arrangements might in some cases be more efficient. (Mercer, Is multinational pooling right for your company? Analysis of pool performance highlights optimal approaches, 2007).

Multi-tie A distribution company whose advisers are capable of advising on the products of a limited number of product providers. This might be a small number for each class of business, or it might be a single provider for a given class of business (a "best of breed" multi-tie").

Mutual fund The US name for a pooled fund [usually open-ended] operated by an investment manager.

Myners Review The Myners Review was a Treasury investigation into UK institutional investment (chaired by Paul Myners, later Chairman of PADA) in October 2001, especially into why it provided so little private equity funding. The review concluded that trustees were too risk averse. In February 2002 the Treasury issued consultation papers on trustees’ familiarity with investment issues, on independent custody and on shareholder activism, and the Pensions Act 2004 introduced a new standard for trustees’ knowledge and understanding especially of investment matters. The NAPF now monitors trustees’ compliance with these guidelines and in October 2007 said they should be revised.

National Association of Pension Funds The club of pension funds, representing trustees, sponsors and members (www.napf.co.uk). Amazing value for money.

National Employment Savings Trust (NEST) The current name for the former Personal Accounts, and even more former National Pension Savings System (NPSS) which are intended to provide a workplace pension arrangement for that half of the population not a member of such a scheme. It was proposed by a Pensions Commission under the chairmanship of Adair Turner. It is intended to be a default pension scheme to be available to members and employer who cannot find a suitable private provider for auto-enrolment which comes into effect from 2012- 2016. It is designed to help those lower down the income scale, but may fail. www.nestpensions.org.uk.

National Institute on Retirement Security The US equivalent of the NAPF.

National Insurance Contributions Office (NICO) Part of HMRC that deals with national insurance contributions; cf NISPI (qv) which now handles contracting-out. (www.hmrc.gov.uk/nic/offices)

National Insurance Contributions (NIC) Payments deducted from pay or declared through self assessment, used by the DWP to fund the state pension and other state benefits, ie paid or credited contributions to the National Insurance Fund. Class 1 National Insurance contributions are compulsory for employees and employers. Class 2 and 4 National Insurance contributions are compulsory for self-employed earners. Class 3 National Insurance contributions are voluntary. National Insurance contributions provide entitlement to specific benefits, including pensions from the state.

National Insurance Credits Credits of earnings awarded by the Government in certain circumstances (for instance when someone has caring responsibilities). They cover periods when a person is not paying National Insurance contributions.

National Insurance Services to the Pensions Industry (NISPI) A directorate within NICO (qv), and part of HMRC (qv). It deals with workplace and personal pensions that are contracted-out of the state additional pensions (SERPS and S2P).

Negative convexity A bond is said to exhibit negative convexity when its price rises less for a downward move in yield than its price declines for an equal upward move in yield. See convexity.

NEST see National Employment Savings Trust.

Net After allowing for deductions of, e.g. tax or investment fees.

Net asset value [NAV] The company's assets less all liabilities; also known as shareholder funds. Can be applied in the context of investment trusts or property companies where shares can trade at a premium / discount relative to the NAV.

Net information ratio [net IR] The information ratio after allowing for costs. Net long approach

Net present value [NPV] A method used in evaluating investments whereby all future cash flows are first discounted at a given discount rate and then added. An investment is acceptable if the NPV is positive.

Net relevant earnings (NRE) The total earnings for an individual (including salary, bonuses and value of many benefits in kind for employees and trading profits of the self-employed) for the tax year. This figure is used to calculate the amount of contributions an individual can make to pension arrangements without incurring a tax charge. From A-day, an individual can contribute the lower of 100% of net relevant earnings or the annual allowance (2014/15 £40,000).

New business strain The loss incurred by a life company in the first year of a policy representing the excess of the acquisition expenses over the income received by the company in that first year.

Nil Allocation Periods A period at the start of a unit-linked policy during which no premiums are allocated to buy units. This is a mechanism to allow the life company to recover the costs of establishing the policy in an efficient way.

Nil paid Shares whose nominal value has not been paid up and where there is therefore a call due on the balance. Government stocks are sometimes issued in this way, with one or more calls at specified dates.

NISPI COEL Contracted-out Early leavers Section (HMRC)

NISPI RPWB Retirement Pension/Widows Benefit deals with queries on contracting-out

Noise We use this term to mean uncertainty about the future not directly related to investment market uncertainty, e.g. an insurance company's uncertainty about the size of future claims on its policies.

Nominal (1) This often means 'before allowing for inflation'. If inflation is positive the nominal return on an asset is greater than its real return. (2) For a bond, see principal.

Nominal amount/Value The value stated on the face of a security.

Nominal rate of return A rate of return expressed only in monetary terms, i.e. not adjusted for inflation.

Nominated date (1) in the case of a money purchase arrangement other than a cash balance arrangement, such date as the individual or scheme administrator nominates, or (2) in the case of any other arrangement, such date as the scheme administrator nominates. (HMRC); see Pension input period.

Non-contributory scheme Scheme that does not require members to contribute to it.

Non-group life policy A policy of insurance under which the only benefits which may become payable are benefits payable in consequence, or anticipation of (1) the death of the individual or (2) the death of one of a group of individuals which includes the individual (e.g. a policy which covers a number of individuals but only pays a benefit out on the first death or last survivor’ death) or (3) the deaths of more than one of a group of individuals (e.g. a policy which pays a benefit out on the death of each of the individuals) (4) where the group includes the individual, and the other members of the group are connected with the individual in accordance with section 195A(8) FA 2004. (HMRC)

Non-systematic risk This is the risk attributable to an individual company, as opposed to the sector or broader market. The impact of non-systematic risk factors can be reduced by the diversification of a portfolio.

Normal distribution A bell-shaped curve often used to estimate the chances of different outcomes.

Normal minimum pension age From A-day, the earliest age at which a member is allowed to draw benefits from a registered pension scheme, other than in ill-health. This is currently age 55. Scheme trustees must implement the new normal minimum pension age of 55 by 6 April 2010. Transitional regulations allow members to protect existing rights which were in place at A-day to receive their benefits at an earlier age – see protected pension age.

Normal pension age (NPA) Earliest age as defined in section 180 of the Pension Schemes Act 1993 at which a member can receive full pension benefits (excluding GMP).

Notifiable events Introduced by section 69 of the Pensions Act 2004, this regime requires trustees and sponsoring employers of certain defined benefit schemes to report independently in writing to the Pensions Regulator specified events. The main purpose of the notifiable events regime is to signal potential claims on the PPF as a result of employer insolvency or scheme underfunding, either of which give the Pensions Regulator the opportunity to intervene before a claim on the PPF arises. The requirement to notify only affects schemes eligible for compensation from the PPF and their sponsoring employers. Defined contribution schemes and schemes that went into wind-up before 6 April 2005 are not affected. Examples: • trustee/employer notifiable event: a scheme decision resulting in a debt to the scheme not being paid in full • trustee notifiable event: granting benefits which cost more than 5% of the scheme’s assets or £1.5m • employer notifiable event: two or more changes in ‘key employer posts’ (ie chief executive and any director or partner responsible in whole or in part for the financial affairs of the employer) within a 12 month period.

Notification of primary conclusions Draft determination by the Pensions Ombudsman. Issued towards the end of an investigation to give the parties a final opportunity to comment prior to a determination being made.

NPW (Not Proceeded With) The status of a life policy where an application has been made by an individual, the life company has offered terms to the individual who then decides for whatever reason not to proceed with the policy.

Occupational pension scheme A pension scheme established by an employer or employers and having effect so as to provide benefits to or in respect of any or all of the employees of that employer or employers, or any other employer. There are legal issues about which schemes fall within the definition, and hence subject to specialised regulation.

Occupational Pensions Directive see European Pensions Directive

Occupational Pensions Regulatory Authority (OPRA) The now disbanded UK regulator of occupational pension schemes for the period 1997 to 2005. Following a number of government inquiries in April 2005 which considered it was a disproportionate and risk-avoiding regulator it was replaced by the Pensions Regulator.

OEIC Open ended investment company. A collective investment scheme structured as a limited company in which investors can buy and sell shares on an ongoing basis.

Offer prices The unit price that the life company uses to allocate units to a policy when premiums are paid. See also Ask price.

Open Architecture The term used to describe the range of funds offered by a unit-linked contract when there exists a very wide range of funds managed by an array of external fund managers as well as the in-house funds of the life company.

Open ended funds Pooled funds in which the number of units varies according to the number of investors wishing to buy or sell units in the fund.

Open ended investment company (OEIC) Pooled fund that is structured as a limited company in which investors can buy and sell shares on an ongoing basis.

Open Market Option (OMO) The right to choose an annuity from an insurance company offering the best deal in the market using the fund in a pension scheme. It may not necessarily the insurer with the best or highest annuity; good administration and solvency is also important.

Open position In the context of exchange-traded derivatives this means a position that is exposed to price movements.

OPRA See Occupational Pensions Regulatory Authority. (obs)

Optimisation The creation of a portfolio which will give you the highest expected return for a given set of forecasts and estimated risks.

Optimiser A computer programme that generates an efficient frontier, given particular input assumptions.

Opting-out (of pension scheme) Describes situation in which an employee decides to leave an occupational pension scheme or chooses not to join one.

Option-adjusted spread A measure of the difference between the yield available on a given bond and that on otherwise comparable risk-free bonds, allowing for any options embedded in the bond.

Options The right, but not the obligation, to buy or sell a fixed quantity of a commodity, currency or security at a fixed price, on or until a particular date.

Ordinary shares Securities which represent an ownership interest in a company. If the company has also issued preference shares, both have ownership rights. Called common stock in the US.

Other money purchase arrangement A money purchase arrangement other than a cash balance arrangement. An arrangement is an other money purchase arrangement where the member will be provided with money purchase benefits, and the amount that will be available to provide those benefits is calculated purely by reference to payments made under the arrangement by or on behalf of the member. This means that in an other money purchase arrangement the capital amount available to provide benefits (the member’s “pot”) will derive wholly from actual contributions (or credits or transfers) made year on year. The scheme administrator or trustees may use the payments made under the arrangement to make investments of any kind on behalf of the member (for example, cash on deposit, shares, other investment assets, a life assurance policy on the member’s death). As long as the pot ultimately used to provide benefits is wholly derived from the original payments, the arrangement is another money purchase arrangement. The subsequent investment income and any capital gains are derived from payments made under the arrangement, and they themselves become part of the member’s pot. It is a feature of other money purchase arrangements that the member bears all the investment and mortality risk. The scheme simply pays out whatever benefits the amount in the pot, including the proceeds of all the investments that have been made using the payments into the scheme, will support. (HMRC)

Out-of-the-money For a call option, when the market price of the underlying asset is below the exercise price. For a put option, when the exercise price is below the market price.

Outperformance The return on a fund in excess of the benchmark return.

Overseas arrangement active membership period This is the period beginning with the date on which the benefits first began to accrue to, or in respect of, the individual under the recognised overseas scheme arrangement or, if later, 6 April 2006 and ending immediately before the recognised overseas scheme transfer. If benefits ceased to accrue under the recognised overseas scheme arrangement before the transfer then it is this date on which the overseas arrangement active membership period is treated as ending. (HMRC)

Overseas pension scheme A pension scheme is an overseas pension scheme if it is not a registered pension scheme but it is established in a country or territory outside the UK and satisfies the requirements in the Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Schemes) Regulations 2006 - SI 2006/206. (HMRC) See [???] schemes

Overseas Retirement Benefits Scheme An overseas employer financed retirement benefits scheme, but not necessarily within HMRC’s definition of Overseas Pension Scheme.

Over-the-counter (OTC) A transaction between two counterparties who engage in a transaction directly, rather than through a recognised exchange.

Overweight Exposure to a given asset or asset class greater than that implied by its weight within a market index or benchmark against which the portfolio is measured. Investment managers may take overweight positions in shares or sectors they expect to outperform in order to add value to the portfolio.

Paid-Up This refers to the state of a life assurance policy where no further premiums are being paid but life cover continues. It applies to policies with an investment element such as most whole of life policies and endowments. Ordinarily, provided the plan still has a surrender value, it will remain in force. Once the surrender value decreases to zero, the plan will lapse without value.

Pan-European schemes see also Cross-border schemes Par value See principal.

Par ValueThe value at which a bond is redeemed

Parent company guarantee A promise by another company, usually the holding company, to take responsibility for any shortfall in the pension fund is the sponsor employer fails.

Participating employer One of several employers participating in a single occupational pension scheme.

Part-timers An employer cannot exclude a worker from membership of an occupational pension scheme on the basis of their part-time status. However, until 1 July 2000, the only means of redress for those part-timers who were treated less favourably than their full time colleagues was a sex discrimination or equal pay claim. Since July 2000 (as a result of regulations), part-time-workers can challenge less favourable treatment on the grounds of their part-time status if it cannot be objectively justified. Male and female employees can bring a claim without having to demonstrate indirect sex discrimination. See equal treatment; TUPE.

Passive management Investment management that seeks to closely match the performance of a benchmark. Past service benefit Pension benefit that a member has earned for his past service.

Past service Refers to service by a member before the current date.

Past service reserve This generally refers to the value of a member’s benefits calculated using his completed pensionable service and actuarial assumptions that include an allowance for projected increases in the member’s salary.

Paternity leave This is the right of fathers to take leave as the primary caregiver for their new born or newly adopted child. Since 6 April 2003, subject to satisfying certain requirements, employees are entitled to two consecutive weeks’ paid paternity leave on the birth of a child, or the placement of a child for adoption. See family leave.

Payable Uprated Contracted-out Deduction Increments (PUCODI) (Pensions Act 2011)A PUCODI is the annual increase which is paid with an individual’s state pension where the individual has deferred receipt of their Guaranteed Minimum Pension and earned increments. New awards of PUCODI’s were abolished by the Pensions Act 2011 as from April 2012. Where individuals contracted-out of the additional state pension between 1978 and 1997 and delayed taking their contracted-out benefits, they earned increments on those benefits. The benefits are payable by the pension scheme but since the increments are not fully indexed by that pension scheme, the government added small amounts to the scheme member’s underlying state additional pension. The original policy intention was to ensure parity between those who were contracted out and those who were not. However past policy changes to the state pension and contracted benefits eroded the policy intention. The Pensions Act 2011 removed the provision from the state for new awards of small top-up amounts to a perspn’s state pension from April 2012 where that person is a member of a defined benefit contracted-out scheme who delayed taking their pension or was the survivor of such a member. Awards which were made and in payment before that date were not affected. (see House of Commons Library, Pensions Bill, Research Paper 11/52, 16 June 2011). Around 120,000 people receive the increment in their own right, with 80% receiving less than £1 a week (the maximum was £14). (DWP, Pensions Bill 2011, Summary of impacts, 17 May 2011).

Payment in Kind (PIK) An investment term, payment-in-kind notes are a junior form of debt with equity-like characteristics since borrowers do not need to pay back interest charges until the term of the loan has expired. Other forms of PIK arrangements are also found, such as paying (transferring to) the bondholder an amount of stock (in the company issuing the bond or in another, typically related, company) with value equal to the current interest due.

Payment schedule A document setting out the contributions required to be paid by the sponsoring employer of a defined contribution scheme. It also provides for the due dates of these contributions.

Peer group analysis A ranking table of the competitive performance of investment managers / funds in, for example, a performance survey such as CAPS or WM.

Peer group benchmark An investment benchmark implicitly defined to be the average asset allocation of an investment manager's competitors.

Pension Asset Pooling

Pension commencement lump sum A lump sum benefit paid to a member of a registered pension scheme (who is aged under 75) in connection with a pension benefit entitlement (other than a short-term annuity contract), and which meets the conditions detailed in paragraphs 1 to 3 of Schedule 29 to the Finance Act 2004.

Pension Credit The main income-related benefit for pensioners. A non-contributory, non-taxable, means-tested benefit, made up of two elements: the Guarantee Credit and the Savings Credit (see respective terms). The qualifying age for men and women is linked to women’s State Pension age. The pension sharing provisions in the Welfare Reform and Pensions Act 1999 (WRPA) introduced the ‘pension debit’ and ‘pension credit’. The ‘pension debit’ is the amount by which the value of the original member’s pension rights are reduced and the ‘pension credit’ the corresponding amount by which the ex-spouse’s or former civil partner's pension rights are increased. Section 29 WRPA determines the value of the pension credit to be transferred to the ex-spouse or former civil partner. (HMRC)

Pension credit member An individual who has rights in a pension scheme which are directly or indirectly attributable to pension credits. (HMRC)

Pension debit Amount of benefit rights given up by a member and allocated to the member’s ex-spouse or ex-civil partner when a pension sharing order is made in respect of that member.

Pension Earmarking Provides a spouse with a share of a pension scheme member's pension rights on divorce; the spouse's share is paid when the member draws benefits. Now called attachement.

Pension fund accounts Pension fund accounts must be prepared and audited in accordance with the requirements of the Pensions Act 1995 and the Statement of Recommended Practice published by the Pensions Research Accountants Group. The Pensions Regulator has the power to impose fines and penalties on trustees for failure to produce accounts within seven months of the scheme year end. The auditor is required to inform the Pensions Regulator if the accounts have not been prepared.

Pension Fund Barometer see Surveys

Pension Fund Pooling Scheme see Pension Fund Pooling Vehicle

Pension fund pooling vehicle A tax exempt unit trust. These were designed by HMRC as a response to competition from European investment managers, and to ensure tax transparency for pension fund investors. They have been operating since June 1996.

Pension fund withdrawal See income withdrawal.

Pension Guarantee Incorporated into an annuity a guarantee ensures that pension instalments for a specified period are paid, even if the member dies before the period expires. It also describes a pension scheme paying a balance of money to meet a guaranteed total, usually to the pensioner’s dependants on the early death of a pensioner. This amount is often established in relation to a multiple of the annual rate of pension or the accumulated contributions of the deceased member.

Pension Income The income you get from your pension savings by buying an annuity, unsecured pension or alternatively secured pension. Pension income is taxable.

Pension increase Increase to a pension or annuity that is already in payment, either as a result of indexation or the exercise of a discretion.

Pension input amount (PIA) (HMRC) The annual increase in an individual’s pension provision (which should not exceed the annual allowance), calculated over the pension input period. While although the annual allowance applies on a tax year basis the PIA is a measure which is not specified as having o be calculated over the tax year – it can cover a different period and is defined by the trustees of a plan. For DC members the PIA is the total of tax relievable contributions paid by the member and any contributions paid by the employer on behalf of the member. For DB members the PIA is calculated as the increase in the value of final salary during the pension input period. To calculate the increase the accrued annual pension is valued using a factor of 10:1. There is no PIA in an arrangement for the tax year in which the individual crystallises all benefits under that arrangement, known as ‘last year PIA exemption’. The amount of contributions paid and increases in value of a member’s benefits for annual allowance purposes as calculated in accordance with sections 230-237 of the Finance Act 2004. See Total pensions input amount.

Pension input period (PIP) (HMRC) Before pensions tax simplification (Finance Act 2004), HMRC limited pension contributions in relation to each tax year. Simplification meant that there are now only two main limits: the lifetime and the annual. The annual limit is £225,000 (2008) or £235,000 (2009). The simple system has now been complicated by the PIP, a rolling window of up to a year in which contributions can be made up to the annual limit. Each PIP starts with the first pension contribution and lasts for a maximum of 12 months. The pension input period has a start and end date. For DB arrangements, the start date of the first PIP is the date on which benefit accrual starts. For active members on 6 April 2006 (A day) the start date of the PIP was set as 6 April 2006. For DC members the start date of the first PIP is the date of the payment of the first contribution (which for members active on 6 April 2006 is the first date on or after 6 April 2006). In DC arrangements either the trustees or the members can set the PIP end date. A pension input period is generally a 12 month period (with the exception of the first one) and is usually set by the trustees by nominating the PIP and notifying members. When no action is taken to make this nomination a default position applies, though complicated and difficult to administer. The period will always commence when an individual’s rights begin to accrue under a scheme but thereafter pension input periods may end on a convenient annual date. The first pension input period will, unless otherwise changed, end at the anniversary of the start date. So a period starting on 1 June 2006 will end on 1 June 2007. It can come to an end earlier than the anniversary if the scheme administrator, or in a money purchase scheme, the trustees or the member, opt to end it sooner. This earlier date is referred to as a nominated date. A nominated date allows a change to be made to the fixed period relating solely to the anniversary of the member entering into the arrangement. Why they just couldn’t use tax years is a mystery. In short it means (1) the period beginning with the relevant commencement date and ending with the earlier of a nominated date and the anniversary of the relevant commencement date, and (2) each subsequent period beginning immediately after the end of a period which is a pension input period (under either this or the earlier paragraph) and ending with the appropriate date. (HMRC)

Pension protection fund (PPF) This is a fund set up to compensate members of underfunded defined benefit schemes where the sponsoring employer experiences an insolvency event. Conditions and restrictions apply for PPF eligibility and compensation.

Pension protection fund levy PPF compensation is funded through a levy on defined benefit schemes and defined benefit elements of hybrid schemes.

Pension Protection Fund valuation A discontinuance valuation which only considers benefits up to the level normally protected by the PPF.

Pension protection lump sum death benefit A lump sum benefit paid following the death of a scheme member of a registered pension scheme, who and was in receipt of a scheme pension under a defined benefits arrangement and which does not exceed the limits imposed through paragraph 14 of Schedule 29 to the Finance Act 2004. (HMRC)

Pension protection lump sum This is a lump sum which may be paid from a registered pension scheme equal to the capital value of the pension at benefit crystallisation, less any instalments already paid.

Pension Quality Mark An award scheme operated by the National Association of Pension Funds open to employer-sponsored defined contribution schemes (including occupational, workplace personal pension and personal accounts) evaluating contribution levels, governance and communications. It requires a minimum total of 10% (6% from the employer) contribution rate.

Pension Risk Transfer Advisory Council (PRTAC) A trade body representing buy-out providers, managed by the Tax Incentivised Savings Association (TISA) Cleveland Business Centre Middlesborough TS1 2RQ 01642 207200 www.tisa.uk.com.

Pension savings statement (PSS) A statement which must by law be given by a pension scheme to a member whose benefits exceed the Annual Allowance or any other member on request within three months; the reason is that members need to know if their pension accrual from all sources will exceed their annual allowance (HMRC).

Pension scheme A pension scheme is a scheme or other arrangements which is comprised in one or more instruments or agreements, having or capable of having effect so as to provide benefits to or in respect of persons on retirement, on death, on having reached a particular age, on the onset of serious ill-health or incapacity or in similar circumstances. (HMRC)

Pension Scheme Return An annual return to HMRC to explain why no tax is payable. The income for HMRC would not suffer if it were abandoned; it is mostly designed to catch inappropriate investments.

Pension Scheme Tax Reference (PSTR) Provided by HMRC to the Scheme Administrator; a number needed to help complete the Pension Scheme Return for HMRC.

Pension Schemes Online Registered pension schemes must submit certain information to the HMRC online only; there is no paper-based method (it was phased out in October 2007). It is still not without its flaws, but appears mostly now to work (www.hmce.eu/pensionschemes/pensionschemes-online.htm).

Pension Schemes Registry The Pensions Regulator maintains a register of occupational and personal pension plans including details of each scheme’s name and address, the full names and addresses of each trustee and the status of the scheme’s membership and benefits. Regulations govern the content and upkeep of this register. It is used to assist the public to locate schemes in which they may have benefit entitlement.

Pension Schemes Services (HMRC) PSS is a department of HMRC which deals with the policy, operational and technical work relating to pension schemes (www.hmce.eu/pensionschemes/index.htm) The telephone number is 0845 600 2622.

Pension Service (obs) An agency of the Department for Work and Pensions, now subsumed into the Pension, Disability and Carers’ Service. The website still operates (www.thepensionservice.gov.uk)

Pension sharing order An order or provision made as listed in section 28(1) of the Welfare Reform and Pensions Act 1999 (or the Welfare Reform and Pensions (Northern Ireland) Order 1999 (SI 1999/3147)) following a divorce or the dissolution of a civil partnership. (HMRC) Pension sharing order Court Order made under the Welfare Reform and Pensions Act 1999 that makes provisions to allow financial settlements on divorce or nullity of marriage or civil partnership, to include the splitting of pension rights of either or both parties to the settlement. At the date of the financial settlement the pension rights can be split between both parties (the former couple in marriage or civil partnership) by varying amounts depending on the terms of the settlement. See pension splitting; earmarking.

Pension Sharing Provides a spouse with a share of a pension scheme members retirement benefits on divorce. The spouse is given a credit to put towards their own retirement benefits. See also pension sharing order.

Pension splitting The former term for pension sharing.

Pension Tracing Service Operated by The Pension Service. Pension scheme members are able to trace lost pension schemes. It is part of the Department for Work & Pensions, the PTS can be contacted on 0845 600 2537, at www.pensionservice.gov.uk or by writing to Tyneview Park, Whitley Road, Newcastle upon Tyne NE98 1 BA, enables private rights to be traced as well. It provides help to potential beneficiaries and third parties acting on their behalf who seek missing pension pots. It is free and operated by The Pensions, Disability and Carers Service, part of the DWP. It is available by phone, on-line or by post.

Pension year The period the drawdown pension limits apply to (and the dependant equivalents). These periods run in consecutive 12-month periods from the point initial entitlement to such pensions actual arise under a money purchase arrangement. These periods are set at the point that initial entitlement arise, and cannot be changed from that point onwards. (HMRC)

Pension, Disability and Carers’ Service The name for the former Pension Service. An agency of the Department for Work and Pensions. It delivers the state pension, the additional state pension, the over-80 pension, the pension credit, winter fuel payments, Christmas bonus payments, pension forecasts, and pension traces. It employs around 16,500 people.

Pensionable earnings The earnings used to calculate benefits and/or contributions. Full details are usually set out in the schemes rules. This may include/exclude: • overtime • annual bonus • car allowance • earnings pensioned through the State (see state pension offset).

Pensionable employment Period of employment during which the individual is or was a member of a scheme. This is used to calculate benefits. It may also include employment where an individual is able to join an occupational pension scheme whether or not he has actually done so. It is also known as pensionable service. See added years.

Pensionable service See pensionable employment.

Pensioneer Trustee (PT) A professional trustee that, prior to 6 April 2006, had to be appointed to carry out defined administrative functions for small self administered schemes.

Pensioneer trustee Until A-day it was an HMRC approval condition that trustees of a small self-administered scheme appoint a pensioneer trustee, whose main function was to ensure that the scheme was not wound up except in accordance with normal pension scheme practice. Since A-day, the appointment of a pensioneer trustee is no longer necessary.

Pensioner member A member of a pension scheme who is entitled to the payment of benefits from the scheme and who is not an active member. (HMRC)

Pensioner Member A pension scheme member who has drawn their pension.

Pensioner Person who is currently receiving a pension from a scheme.

Pensions Commission See Turner report, www.webarchive.org.uk/ukwa/target/145583

Pensions Credit A means-tested benefit that boosts a pensioner's state pension to ensure they have a minimum level of income.

Pensions Institute An academic think tank attached to Cass Business School www.pensions-institute.org.

Pensions Ombudsman Independent person appointed under section 145 of the Pension Schemes Act 1993 to investigate complaints and disputes from scheme members. He also investigates complaints and disputes between trustees of schemes and employers and between trustees of the same or different schemes. The Pensions Ombudsman has the power of enforcement and awards penalties for distress and inconvenience. See determination (Pensions Ombudsman); dispute resolution. He is an independent, levy funded, individual who determines complaints by scheme members and beneficiaries about the way a pension scheme is run against scheme trustees, managers, administrators and employers. The Deputy Pensions Ombudsman has the same statutory powers as the Pensions Ombudsman.

Pensions Policy Institute (PPI) A charitable academic organisation funded by the industry and well-wishers to provide independent research on pensions and pensions policy. Wonderful source of basic materials and research (www.pensionspolicyinstitute.org.uk)

Pensions Protection Fund (PPF) The PPF is a discontinuance fund which takes assets from the underfunded schemes of insolvent employers and provides a reduced level of benefits (www.pensionprotectionfund.org.uk). It imposes a levy on solvent funds and employers to pay for its deficits (around £695m pa) and because of increased buy-outs by solvent schemes, the universe of such schemes able to pay levies is diminishing, while the call by such schemes is increasing; the long-term viability (or at least the benefits indicated) of the PPF is very much in doubt.

Pensions reform Pensions reform from the government has been in continual process since around 1983, with a new act virtually every couple of years. Indeed almost alone in government, pensions reform has its own minister and has done for over a decade; there is no health reform or transport reform minister for example. The name of the minister is not given, as it changes on average every 9 months and would make this survey outdated before it was published. The list of previous ministers includes Frank Field, Ian McCartney, Steven Timms (twice), Mike O’Brien, James Purnell, Malcolm Wicks, John Denham...In addition there have many White Papers and other reports, including the Goode Report, the Turner Report, the Thoresen Report, the Pickering Report, the Lilley proposals, the Hague Bill, the Keith Joseph proposals, the Barbara Castle reforms, the Norman Fowler white paper.

Pensions Regulator (tPR) The Pensions Regulator was established under the Pensions Act 2004 to replace the dysfunctional OPRA in April 2005. Its main purposes are to: • protect the benefits of members of company pension arrangements (whether trust or contract based) • keep claims on the pension protection fund to a minimum• facilitate good pension administration. To achieve these purposes, it has extensive powers, including: • provider of information, education and assistance to pension schemes and their advisers • power to serve: - improvement notice - third party notice - freezing order - prohibition order - contribution notice - financial support direction, and - restoration order. See codes of practice; anti avoidance. Longer term is role will diminish as the number of defined benefit schemes diminishes – but it is trying to find a role for itself in defined contribution schemes.

Pensions Regulator tribunal A tribunal has been established to hear references from the Pensions Regulator’s determinations. The decisions of the tribunal can be appealed on a point of law to the Court of Appeal (or Court of Session in Scotland).

Pensions Simplification The name given to the changes introduced by HMRC on A-Day. One single tax regime was introduced to replace the previous eight. With hindsight, it has been plagued by Orwellian undertones.

Pensions, Disability and Carers Service An agency of the DWP which manages state pension administration and issues (www.dwp.gov/pdc)

Pensions Force An NAPF/DWP initiative to help employers explain how their pension plans work to their workforce, for free. (www.napf.co.uk/pensionsforce)

PEP Personal equity plans are not an investment in their own right. They are a tax free wrapper used to hold investments. PEPs were discontinued on 6th April 1999 and replaced by individual savings accounts (ISAs). PEPs in existence were allowed to continue to grow with similar tax privileges and are now treated as stocks and shares ISAs. Stock and share investments which could be held in a PEP include unit trusts, open ended investment companies (OEICs), investment trusts, ordinary shares, preference shares and fixed interest corporate bonds. Income from PEP investments is tax free and you don't have to report it on your tax return. Capital gains are also exempt from CGT.

Performance related fee An investment management fee the extent of which is determined by the degree of over or under performance relative to an agreed benchmark.

Permitted investments Types of investments that trustees are allowed to make under a scheme’s rules. This term also refers to the investments stipulated by HMRC in connection with SSASs and registered pension schemes.

Perpetuity A stream of cash flows that theoretically will last for ever.

Personal accounts A new system of personal pension savings accounts (similar to the National Pension Savings Scheme) proposed by Lord Turner’s Pensions Commission and to be introduced in 2012 and now known as NEST. All employers will be required to offer auto-enrolment in the scheme to their employees unless they have a more generous occupational pension scheme which already enrols employees automatically. Employers will be required to contribute 3% of salary (between proposed limits of £5,000 and £33,000) to the scheme, with employees paying 4% and the government 1%.

Personal Accounts Board The governing board of PADA. (obs)

Personal Accounts Delivery Authority (PADA) (obs)A quango charged with exploring whether personal accounts can be delivered at the administrative price that government policy suggested it might (ie 0.03% of contributions). The figure was suggested by Lord Turner in the Pensions Commission Report which led to the introduction of the Personal Account, but despite the demotic it has never been shown that lower costs are more important than higher performance. The drive to low costs may be a distraction, and meanwhile no-one is really sure whether the system will cope. For an equivalent horror story, see the collapse of the equivalent Japanese personal accounts, which lost the pension account records of 50 million people (Hiroshi Yumoto, Pension holder hunt could be ‘endless’, Daily Yomiuri Online 13 December 2007). The Chief Executive was Tim Jones, former Chief Executive of retail banking at NatWest, and the Chairman was Paul Myners. Now replaced by NEST.

Personal Accounts see NPSS; NEST

Personal Lifetime Allowance (PLA) This is the amount of an individual’s pre-A Day rights registered with HMRC for protection from the imposition of a Lifetime Allowance Charge.

Personal pension is a pension which operates like a money box for an individual. He or she saves money each month and hopes that when retirement is reached there will be enough to buy a reasonable pension after the investment management charges, dealing fees, commission expenses, marketing overheads and administration costs have been paid, and that the Stock Market will not have collapsed three days before retirement. It can be useful, however, for young, mobile employees. A personal pension plan can be registered with the Pensions Regulator as a stakeholder pension scheme if certain conditions are met. See group personal pension; self invested personal pension.

Personal representatives In relation to a person who has died, this means (in the UK) persons responsible for administering the estate of the deceased. In a country or territory outside the UK, it means the persons having functions under its law equivalent to those administering the estate of the deceased. (HMRC)

PFPVs See pension fund pooling vehicles.

Phased annuity See segmentation.

Phased Retirement With an Unsecured Pension; the ability for you to phase your retirement from your initial selected retirement date until you are 75. You can select the most suitable option each year to meet your current circumstances. At each phased retirement only part of your total pension fund is used to provide you with a pension income. Up to 25% of each phased segment can be taken as a tax-fee cash lump sum and, once activated you can continue to draw income from the rest of the segment. Any segments not en cashed continue to be invested free of tax (except UK dividend income). By age 75 all of your pension fund had to have gone into drawdown. (obs)

Pickering A DWP sponsored independent review into simplification of the pensions system under the chairmanship of Alan Pickering a former chairman of the NAPF in July 2002. With some trivial exceptions, it was comprehensively ignored by the DWP.

Pillar First second and third elements of a holistic pension system. The first pillar is the state pension, the second pillar is workplace pensions and the third is private savings.

PIP see Pension input period

Placing The placing of a company's securities made by a sponsor or stockbroker with their own clients and with the markets.

Platforms The technological solution to facilitate the administration of a wrap account, allowing a series of investments in different tax wrappers to access a wide range of collective investment funds, providing a simple presentation to both adviser and customer.

Policy loan A loan granted by a life assurance company to a policyholder. The extent of the loan is based on a percentage of the surrender value (typically up to 90%) of a whole life or endowment policy.

Pooled fund/Pooled vehicle A fund such as a mutual fund or [UK] unit trust that invests the assets of many different individuals or institutions collectively. See also collective investment vehicle.

Pooled pension investment (PPI) System of investing a pension fund in a range of stocks, shares and other investments. See individual pension account (IPA).

Portability Directive A draft EU Directive intended to give EU workers the right to jouin a pension scheme, obtain vested rights within a reasonable time and the right to transfer those pension rights when they leave.

Portable alpha An investment technique where the active return of an investment manager relative to one benchmark is combined with the return from a separate benchmark [often in a different market].

PPF 7800 Index An index of 7,800 pension funds prepared by the PPF showing the aggregate funding position; it demonstrates funding volatility – in March 2008 funds showed a deficit of £23B, and in April 2008 a surplus of £30B – which is a problem for the PPF but not for funds.

PPF levy [definition] see PWC, Pension Protection Fund Levy, (Pensions Files) (www.pwc.com/uk/eng/ins¬sol/publ/pensions)

PPF see Pension Protection Fund

PPFM Principles and Practices of Financial Management. A formal document produced by the company and signed off by the board detailing the processes of managing the with-profits fund, particularly explaining how areas involving discretion will be handled. The contents of the PPFM are prescribed by the FSA. These tend to be long and tedious documents which led to a shorter concise version, the Customer Friendly PPFM being introduced for the benefit of the non-technical reader.

PPP See personal pension plan.

PRE Policyholder's Reasonable Expectations is a concept that was first introduced in the Insurance Companies Amendment Act 1973. The definition of PRE was ultimately a matter for the Courts but was not tested until the Equitable Life Assurance Society case in 1999 and the Axa case in 2000 in respect of the attribution of the inherited estate. Prior to that, much debate took place between the actuarial profession and the regulators as to how PRE should be interpreted. FSMA replaced the term PRE with "treating customers fairly".

Preference shares [UK] Shares evidencing ownership in a corporation, which pay a fixed percentage dividend but which do not give the holder voting privileges.

Preferred security Typically, a form of equity capital that pays a fixed dividend and has a higher claim on the company's assets than common stock [ordinary shares], but a lower claim than bonds.

Pregnancy See Family leave.

Premium (1) For securities selling above par, the difference between the price of a security and par. (2) An amount that must sometimes be paid above par in order to call an issue, i.e. a call premium. (3) Occasionally used and interchangeable with margin or spread when the latter two refer to a percentage above a given amount or rate. (4) The price paid for an asset. (5) The additional price an investor is prepared to pay for an asset with attractive characteristics (6) The cost of life cover; usually paid monthly but can be paid annually and sometimes quarterly. For most policies the plan will come to an end if the premium is not paid for one month.

Prescribed occupation Any of the following occupations -Athlete, Badminton Player, Boxer, Cricketer, Cyclist, Dancer, Diver (Saturation, Deep Sea and Free Swimming), Footballer, Golfer, Ice Hockey Player, Jockey - Flat Racing, Jockey - National Hunt, Member of the Reserve Forces, Model, Motor Cycle Rider (Motocross or Road Racing), Motor Racing Driver, Rugby League player, Rugby Union Player, Skier (Downhill), Snooker or Billiards Player, Speedway Rider, Squash Player, Table Tennis Player, Tennis Player (including Real Tennis), Trapeze Artiste, Wrestler. (HMRC) (obs)

Prescribed rules Prior to the Pensions Act 2004, these were rules in the MNT legislation providing a system for choosing member-nominated trustees/directors. These rules were required to be used to put in place member-nominated trustees/directors if: • the sponsoring employer’s proposals for alternative arrangements, or • the trustee’s proposals for appropriate rules (or both) have failed, or • if it has been decided to adopt the default procedure.

Prescribed scheme Any of the following schemes:-The Armed Forces Pension Scheme, The British Transport Police Force Superannuation Fund, The Firefighters’ Pension Scheme, The Firemen’s Pension Scheme (Northern Ireland), The Police Pension Scheme, The Police Service of Northern Ireland Pension Scheme, The Police Service of Northern Ireland Full Time Reserve Pension Scheme. (HMRC)

Preservation is a law which states that you do not forfeit your pension rights just because you leave the employer sometime before retirement. It is not a perfect law, but it is very much better than it used to be, and is getting better all the time. The principle of UK pensions law protects pension rights built up in the past. See preserved benefits.

Preserved benefits Benefits that a member has already accrued from a pension scheme when he ceases to be an active member (or the scheme closes) before his normal pension age and which are payable on retirement. They are sometimes called frozen benefits.

Price-to-earnings ratio [PE ratio] The ratio of a company's share price to the earnings per share.

Primary market If a transaction occurs in the primary market it relates to a new issue of securities by a company, government or other organisation seeking to raise money.

Primary protection (see also Scheme specific protection Enhanced protection) (HMRC) A pension scheme member who has pension rights valued in excess of the lifetime allowance could safeguard against a later tax charge. This can be used by individuals who, on 5 April 2006, have a benefits value in UK approved schemes that exceeds the Standard Lifetime Allowance of £1.5 million for 2006/07. It is possible for somebody to register their own Personal Lifetime Allowance (PLA). This is expressed as a Primary Protection factor, which will be used to calculate the member's PLA at vesting date. Any amounts in excess of this will be subject to a Lifetime Allowance Charge. Under transitional arrangements, a member whose rights are valued at more than £1.5 million at A-day may register with HMRC to have those rights protected from a tax charge because those rights exceed the lifetime allowance. This is known as primary protection and allows a member’s lifetime allowance to increase until retirement in line with increases to the standard lifetime allowance. A tax charge arises if the member accrues further additional benefits. A member must register with HMRC by 5 April 2009 to obtain primary protection. See enhanced protection.

Primary Threshold The minimum level of weekly earnings on which an employed person pays National Insurance contributions. It is the weekly equivalent of the standard personal allowance for income tax.

Principal employer Where there are several employers participating in a scheme, this term is used to denote a particular employer that has special powers or duties, such as appointing and removing trustees, amending the scheme provisions, and determining when winding up should be triggered. See sponsoring employer.

Principal/Face value/Nominal amount The amount inscribed on the face of a security, exclusive of interest or premium, due to a security holder at maturity and it is the amount used in the computation of interest due on such security.

Priority liabilities Benefits and other liabilities that are given precedence in accordance with a scheme’s priority rule when a scheme is being wound-up. See winding-up.

Priority rule This sets out the order of precedence of liabilities to be met if, when a scheme is being wound-up under the scheme rules, the assets are insufficient to cover all liabilities. Section 73 of the Pensions Act 1995 provides an overriding, statutory priority order of benefits to be secured on the winding-up of a defined benefit scheme. Note the statutory priority order has been amended over time so the priority order varies depending on the date of commencement of the winding up. See priority liabilities.

Private equity Equity-related capital used to finance change in an unquoted (ie non-public) company. See www.bvca.co.uk. Private equity is an investment in shares which are not quoted on the stock exchange, and are therefore less marketable (and liquid) that public equity (ie quoted shares). Because of the perceived lack of transparency (corporate governance rules do not apply o private companies) and because the investments are often highly geared (ie they use the company’s own money or borrowings to carry out the deal) there has been heavy criticism in the press – and employers that are funded with private equity may be less financially stable than publicly quoted companies, because of the level of borrowings. This means they may be less likely to be able to fund the pension scheme. (see TUC, Private equity – a guide for pension fund trustees, October 2007 (www.tuc.org.uk)) See also Walker Guidelines.

Professional Trustee A paid (and qualified or experienced) trustee, to be distinguished from unpaid company nominated or member nominated trustees, and often appointed to carry out defined administrative pension functions.

Profit signature A graphical representation of the emergence of losses and profits through the lifecycle of a policy, normally depicted by a large loss in the first year representing the new business strain followed a series of small profits in the future years. The profit signature is an output of the profit testing process performed by the actuaries during the product development.

Prohibition order Order made by the Pensions Regulator prohibiting a person from being a trustee of a particular occupational pension scheme. If the person is already in place, the prohibition order has the effect of removing him. This means that a deed of removal is not required to effect such a removal. See disqualification order; suspension order.

Property investment LLP A Limited Liability Partnership whose business consists wholly or mainly in the making of investments in land and the principal part of whose income is derived from that business. (HMRC)

Proposal form The application form required to be completed and signed by the applicant containing all the data required by the life company including any necessary health questions and declarations.

Prospective member An individual, not yet a member of his employer’s pension scheme, who is either entitled to join or will become eligible to join that scheme in the future.

Prospectus/Offering memorandum A document, prepared by the lead manager to an issue containing all the pertinent information about a public offering of securities and about the borrower and guarantor, if any. It is made available to the appropriate legal authorities, stock exchanges and prospective investors. A preliminary prospectus is generally dispatched at the beginning of the subscription period and a final prospectus is dispatched immediately after both the final terms have been fixed and the subscription agreement has been signed by the borrower and the managers.

Protected modification Modification that would or might: • result in any subsisting right that is not a right or entitlement to money purchase benefits becoming, or being replaced with, such a right or entitlement, or • the reduction of any pension in payment. See section 67.

Protected pension age Since A-day, subject to satisfying certain conditions, HMRC will allow benefits to be paid to pension scheme members prior to age 55 without an unauthorised payments charge being levied. See normal minimum pension age.

Protected pension input amounts The amounts that were paid before the impact of the Finance Act 2009 on pension contributions in relations to earnings over £150,000.

Protected rights The name given to the fund built up by contracting out of the state second pension; they are the rights which, in a contracted-out money purchase scheme, replace the rights an individual would have earned under SERPS. Since they are money-purchase, you have no idea what they are until retirement, so that they are not in fact protected at all. Protected rights is the collective term for the National Insurance rebate, associated tax relief and investment return. As protected rights no longer exist after April 2012, this may help to simplify administration in terms of record-keeping, member communications and benefit processing. As defined in regulation 3 of the Personal and Occupational Pension Schemes (Protected Rights) Regulations 1996. Before 6t h April 2009 this also included safeguarded rights, wherever appropriate. (HMRC). It is lowest amount of benefits that a contracted-out money purchase scheme is required to provide to a member, calculated by using the defined contribution basis, with the money paid into the scheme as minimum contributions or minimum payments. The rules were relaxed in the 2008 Finance Act and SIPPs can now include protected rights, which simplifies planning for many people (see Matthew Craig, Protected Rights, Suffolk Life, February 2008, (www.suffolklife.co.uk). Protected rights are those rights offered by a personal pension plan in replacement for second state scheme rights (which it agreed to provide in exchange for paying lower national insurance contributions). Personal pension arrangements that provide such rights have investment restrictions imposed, and are mostly limited to cash. Protected rights include a 50% spouses/partners pension, outlawing of the phased purchase of annuities, and separate recording of the rights (see also John Moret, Protected-rights assets, Investment Week, 22 October 2007).

Protection see Enhanced protection, Primary protection, Scheme specific protection (HMRC)

Proxy A written authorisation given by a shareholder to someone else to vote on his behalf at a company's annual general meeting [AGM] or special meeting [EGM].

PSS Forum Pension Schemes Services Forum, an HMRC user group which tries to get HMRC to simply matters.

Public offering An offering for sale of a new issue of securities to the general investing public. Securities of such an offering will generally be placed through a syndicate, will have securities issued in small denominations (e.g. £1,000 each), and will be listed on a stock exchange.

Public sector pension scheme Occupational pension scheme for employees of central government, local government, nationalised industries and other statutory bodies. Employees who formerly worked in the public sector but whose employment has transferred to the private sector under TUPE may sometimes be eligible for membership of a public sector scheme. See Local Government Pension Scheme.

Public sector transfer arrangements Arrangements of the transfer club to which schemes in the public sector belong. A transfer club is formed where several schemes agree to a common basis of transfer payments.

Public service pension scheme A pension scheme (1) established by or under any enactment, (2) approved by a relevant governmental or Parliamentary person or body, or (3) specified as being a public service pension scheme by a Treasury order. (HMRC)

Purple Book A publication issued jointly by the PPF and tPR setting out statistics derived from industry filings (the Defined Benefits Pensions Universe Risk Profile) www.thepensionsregulator.gov.uk/pdf/purplebook2007.pdf

Put option A put option gives the buyer the right [but not the obligation] to sell an asset on [and sometimes before] a given date at a price agreed today. The seller [writer] of the option has the obligation to buy the underlying asset at that price if the option is exercised.

PVFP (Present Value of Future Profits) The discounted value of the stream of profits anticipated to be generated over the remaining life of the in-force book of business.

QROPS see Qualifying Recognised Overseas Pension Scheme

Qualifying Earnings Factor: The minimum level of earnings on which a person must have paid, been treated as having paid or been credited with National Insurance contributions in a tax year in order to make it a qualifying year for basic state pension (qv).

Qualifying non-UK pension scheme (QNUPS) From April 2010 UK residents can transfer non-UK pension assets into a QNUPS; a QNUPS is available for UK residents and UK domiciled and expatriates. There is no limit on the amount that can be paid into a QNUPS, and QNUPS can accept property, unquoted shares and art as assets. The fund has a tax-free roll-up, there is up to 30% available as a tax-free lump sum, there is no requirement o have earned income, there is no agre restritin on investing and no age-75 drawdown or annuity requirement. Funds can be used as security for a loan of up to 25%, and the fund is free of IHT both before and after benefits start.

Qualifying overseas pension scheme (QOPS) An overseas pension scheme is a qualifying overseas pension scheme if it satisfies certain HMRC requirements. The scheme manager must notify HMRC that the scheme is an overseas pension scheme and provide evidence to HMRC where required. The scheme manager must also sign an undertaking to inform HMRC if the scheme ceases to be an overseas pension scheme and comply with any prescribed benefit crystallisation information requirements imposed on the scheme manager by HMRC. The overseas pension scheme must not be excluded by HMRC from being a qualifying overseas pension scheme. See also ROPS, QROPS, QNUPS)(HMRC)

Qualifying policy The proceeds from a life assurance policy to an individual are free of tax provided the policy is qualifying. The rules which govern qualification are: (a) the premiums must be payable for ten years or 75% of the term whichever is the shorter. For example a ten year endowment plan will qualify after seven and a half years; (b) the premiums must be paid regularly on an annual or more frequent basis such as monthly; (c) the sum assured must be at least 75% of the total premiums payable over the life of the policy.

Qualifying Recognised Overseas Pension Scheme (QROPS) A QROPS is a foreign pension scheme that HMRC recognise as being capable of accepting a transfer value from a UK-registered pension scheme. HMRC impose rules on QROPS before they are regarded as acceptable and these include that it is recognised for tax purposes by the local jurisdiction, is open to membership by locals, and reflects either EET or TTE tax systems. The maximum lump sum is restricted to 30% of the fund value and the minimum retirement age is not lower than the UK HMRC ages (55 from 2010). It has so far been used by expatriates to export their pension arrangements, so as to avoid the lifetime allowance charge, no obligation to buy a lifetime annuity; the ability to leave money to heirs, no liability to UK tax on pension income and investment freedom. HMRC publish a list of their rules and recognised schemes on www.hmrc.gov.uk/pensionschemes/qrops.pdf. It is almost certain that HMRC requirements breach EU freedoms and are not enforceable on transfers within the EU, but as yet there have been no challenges.

Qualifying service Service of a member used when determining whether the member is entitled to short service benefit.

Qualifying year for state pension A tax year in which someone has qualifying earnings, or credits of earnings, of at least 52 times the Lower Earnings Limit.

Qualitative analysis Assessing the value of an investment by examining mainly non-numeric characteristics such as management, people, process etc.

Quantitative fund management ['quant'] Investment management that stresses statistical and other numerical relationships between securities and their returns, and makes extensive use of computer models.

Quants People who make investment decisions based on mathematical models.

Quota Share Reassurance A surplus reassurance arrangement whereby the ceding company retains a fixed percentage of every policy with the balance going to the reassurer.

Race discrimination One of the several discriminations illegal under pensions law.

Rack rent The rent that would be received on a property if it were leased on the open market. The current rent may be greater or less than the rack rent depending on the terms of the lease and how the market has moved since the last rent review.

Raising Standards of Pensions Administration (RSPA) is a campaign group and registered charity designed to do just that (www.raisingadminstandards.com). It issues a statement of standards of service that pension schemes should provide to members.

Raising Standards of Trustee Education (RSTE) is a campaign group and registered charity designed to do just that (www.rste.co.uk). Although its title refers to trusteeship generally its activities are confined to pension trustees.

Rating agency There are several recognised rating agencies (S&P, Fitch, Moody’s) which attempt to measure the risk of a particular investment; faith in the value of such ratings has fallen since the financial credit crisis of 2007/2008.

Rating If as a result of the underwriting process, the life company is not prepared to accept the risk at standard rates, it may offer to provide the cover for a higher premium by rating the life. This is often expressed as a percentage of the standard rates, eg +100% would indicate that a life is assessed as being twice as likely to die as a standard one. In exceptional cases, a life may be postponed meaning that the life company will wait for say 12 months before being prepared to offer any kind of terms, or alternatively a life may be declined meaning that the life company is simply not prepared to offer any terms to the applicant.

Real assets Assets which should have a natural link to the performance of the economy and the general level of prices [e.g. equities or real estate].

Real estate Buildings or land.

Real estate investment trust (REIT) A company that owns and usually operates income-generating real estate. REITs are normally quoted on a stock exchange.

Real interest rate (or yield or return) The interest rate [or yield or return] less the rate of inflation. Real return The return less the rate of inflation.

Real value The value after allowing for inflation. If the value of an asset and the level of consumer prices both double, the asset's real value is unchanged.

Rebalance To change a fund's constituents so that they more closely match those of its benchmark.

Reckonable service Number of years and days of service used to calculate a member’s local government pension. It excludes strike days and career breaks.

Reclaiming Basic Rate Tax Pension contributions receive tax relief. The Pension Scheme Provider will reclaim basic rate tax from HMRC on the member’s personal gross contributions. This is added to the pension fund.

Recognised European Economic Area (EEA) collective investment scheme. This means a collective investment scheme (within the meaning given by section 235 of the Financial Services and Markets Act 2000) which is recognised by virtue of section 264 of that Act (schemes constituted in other EEA states). (HMRC)

Recognised overseas pension scheme (ROPS) A pension scheme of another country which meets specified requirements and is recognised by HMRC. A recognised overseas pension scheme is an overseas pension scheme which is established in a country or territory mentioned in regulation 3(2) of the Pension Schemes (Categories of Country and Requirements for Recognised Overseas Schemes) Regulations 2006 SI 2006 No 0206. An overseas pension scheme which is not established in such a country is a recognised overseas pension scheme if it satisfies the requirements prescribed in regulation 3(4) of those regulations. See overseas pension scheme. See also Qualifying recognised overseas pension scheme (QROPS) and Qualifying non-UK pension scheme (QNUPS) (HMRC)

Recognised transfer A transfer representing a member's accrued rights under a registered pension scheme to another registered pension scheme (or, in certain circumstances, to an insurance company) or a qualifying recognised overseas pension scheme. (HMRC) It is the transfer of an amount representing the accrued rights in a registered pension scheme to another registered pension scheme or recognised overseas pension scheme.

Recovery plan Trustees must agree a recovery plan if the statutory funding objective (SFO) is not met. The recovery plan must set out how the SFO will be met and over what time period. It must be appropriate having regard to the nature and circumstances of the occupational pension scheme. Any recovery plan must be submitted to the Pensions Regulator within a reasonable period after it is prepared or revised. If the recovery plan replaces an earlier recovery plan, it must be accompanied by given information.

Redemption When a bond is cancelled by repayment to the bondholders of the capital originally lent to the bond issuer.

Redemption yield Calculation of the return that investors will earn on any bond if they hold it to redemption, taking into account income and any capital gain or loss that will be made at the maturity date. See also yield to maturity.

Reference scheme test Test carried out to compare the benefits provided by a COSR scheme with those under the reference scheme to ensure that they are at least equal. The scheme actuary of a COSR scheme must certify that the scheme complies with the reference scheme test. See reference scheme.

Reference scheme Theoretical scheme against which the benefits of a COSR scheme are compared to ensure that the COSR scheme provides the benefits that are at least equal to the reference scheme in order to remain contracted-out after 5 April 1997. See reference scheme test.

Refund of excess contributions lump sum A lump sum benefit paid to a member of a registered pension scheme because they have contributed more to the scheme than they are entitled to tax relief on, and which meets the conditions of paragraph 6, Schedule 29 to the Finance Act 2004. (HMRC)

Refund of excess contributions This is a payment to a member from a registered pension scheme. It is paid where a member has made contributions to his pension arrangements in that year, in excess of his annual allowance. It is equal to those contributions paid in excess of the annual allowance less any tax relief granted on those contributions. The refund must be paid within six years of the last day of the same tax year.

Refund of member contributions Since A-day, such refunds will only be automatically given to members who leave a scheme with fewer than three months’ pensionable service. Members with between three months and two years pensionable service can either opt for a refund of their contributions or a transfer value. See short service refund lump sum.

Registered pension scheme A pension scheme is a registered pension scheme at any time when, either through having applied for registration and been registered by the Inland Revenue, or through acquiring registered status by virtue of being an approved pension scheme on 5 April 2006, it is registered under Chapter 2 of Part 4 of the Finance Act 2004. (HMRC) Since A-day a pension scheme must be registered with HMRC to receive favourable tax treatment. Some schemes are deemed to be registered where they were an approved scheme prior to A-day and have not notified HMRC that they do not wish to be a registered pension scheme. Registered Pension Scheme The current term for a UK tax-approved pension scheme. To benefit from tax privileges all such pension schemes must be registered with HMRC. Schemes set up before 6 April 2006 were normally automatically registered.

Registered pension scheme return This is a form containing information that the Pensions Regulator will use:• to make sure the information it holds on the register of pension schemes is accurate • to calculate levies due from pension schemes • in regulating pension schemes. The Pensions Regulator will also share this information with the pension protection fund. From April 2005, trustees of registered pension schemes (or managers of all non trust based registered pension schemes) were required to complete a scheme return and submit it to the Pensions Regulator. Trustees of defined benefit schemes, or defined contribution schemes with five or more members, will be asked by the Pensions Regulator to complete a scheme return annually. Triennial scheme returns are required for defined contribution schemes with fewer than five members.

Registered Pension Schemes Manual (RPSM) This is the manual that was said when pensions tax simplification was introduced in 2005 not to be necessary; it is around 3600 pages long, very complicated and exemplary of everything that is wrong with the pensions fiscal system (www.hmrc.gov.uk/pensionschemes).

Registration The process of obtaining registered pension scheme status from HMRC. Regulated modification A detrimental modification or a protected modification or both. Regulator See Pensions Regulator.

Reinstatement Following the lapse of a policy, ordinarily through failure to pay the due premiums, some policies allow the ability to reinstate the cover, subject to (a) payment of the missed premium and (b) a declaration of health to satisfy the company that there has not been a material change in the risk they are covering.

Relevant administrator For a retirement benefits scheme, former approved superannuation fund or relevant statutory scheme as defined in section 611A Income and Corporation Taxes Act 1988 (ICTA), or a pension scheme treated by HMRC as a relevant statutory scheme, this is the person(s) who is/are the administrator of the pension scheme under section 611A of ICTA.For a deferred annuity contract where the benefits are provided under one of the types of scheme above, or a retirement annuity, this is the trustee(s) of the pension scheme, or the insurance company which is a party to the contract in which the pension scheme is comprised.For a Parliamentary pension scheme or fund, this is the trustees of the scheme or fund.For a personal pension scheme, this is the person who is referred to in section 638(1) of the Income and Corporation Taxes Act 1988). (HMRC)

Relevant annuity For the purposes of Part 4 of the Finance Act 2004 (pension schemes etc) a “relevant annuity” is a single life annuity without a guaranteed term. (HMRC)

Relevant benefit accrual This is the test that is applied to those who have registered for enhanced protection to ensure that their benefits have not grown above the prescribed limits set by HMRC. These limits have been set at either the greater of 5% or the growth in the retail prices index for each year after A-day. Relevant benefit accrual works by applying two tests on member’s benefits, these tests compare the member’s capital value at A-day to that at the date of retirement. The capital value at retirement must be lower than at least one of the tests.

Relevant benefits Obsolete since A-day, these are benefits defined by tax legislation (section 612(1) of ICTA 1988 – now repealed). These benefits included any type of financial benefit given by an employer on retirement or death or as a result of a pension sharing order but excluded benefits given in connection with redundancy (as opposed to retirement).

Relevant commencement date This means (a) in the case of a cash balance arrangement or a defined benefits arrangement or a hybrid arrangement, the only benefits under which may be cash balance benefits or defined benefits, the date on which rights under the arrangement begin to accrue to or in respect of the individual, or (b) in the case of a money purchase arrangement other than a cash balance arrangement, the first date on which a contribution within section 233(1) of Finance Act 2004 is made, oc) in the case of a hybrid arrangement not within paragraph (a), whichever is the earlier of the date mentioned in that paragraph and the date mentioned in paragraph (b). (HMRC)

Relevant consolidated contribution A contribution made by way of discharge of any liability incurred by the employer before 6 April 2006 to pay any pension or lump sum to or in respect of the individual. (HMRC)

Relevant earnings See net relevant earnings.

Relevant overseas individual An individual who either does not qualify for UK relief on contributions paid to a registered pension scheme because they are not a “relevant UK individual” as defined in section 178 Finance Act 2004, or an individual who is not employed by a UK resident employer and only qualifies for UK relief on pension contributions because they were resident in the UK both during 5 years immediately before the tax year under consideration and when they became a member of the registered pension scheme. (HMRC)

Relevant statutory scheme Statutory scheme that was either established before 14 March 1989 or established after that date and registered by HMRC as a scheme that has provisions corresponding to those of an approved scheme.

Relevant UK earnings This means (1) employment income, (2) income which is chargeable under Schedule D and is immediately derived from the carrying on or exercise of a trade, profession or vocation (whether individually or as a partner acting personally in a partnership), and (3) income to which section 529 of Income and Corporation Taxes Act 1988 (ICTA) (patent income of an individual in respect of inventions) applies. Relevant UK earnings are to be treated as not being chargeable to income tax if, in accordance with arrangements having effect by virtue of section 788 of ICTA (double taxation agreements), they are not taxable in the United Kingdom. (HMRC)

Relevant UK individual An individual is a relevant UK individual for a tax year if (1) the individual has relevant United Kingdom (UK) earnings chargeable to income tax for that year, (2) the individual is resident in the UK at some time during that year, (3) the individual was resident in the UK both at some time during the five tax years immediately before that year and when the individual became a member of the pension scheme, or (4) the individual, or the individual's spouse, has for the tax year general earnings from overseas Crown employment subject to UK tax. (HMRC)

Relievable pension contribution A contribution paid to a registered pension scheme by or on behalf of a member of that scheme, unless one or more of the following exceptions applies. A payment is not a relievable contribution if (1) the member was aged 75 or over when the contribution was made, or (2) the contribution is paid by the member’s employer, or (3) the payment is an age related rebate or a minimum contribution paid by HMRC to a contracted-out pension scheme under section 42A(3) or section 43 of the Pension Schemes Act 1993 or the corresponding Northern Ireland legislation or (4) it is a life assurance premium contribution in accordance with section 195A Finance Act 2004.(HMRC)

Religious discrimination A form of pensions discrimination which is outlawed in pension schemes. Religion was an issue (and remains an issue with annuities) since certain faiths object to contracts on human life.

Remuneration In a defined benefit scheme, the amount of pension earned is invariably related to the amount of salary; HMRC calls this remuneration. So far as scheme rules or an employer’s policy is concerned, it can include or exclude bonuses, commission and other fluctuating emoluments.

Renewable Term Assurance Term life insurance with a term of, for example, three years, at the end of which the policy can be renewed for a further three years and similarly thereafter for an overall specified length of time.

Renewal commission A financial reward to a financial adviser for the ongoing payment of premiums on a regular premium contract. It is due at the annual renewal date of the policy and is expressed as a percentage of the premium.

Renewal The annual anniversary of a life contract at which point various options may be available to the policyholder to vary the terms of the policy, eg increase or decrease either the premium or the sum assured.

Reportable events From A-day, the scheme administrator must report certain events to HMRC. These are

referred to as reportable events and include: • unauthorised payments made to either a member or employer • the winding-up of a scheme • the payment of pension before normal minimum pension age.

Reporting This involves providing members with annual or quarterly updates on the performance of their chosen investment funds as well as an obligatory annual forecast on the value in today's terms of their accumulated benefits today and at retirement.

Repurchase agreement [REPO] An agreement to sell securities, usually bonds, to another party and to buy them, usually after a few days, back at a specified date and price.

Requisite benefits Between 6 April 1978 and November 1986 schemes contracted out of SERPS had to meet a requisite benefits test confirming that they provided a minimum accrual rate (1/80th pensionable salary for each year of pensionable service). This test was in addition to the GMP requirements. The test is now obsolete.

Responsible investing The incorporation of client-specified non-financial corporate or societal behaviours into the investment decision process. These tend to be grouped under environmental, social and corporate governance ['ESG'] issues. See also corporate governance.

Re-spreading Re-spreading involves repeatedly delaying funding a deficit in a pension fund; it can occur when the deficit funding extends beyond the next valuation and is spread over a longer period than originally envisaged as a result of the next valuation. The Pensions Regulator regards re-spreading with distaste.

Restoration order The Pensions Regulator may make a restoration order in respect of a transaction involving a scheme (not including a defined contribution scheme) if: • the employer has become insolvent; or • the transaction is one at an undervalue entered into with a person on or after 27 April 2004. The purpose of a restoration order is to restore the scheme funding level to the position where it would have been had the transaction not been entered into. See anti-avoidance; contribution notice; financial support direction.

Retail prices index (RPI) Indicator of price inflation often used to assess or limit annual pension increases.

Retained benefits Benefits acquired from previous employment (or self-employment) that must be taken into account when calculating benefits from membership of a current pension scheme.

Retained earnings Company earnings that are not paid out as dividends.

Retirement Annuity Contract (RAC) The predecessor of the personal pension plan. Available before April 1988 to the self-employed and those in employment who did not have access to an occupational pension scheme. It is an annuity contract that was established before 1 July 1988 between an insurance company and a self-employed individual or a person in non pensionable employment.

Retirement benefit scheme A retirement benefit scheme is any of the following (1) a scheme which was approved under Chapter 1 of Part 14 of Income and Corporation Taxes Act (ICTA) 1988; (2) a relevant statutory scheme (as defined in s61 1A ICTA 1988); (3) a scheme treated as a relevant statutory scheme; or (4) an old code scheme approved under s208 ICTA 1970 that has not received contributions since 5 April 1980.(HMRC)

Retirement Retirement is a relatively new concept for many humans, not more than 100 years old. The Prudential issues an annual Class of XXXX Retirement Report.

Retrocession A reassurance pooling arrangement to increase the capacity that a reassurer can offer its life company partners.

Return on equity [ROE] The last fiscal year earnings per share [ESP] divided by the last fiscal year net equity per share of common stock. ROE tells shareholders how effectually their money is being employed.

Return The income on an asset together with its capital appreciation, expressed as a proportion of the asset's initial price.

Revalued earnings For the purpose of calculating benefits, these are earnings that have been subject to indexation.

Revalued earnings scheme Scheme in which the benefits are based on revalued earnings for a given period, a notable example being SERPS.

Reversionary Bonus A bonus added to the sum assured (or basic sum assured) of a with-profits life assurance policy out of a life company's surplus profits usually on an annual basis. These bonuses are payable at the end of the term of the policy (that is, at maturity), or on prior death of the life assured. Once allocated, their values are guaranteed provided premiums are paid up to maturity or death. The values of such bonuses are usually related to the sum assured and can be either simple reversionary bonuses (related to the sum assured only) or compound reversionary bonuses (related to the sum assured plus bonuses to date).

Reviews see Hampton, Thornton, Pickering, Myners, Thoresen, Turnbull, Cadbury, Greenbury, Goode

Rights issue A form of company fund raising where existing shareholders are given rights to purchase newly issued shares in proportion to their existing holding.

Risk free rate The interest rate paid by an investment with the lowest possible level or risk, regarded until recently as being UK government bonds.

Risk In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must promise higher expected returns if investors are to invest in them. Risk is usually measured by the standard deviation of returns. Risk management is an important aspect of portfolio management and may involve the use of complex statistical models.

Risk management A system which identifies, assesses and prioritises risk and identifies resources to minimise, monitor and control it.

Risk premium The extra expected return over the risk-free rate demanded by investors to compensate them for the volatility of returns or the possibility of default of risky assets.

Risk register A formal list of the risks, and their degree of importance, to which the pension trustees are exposed to. www.thepensionsregulator.gov.uk/pdf/cop9intcontrolsexampleregister.pdf

Risk/Return trade off The amount of expected return that must be sacrificed in order to reduce risk.

Risk-free asset/Rate An investment with no chance of default, and a known and certain rate of return. [Typically the yield on a government bond or cash.]

RPI Stands for the Retail Price Index, which is the index of retail prices compiled by the Office for National Statistics. Where that index is not published for a relevant month any substitute index or index figures published by the Office for National Statistics may be used. (See section 279 Finance Act 2004.) (HMRC)

Running yield [or current yield] The current income from an asset divided by its price.

S&P Standard and Poors, a firm that for a fee gives a rating to companies to determine their ability to continue to support its pension scheme. Cf D&B

s9(2B) rights Rights to benefits (other than benefits from AVCs) under a COSR scheme by virtue of section 9(2B) of the Pension Schemes Act 1993 and which are attributable to contracted-out employment after 5 April 1997. After 6 April 1997 GMP (qv) rights no longer accrued for members who were contracted-out of the state scheme, and all rights accrued after that date are treated as ‘Post97 contracted-out rights’. These rights revalue at least in line with RPI and are known as Section 9(2B) rights.

s21 orders See section 148 orders.

s32 policy A term used to refer to a buy-out policy with an insurance company. These arrangements were previously governed by section 32 of the Finance Act 1981; they were/are designed to accept transfers from defined benefit schemes.

s32A policy Insurance policy that secures the protected rights of a member when a contracted out money purchase scheme is wound-up.

s37A orders See section 109 orders.

s47 appointment letter This term refers to the appointment of advisers under section 47 of the Pensions Act 1995. This section requires that certain advisers are formally appointed by the trustees of occupational pension schemes. These include legal advisers, the actuary, the auditor and the fund manager. See scheme actuary; scheme auditor.

s49 scheme See section 53 scheme. s52A orders See schedule 3 orders.

s53 scheme This refers to an Occupational pension scheme that was formerly contracted-out, still has guaranteed minimum pensions (GMPs) or protected rights and therefore remains subject to supervision by HMRC under section 53 of the Pension Schemes Act 1993. It used to be known as a section 49 scheme.

s67 This section of the Pensions Act 1995 prevented scheme rules being modified if the change adversely affected members’ rights. It has been amended by the Pensions Act 2004 to allow schemes to amend subsisting rights without the members’ consent where the actuarial value of the rights as a whole will be maintained. A conversion of defined benefit rights to defined contribution rights or a change resulting in a reduction of a pension in payment will not however meet the requirement for actuarial certification and so will always require members’ consent. Trustees will still be required to approve the proposed modification. See protected modification.

s75 debt See debt on the employer.

s109 orders Annual order issued under section 109 of the Pension Schemes Act 1993 that specifies the rates of increase to be applied to post-1988 GMPs in payment. Used to be known as section 37A orders.

s143 guidance Pensions Act 2004 s143 sets out a method of calculating liabilities for determining the level of a scheme’s funding to determine whether the Board of the Pension Protection Fund should take over the responsibility for a particular scheme.

s148 orders Annual order issued under section 148 of the Social Security Administration Act 1992 that, using the increase in national average earnings, specifies the rates of increase to be applied to the earnings factors on which the state second pension and GMPs are based. Used to be known as section 21 orders.

s156 guidance Pensions Act 2004 s156 directs actuaries on how to value liabilities in relation to a closed scheme fvor PPF pruposes.

s179 The valuation to determine scheme underfunding for the purposes of enabling risk-based pension protection fund levies to be calculated is provided for in section 179 of the Pensions Act 2004. The section sets out the method of valuation for calculating liabilities for Pensions Protection Fund purposes. For undertaking a valuation to determine the level of a scheme’s funding position in accordance with section 179 of the Pensions Act 2004. The results of the valuation are combined, with the results of the s179 valuations for all other schemes that are eligible for the PPF, to assess the general level of scheme underfunding and used to set the levy quantum and scaling factor. The s179 results for an individual scheme are also used to calculate the pension protection levy for that scheme.

s226 annuity See retirement annuity.

S2P is the State Second Pension which was introduced in 2002 to replace over time the State Earnings Related Pensions (SERPS). It is a flat-rate pension which gives benefits to people who are earning under £11,000 as though they had been earning that amount. Common sense dictates that since it is a flat rate pension it will eventually be merged with the Basic State Pension. It can be provided by the state (in which case the individual is contracted-in) or by a company scheme (which is contracted-out) or through a personal pension, if you are in employment (in which case it is called an appropriate personal pension).

s608 A section 608 scheme is an occupational pension scheme that was approved before 6 April 1980 (see ICTA 1970 s208), has not been reapproved under later legislation and has not received any contributions since 6 April 1980 (see Finance Act 2004 s153 & Schedule 36 para 1(b) and 3). It is automatically registered under the FA 2004 provisions.

Sacrifice see salary sacrifice

Safe harbour Investment strategy which minimises future uncertainty.

Safe haven See safe harbour.

Safeguarded rights Part of a pension credit that is attributable to the contracted-out benefits of a member.

Salary sacrifice Salary sacrifice is an agreement between the employer and employee by which the employee foregoes future remuneration in exchange for the employer paying the equivalent amount as a contribution to a pension scheme. HMRC are often suspicious of salary sacrifice arrangements but it is perfectly legal if properly documented. By foregoing remuneration, an employer and employee may reduce their obligations to pay national insurance contributions. Salary sacrifice may offer significant advantages to employers, with opportunities to millions in National Insurance (NI) payments, and often with union support. From April 2008 the ceiling for paying the standard 11% rate of NI contributions rose and applies to income up to £40,040 a year. Pensions salary sacrifice can be offered as a stand-alone option, alongside other salary sacrifice arrangements, such as child care vouchers. Alternatively it can operate under the umbrella of, or perhaps as a precursor to, a broader flexible benefits scheme offering the potential for further NI savings and greatly enhanced employee appreciation of their benefits package. See eg www.mercer.com/referencecontent.jhtml?idContent=1304490. Salary sacrifice may not be appropriate for everyone. But where employees are contributing to a contracted-out, trust-based pension scheme, salary sacrifice is may be beneficial for most employees since there can be a positive effect on state benefits. But for members of contracted-in trust or contract-based group personal pension and stakeholder pension schemes, and taking account of factors such as age, sex and salary, the impact of salary sacrifice on some state benefits can be less attractive.

Salary-Related Scheme An occupational pension scheme that provides benefits based on accrual rate, pensionable service and pensionable salary. Also known as a defined benefits scheme; it can involve basing a pension on final salary, career average or other system.

Satellite portfolio See core portfolio.

Savings Credit A component of Pension Credit which provides additional support for those aged 65 and over with income above the Savings Credit Threshold.

Schedule 3 orders Order under which the government decides how much preserved benefits should increase between a member leaving a scheme and his normal pension date. It was formerly known as a section 52A order.

Schedule of contributions The trustees of a defined benefit scheme must ensure that they have in place a schedule of contributions at all times. It should be agreed by the employers participating in the scheme and show the contributions payable by the employers and members. If the trustees and employers have agreed a recovery plan, the schedule of contributions should also show the additional contributions that are required from the employers. The schedule of contributions must be certified by the scheme actuary, and must be periodically revised by the trustees. See statutory funding objective.

Scheme actuary This is a named actuary appointed by the trustees or managers of an occupational pension scheme under section 47 of the Pensions Act 1995. Statutory responsibilities of the scheme actuary include:• producing the scheme actuarial valuation • completing the required certification for contracted-out defined benefit schemes • certifying the schedule of contributions • certifying the basis for transfer values • reporting material breaches of statutory responsibilities by the employer or trustees to the Pensions Regulator. See section 47 appointment letters.

Scheme administration employer payment Payments made (1) by a registered pension scheme that is an occupational pension scheme, (2) to or in respect of a sponsoring employer or a former sponsoring employer (3) for the purposes of administration or management of the scheme.(HMRC)

Scheme administration member payment Payments made by a registered pension scheme to or in respect of a member or a former member for the purposes of administration or management of the scheme.(HMRC)

Scheme administrator Before A-day, this term referred to the person or body responsible for the day to day management of the pension scheme, including maintaining members’ records, calculating and paying benefits, and managing contributions. Under the Finance Act 2004, this is the person who is appointed in accordance with the scheme rules for tax purposes and will generally be the trustees, the scheme managers (if contract-based) or any authorised delegate. He must make a declaration to HMRC that he understands his responsibilities which include making quarterly returns to HMRC in respect of any income tax due from the registered pension scheme and that he intends to discharge them. Penalties for non-compliance apply. The person(s) appointed in accordance with the pension scheme rules to be responsible for the discharge of the functions conferred or imposed on the scheme administrator of the pension scheme by and under Part 4 of Finance Act 2004. This person must be resident in an EU member state or in Norway, Liechtenstein or Iceland (EEA states which are not EU states). The person must have made the declarations to HMRC required by section 270(3) Finance Act 2004.(HMRC)

Scheme auditor Auditor appointed by the trustees or managers of an occupational pension scheme under a section 47 appointment letter.

Scheme cessation see Current Account Management

Scheme chargeable payment Scheme chargeable payments are (1) any unauthorised payment by the pension scheme other than a payment that is exempted by section 241(2) Finance Act 2004 from being a scheme chargeable payment (see list below), and (2) a payment that the pension scheme is treated as having made and classed as a scheme chargeable payment by (a) section 181A Finance Act 2004 because of not meeting the minimum level of payment of alternatively secured pension, (b) section 183 or 185 Finance Act 2004 because of unauthorised borrowing, or (c) section 185A or 185F Finance Act 2004 because of income or gains from taxable property. The following unauthorised payments are not scheme chargeable payments. (1) The payment is treated as having been made by section 173 Finance Act 2004 and the asset used to provide the benefit is not a wasting asset as defined in section 44 Taxation of Capital Gains Act 1992. (2) The payment is a compensation payment as defined by section 178 Finance Act 2004. (3) The payment is made to comply with a court order or an order by a person or body with the power to order the making of the payment. (4) The payment is made on the grounds that a court or any such person or body is likely to order (or would be were it asked to do so) the making of the payment. (5) The payment is of a description prescribed by regulations made by HMRC.(HMRC) From A-day, this arose if a scheme either makes an unauthorised payment or borrows an amount that it is not authorised to borrow. See scheme sanction charge.

Scheme pension A pension entitlement provided to a member of a registered pension scheme, the entitlement to which is an absolute entitlement to a lifetime pension under the scheme that cannot be reduced year on year (except in narrowly defined circumstances) and meets the conditions laid down in paragraph 2 of Schedule 28 to Finance Act 2004. (HMRC) It is a pension paid from a scheme either directly or by way of an annuity. Scheme pensions is a broad term covering all types of pensions being paid from a fund that is not an unsecured pension or alternatively secured pension (ie income drawdown) and is not an annuity. It is invariably a set amount rather than a fluctuating amount and has become important in recent years as the government introduced inheritance tax on any redistribution of funds to other family members from 6 April 2008. There is an additional tax charge of an ‘unauthorised payment charge’ (40%), a scheme sanction charge (15%), unauthorised payment surcharge (15%, where the amount distributed is more than 25% of the total fund value). And if death occurs after 75, the remaining fund is then assessed for IHT, a total of 82%. The rules do not apply to schemes with 20 or more members. Oddly scheme pension may suffer higher rates of tax (as above) than unsecured pensions on relation to death before age 75, where there is a stand alone tax of 35%. This is part of pensions tax simplification.

Scheme return All registered schemes (ie registered with HMRC, to gain fiscal neutrality) must file a return with the Pensions Regulator on an annual basis. The return is also used by the PPF t help calculate the levy.

Scheme return See registered pension scheme return.

Scheme sanction charge From A-day, this will be imposed on a scheme administrator if during the course of any rolling 12 month period the scheme has made one or more scheme chargeable payments. The charge is set at a maximum of 40% of all scheme chargeable payments made in any tax year.

Scheme specific funding Formal name for the regulation which governs how an actuarial valuation must be carried out. It contrasts with the formal ‘minimum funding requirement’, and allows the actuary to take individual circumstances of the fund into account. See statutory funding objective.

Scheme specific protection (see also Primary protection Enhanced protection) (HMRC) Scrip dividend Payment of dividends in the form of additional shares rather than cash.

Scrip issue See bonus issue.

Secondary market The purchase and sale of securities which have previously been issued in the primary market.

Seconded employee For the purposes of the legislation on cross border pension schemes, this is an employee who is sent, by his UK employer, to work overseas for a limited period in another EU member state but is still working under the control of the UK employer and who, at the end of that period, intends to return to work for that employer in the UK, or to retire.

Sector Stock markets are divided into sectors, which comprise of companies from the same industries e.g. telecommunications sector, oil sector, media sector etc.

Secured bond A bond for which the issuer has set aside assets as collateral to ensure principal repayment and encourage timely interest payments.

Secured pension Either a lifetime annuity or scheme pension.(HMRC)

Secured unfunded unapproved retirement benefit scheme (SUURBS) These are schemes which since A-day are referred to as employer-financed retirement benefit schemes. Promises made under these arrangements are secured against assets of the company. They are arrangements designed to provide security for an unfunded pension promise to an executive in a way that does not attract a benefit in kind tax charge. See funded unapproved retirement benefit scheme; unfunded unapproved retirement benefit scheme; employer financed retirement benefits scheme.

Securities Assets tradable in standardised units on secondary markets, particularly equities and bonds. Securities class action see Class action

Securities lending see Stock lending

Securitisation The creation of securities from non-tradable assets.

Seed stage The stage of a company’s development when it is still developing its products or services, but may not be out in the market selling its products or services

Segmentation The process whereby a number of schemes are set up at the same time to allow the member to draw benefits at different times (phased annuity). It is applicable to personal pension plans and retirement annuities. This is also referred to as clustering.

Segregated fund Where the assets of a particular fund are managed independently of those of other funds under the fund manager's control.

Selected Pension Age (SPA) The age chosen by a personal pension plan member to draw retirement benefits.

Selection against the life office The actions of an adviser or a client taking advantage of a piece of information to the financial detriment of the life company. Examples might include loose unit pricing arrangements allowing investors to make decisions based on hindsight.

Self-administered scheme Occupational pension scheme in which the trustees or an investment manager decide how the investments are managed (as an alternative to insured or fully insured).

Self-invested personal pension (SIPP) This is a personal pension plan that allows a member to select the scheme’s investments. SIPPs are particularly attractive to the higher paid. They give the opportunity to invest in a wide range of investments other than (and as well as) insurance products, including property. Contributions to a SIPP count towards an individual’s annual allowance, and benefits from a SIPP count towards an individual’s lifetime allowance. They are personal (as opposed to workplace) pensions placed through an institution (an insurance company or bank) where the contributor decides on the investments. They are also known as member-directed plans.

Self-investment This is where a scheme’s assets are invested in connection with the employer’s business. In most cases, as a result of section 40 of the Pensions Act 1995, up to a maximum of 5% of a scheme’s assets can be invested in this way, although different rules apply to a small self-administered scheme.

Serious ill-health lump sum Since A-day, this is payable after the scheme administrator has obtained medical evidence that a member’s life expectation is less than a year, and only when all or part of that member’s lifetime allowance is available. It will only be paid in relation to those benefits that have not been taken. It must be paid before the member reaches age 75.

SERPS The state earnings-related pension, is 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 plan which provided alternative and equivalent benefits. SERPS was replaced by the state second pension from 6 April 2002. Not to be confused with a United States SERP which is a senior executive retirement plan. The second state pension was introduced by Barbara Castle in 1978.

Settlement The payment or collection of proceeds after trading a security. Settlement usually takes place some time after the deal and price are agreed.

Settlor A settlor is the term given to an individual setting up assets under a trust. The settlor agrees the provisions of the trust deed, appoints the trustees and specifies the beneficiaries under the trust.

Sexual discrimination see Gender discrimination

Sexual orientation discrimination

SFO See statutory funding objective.

Share A stake in a company which confers ownership rights on the holder. Shares are also known as equities.

Share buy-back Share buy-backs can be a tax-efficient alternative to pay out dividends. When a company buys some of its own shares in the market to reduce its issued share capital, it changes the proportion of debt to equity that it holds on its balance sheet.

Share capital The funding for a company that is raised through the issue of shares.

Sharpe ratio A measure of risk-adjusted return: the average additional return per unit of risk. Specifically, it is the ratio of the average performance relative to the risk-free asset [usually cash] to the volatility of return relative to the risk-free asset.

Short An investor is 'short' when the exposure to a given asset is less than the level considered neutral. If the neutral exposure is zero, the investor's exposure is negative. Investors go short on a given asset with a view to buying it back at a lower price at a later date.

Short bond/Short dated bond A bond with a term to redemption of less than 5 years.

Short extension investing A relative return investment approach that provides full exposure to the market by taking both short and long positions. For example, a fund manager can invest 130% of the fund's value in long positions and 30% in short positions resulting in 100% market exposure but with the potential for more alpha, given the extended opportunity set, than a typical long-only portfolio. The actual percentages may vary but the principal remains the same.

Short extension strategies (see also 130/30)

Short selling Selling securities without actually holding them. It can make a profit if the share price falls, and can be used as part of a contingent asset strategy. Pension funds cannot do this direct in relation to their sponsor employer, but may be able to do so using derivatives.

Short service benefit (SSB) Under the preservation legislation this is the pension benefit which must be provided for a member who leaves the scheme before retirement and does not receive an immediate pension.

Short service refund lump sum A lump sum benefit paid to a member of an occupational pension scheme because they have stopped accruing benefits under the scheme and have less than two years of pensionable service under the scheme, and which meets the conditions of paragraph 5, Schedule 29 to the Finance Act 2004.(HMRC). It is the new term for a refund of employee contributions.

Short service Refunds A refund of employee contributions to a member who leaves before preservation (vesting) crystalises.

Short Term Annuity A temporary annuity that runs for no longer than 5 years. Allows an individual to draw an income whilst deferring purchasing a full annuity. Available between 50 and 75.

Short-termism The allegation that pension funds (and other investors) invest only to make short-term gains, thus making it difficult for companies to take longer-terms views on their corporate development and harming industry. Most of the evidence is the other way (see eg Geoff Lindey and Will Goodhart, False assumptions about institutional investors, UKSIP letter to FT 29 November 2007 which argues that the statistics are misunderstood).

Simplification see also Deregulation; Tax simplification

Single Lifetime Annuity An annuity that will not pay out to a spouse, civil partner or dependant after the member’s death.

SIP see Statement of investment principles

SIPP Establishment Fee This is the charge for preparing and processing the documentation to make you a member of the pension. It includes opening the bank account and processing any fees relating to the payment of contributions into the pension at the outset of membership.

SIPPs See self-invested personal pension.

Skilled person report The Pensions Regulator can issue a notice to the trustees, employers or other people involved in the administration of a pension scheme asking them to provide the Pensions Regulator with a report on specified matters. The person appointed to make the report must be approved by the Pensions Regulator and such person must appear to the Pensions Regulator to have all the necessary skills to make the report.

Small lump sum The expression “small lump sum”, when used as a defined term in this manual, refers to a specific type of authorised payment made after 30t h November 2009 under part 2 of the Registered Pension Schemes (Authorised Payments) Regulations 2009. Typically “small lump sums” will be payments of less than £2,000 derived either from member’s uncrystallised benefit rights, or from member’s/ dependant’s crystallised pension rights. “Small lump sum” payments were developed to help solve a problem popularly known as having a “stranded pot”, where the sum in question is too small to arrange a pension with. In order to qualify as a “small lump sum” the payment must meet certain conditions laid down in the regulations (see RPSM09105400). (HMRC)

Small self-administered scheme (SSAS) This is an occupational pension scheme. HMRC requires these schemes to meet special conditions eg: • maximum of 12 members • assets must not be insurance policies. Following A-day, HMRC relaxed some of the rules applying to SSASs – eg they no longer require a pensioneer trustee. It is an occupational pension scheme, usually for small businesses, that gives members more investment control and flexible retirement options.

Small-cap Used to describe collectively those companies that have a small market capitalisation.

Smoothing Smoothing is the process that life companies use to even out good and less good years of investment returns when declaring bonuses. In a good year, companies will declare bonuses below the level of investment return with the excess falling into the estate. In poor years, companies will declare bonuses above the level of return to ensure less volatile returns to policyholders, and by so doing reduce the amount of the estate.

SMPIs See statutory money purchase illustrations.

Socially responsible investments (SRI) Since July 2000, all occupational pension schemes must state in their statement of investment principles how, if at all, they have considered social, environmental and ethical matters in their investment strategies.

Soft commission is so called because trustees who are soft-hearted allow fund managers to enjoy what is in effect Christmas twice-a-year. It allows investment managers to use stockbrokers to buy and sell your shares at a high commission rate so that the stockbrokers can buy them gifts (not normally cheapies, like silk stockings and champagne, but really expensive ones like Reuters screens). Don’t allow it without good cause. The Myners review published by the Treasury in March 2001 recommended the abolition of soft commission arrangements. Soft commissions are payments on the provision of services by a broker in exchange for a guaranteed level of sales and purchases of stock in the stock market ordered by a fund manager. Brokers have been criticised for not offering an incentive to the fund manager to negotiate a reduction in brokers’ fees, since in any event they are paid by the client (the pension fund). This means that dealing costs (paid by pension funds) are not as low as they could be. Although it is legal, it must be disclosed in the customer agreement between the pension fund and the investment manager. The Myners review recommended that soft commissions should be abolished.

Solvency II An draft EU Directive requiring insurance companies to have adequate reserves, whose provisions some EU member states wish to extend to pension schemes. If applied in this way it would make most UK pension funds insolvent, which is why the UK is against its extension.

Sovereign debt Bonds issued by a central government.

Special Annual Allowance Charge (HMRC) (see Special Annual Allowance Charge) Protected Pension Input Amounts) Order 2010) Special annual allowance charge A charge in respect of the amount by which the total adjusted pension input amount for a tax year in the case of an individual who is a member of one or more registered pension schemes exceeds the amount of their special annual allowance for the tax year. For 2009-2010 the charge was at the rate of 20%. For 2010-2011 the charge is at the ‘appropriate rate’. The special annual allowance applies only in respect of individuals with ‘relevant income’ (see RPSM15101020) of £130,000 or more.(HMRC) The tax charge of 20% imposed on the amount by which the total adjusted pension input amount for the year exceeds the special annual allowance limit for the respective tax year (Finance Act 2009).

Special purpose vehicle (SPV) A legal structure sometimes also used in contingent asset funding strategies under which both the sponsor and the fund achieve a specific objective, eg the employer places assets into an SPV which are loaned back to the employer on specified terms, the returns being shared between the fund and the sponsor.

Specialist [mandate, portfolio] A specialist investment mandate or portfolio is usually one involving a single asset class, region or investment style [as opposed to 'balanced'].

Speculative grade A credit rating below investment grade.

Spiking (US) When pensions plan members in a DB plan add extra jobs, bonuses or overtime pay in the final year before retiring to increase pensions, which are based in part on final earnings.

Split fund is an arrangement which means that you divide the assets of your scheme between different fund managers and watch them compete. Some schemes have up to a dozen fund managers, but even for the smaller schemes a couple is not a bad idea.

Sponsor covenant The ability and willingness of the sponsor of a pension scheme to meet the pension promises it has made to its employees.

Sponsoring employer In relation to an occupational pension scheme means the employer, or any of the employers, to or in respect of any or all of whose employees the pension scheme has, or is capable of having, effect as to provide benefits.(HMRC) In relation to an occupational pension scheme, the employer, or any of the employers, to or in respect of any or all of whose employees the occupational pension scheme has, or is capable of having, effect as to provide benefits. See principal employer.

Spot price The price of an asset when payment of the purchase price and delivery of the asset are essentially immediate [in contrast to the forward price].

Spousal by-pass trust A trust of lump sum pension death benefits from a registered scheme under which the deceased member’s widow or widower is a potential beneficiary. The object of the trust is to make sure that the death benefits do not form part of the taxable estate of the widow or widower yet still give them possible access to those funds as a beneficiary to whom the trustees can appoint benefits or lend funds (see John Woolley, In perpetuity, Taxation, 18 February 2010 (Vol 165 No 4243)

Spread duration A measure of the percentage change in a bond's price for a 100 basis point change in its option adjusted spread. Often used to quantify the sensitivity of a portfolio to changes in spreads. The spread duration of a portfolio is the market weighted average of the spread duration of all of its securities.

Spread The difference in yield between two different bonds. It is typically used to describe the extra yield offered by corporate bonds over gilts.

SRI regulations Occupational Pension Schemes (Investment) Regulations 1996 SI 1996 No 3127 (as amended by SI 1999 No 1849) reg 11A and SI 1998 No 1831 (as amended by SI 1999 No 3259) reg 9A

SRI See socially responsible investments.

SSAP 24 The statement of standard accounting practice that, until recently, required pension liabilities (and assets) to be reflected in the accounts of the sponsoring employer. Intended to enable investors and shareholders to compare companies more easily, and to inspect the pension rights of directors/senior employees. SSAP 24 has now been replaced by FRS 17. See accounts, company; IAS 19.

SSAS See small self-administered scheme.

Stakeholder Registration Requirements A requirement that employers with five or more employees must set up a payroll deduction facility to allow employees if they wish to make pension contributions to a provider chosen by the employer. It is one of a range of failed pensions policy initiatives; the DWP website dedicated to stakeholder has been removed, but the legislation continues.

Stakeholder Pension Scheme A type of personal pension plan, offering a low-cost and flexible alternative and which must comply with requirements laid down in legislation. Since October 2001, employers had to offer employees access to a designated scheme (or an acceptable pension alternative by way of an occupational pension scheme or a group personal pension). A stakeholder pension scheme is very similar to a personal pension plan but must meet minimum statutory criteria as to lower and capped fees. An employer does not have to contribute to this scheme on its employees’ behalf. It must be registered with HMRC, satisfy the CAT standards and be registered with the Pensions Regulator as a stakeholder scheme. It is being phased out as auto-enrolment applies.(obs)

Stamp Duty and Reserve Tax [SDRT] Stamp duty depends upon there being a document which can be stamped. For this reason SDRT was introduced in the UK in 1986 to cater for paperless transactions in shares. It is the tax paid on the transfer in beneficial ownership of certain types of asset, for example, units in UK unit trusts which invest in UK equities or property.

Stand-alone lump sum A lump sum benefit paid as a single BCE to a member (aged under 75) of a registered pension scheme that represents all the member’s uncrystallised rights under the scheme. The lump sum must meet the conditions of Articles 25 - 25D of The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572 - as amended by The Taxation on Pension Schemes (Transitional Provisions)(Amendment No.2) Order 2006 - SI 2006/2004.(HMRC)

Standard deviation A measure of risk. The typical spread of outcomes, particularly of investment returns.

Standard level of means tested This is defined as the level of income provided by the Pension supportCredit standard minimum income guarantee which in 2013–14 tops up pensioners’ income to £145.50 a week. This will change from 6 April 2016 to around £144 a week reflecting a single-tier state pension.

Standard lifetime allowance The overall ceiling on the amount of tax-privileged savings that any one individual can accumulate over the course of their lifetime without taking any special factors into account that may increase or decrease the tax-privileged ceiling. For the year 2014-15, this amount is £1.25m. The standard lifetime allowance for following tax years will be specified by an annual order made by the Treasury, and will never be less than the amount for the immediately preceding tax year.(HMRC) It is the lifetime allowance to which neither primary protection nor enhanced protection applies.

State Additional Pension The earnings related part of the state pension, paid in addition to the basic state pension.

State Earnings Related Pension Scheme (SERPS) Alternate name given to the state additional pension between April 1978 and April 2002.State Earnings-Related Pension An earnings-related additional State Pension based on National Scheme Insurance contributions paid as an employee, which was in place between 1978 to 2002 before being replaced by the State Second Pension.

State Graduated Pension Scheme (see also Equivalent Pension Benefit) The State Graduated Pension Scheme was an early attempt to provide earnings-related benefits in addition to the basic flat rate state pension; it started in 1961. Employers with occupational pension schemes could contract-out of the State graduated Pension Scheme and in order to do so had to guarantee to provide members with the maximum pension which a participating member could obtain in respect of his service from the graduated pension scheme; this pension was called the equivalent pension benefit. By April 1975 the maximum EPB for an employee who had been contracted out since April 1961 had reached a total of £42 pa for men and £35 pa for women. The SGPS was discontinued in 1975 to make way for the then new State Earnings Related Pension Scheme (SERPS) that came into effect as from 6 April 1978. Following the discontinuance of the SGPS, contracted-out occupational pension schemes had to secure their EPB liabilities, and there were two methods of achieving this. Schemes could make a payment in lieu to the state scheme to reinstate the members back into the state scheme. Or the occupational scheme retained the liability for the EPB as a benefit for the member at retirement (as a paid-up benefit). Since no index-linking applies, inflation has rendered these benefits virtually worthless, although the administration for schemes remains. In practice many schemes have lost touch with members, and the cost of tracing is disproportionate. And where they are contacted, many members fail to claim, because of the small amounts involved. As a consequence it is policy for schemes to retain a reserve funds for the liabilities and mark the records as closed. It is the alternative name given to the state additional pension between April 1961 and April 1975.

State Pension Administered and paid by The Pension Service, this benefit is made up of the basic state pension and the state additional pension. It is calculated by reference to an earner’s National Insurance Contribution payment history. It is composed of the basic state pension and the state second pension.

State Pension age (SPA)The earliest age at which a person can get their state pension. A claim is required to get a state pension. From 2010 to 2020, state pension age for women will be gradually increased to age 65.

State Pension Credit The third pillar of state pensions; it comprises both the guarantee credit (qv) and the savings credit (qv).

State Pension Date (SPD) The earliest date that the state pension can be paid.

State Pension Deferral On reaching state pension age, a pensioner can defer taking their state pension in exchange for a higher pension or lump sum in the future.

State Pension Forecast An illustration provided by The Pension Service giving an estimate of what state pension an individual may receive at state pension age.

State pension offset Reduction in a member’s pensionable earnings or his pension to take into account the amount of state pension that he receives. Also known as offset or the LEL offset.

State second pension (S2P) Additional state pension that replaced SERPS and is paid in addition to the basic state pension. It is the alternate name given to the state additional pension since April 2002. The current earnings-related additional State Pension replaced the State Earnings Related Pension Scheme in 2002. It is based on contributions paid as an employee or credits for caring or ill-health.

Statement of funding principles A statement of funding principles is a written statement that trustees must prepare (in consultation with the employer) and maintain, setting out their policy to ensure that the statutory funding objective is met. It sets out the actuarial methods and assumptions to be used for the scheme’s actuarial valuation and also the approach to be adopted to rectify any shortfalls; it was first iIntroduced by the Pensions Act 2004.

Statement of investment principles (SIP) A statement of investment principles prepared under Pensions Act 1995 s35 or under the Local Government Pension SCgheme (Management and Investment of Funds) Regulations 1998 SI 1998 No 1831 (as amended by SI 1999 No 3259) reg 9A It is a written statement that trustees are required to prepare and maintain setting out the principles governing decisions about investments in relation to an occupational pension scheme. Trustees are required to obtain advice from a suitably qualified person and must consult with the sponsoring employer.

Statutory discharge This occurs where a member who leaves a scheme exercises his statutory right to a cash equivalent and transfers that amount to another pension scheme or buy-out policy. In such circumstances, the trustees of the scheme are discharged from their responsibilities to the member.

Statutory funding objective (SFO) Also known as scheme specific funding, the SFO requires all defined benefit schemes (unless exempt) to hold sufficient assets to cover their technical provisions. The assets which may be taken into account in the calculation along with the actuarial assumptions and methods to be used when calculating technical provisions are set out in regulations. A defined benefit scheme that does not meet the SFO will be required to submit a recovery plan aimed at rectifying the shortfall position to the Pensions Regulator. See statement of funding principles; schedule of contributions.

Statutory money purchase illustrations (SMPIs) From April 2002, money purchase schemes (whether occupational pension schemes, stakeholder pension schemes or personal pension plans) must provide members with an annual statement setting out the value of their earned pension and displayed at today’s value. They are annual statements issued to personal pension scheme members, giving forecasts of benefits now and at retirement (in today's terms).

Steward An official of the DWP responsible for keeping an eye on the PPF (see Framework Document between the Board of the PPF and the DWP, July 2008)

Stochastic valuation A stochastic valuation involves a large number of calculations and assumptions generated by computer involving some random selection. It is intended to assist the actuaries, trustees and employers assess the likely range of the funding position.

Stock lending Stock lending became something of a minor obsession for the Pensions Regulator in 2010 following a slightly incoherent letter to it from Frank Field MP about some stock lending that had taken place in a pension scheme whose directors lived in his constituency (tPR, Help for trustees: Understanding and managing the risks of securities lending, January 2010). Stock lending involves a lender, such as a pension scheme, transferring securities to a borrower temporarily. The securities are lent in exchange for a fee, with the borrower granting collateral (such as cash or other securities) to cover the loan. Legal ownership of the securities is transferred from lender to borrower but the borrower must return the securities (or equivalent) at the end of an agreed term, or sometimes on demand. The upside for trustees is that stock lending can give pension schemes the opportunity to earn fees or offset fund management costs, without directly affecting the value of scheme assets. More generally, allowing securities to be borrowed temporarily can help the liquidity of capital markets and reduce the potential for failed settlements. The downside to stock lending is that pension scheme assets are sometimes lent by fund managers without trustees’ full awareness. The Regulator has seen examples of (1) fund managers keeping the bulk of investment return, with trustees retaining all the risk; and (2) trustees having inadequate collateral in place to protect against the risk of stock lending. Stock lending is a common practice but will not be appropriate for all schemes: for example, it could contravene the scheme's investment powers or investment strategy and may not correspond with trustees'/members' risk preferences. Pension scheme trustees therefore need to identify and control the risks involved in stock lending. They should receive adequate benefit if fund managers are lending assets on their behalf. The Regulator recommends that trustees ask themselves questions such as (1) Do the scheme's arrangements with fund managers provide clarity about whether (and which) scheme assets may be lent, and on what terms, including the benefits for the scheme in terms of enhanced return or reduced management fees? (2) Do you have a good understanding of what proportion of scheme assets may be lent out under this arrangement? (3) Do you have an up-to-date knowledge of how much securities lending has taken place and is currently taking place in respect of your scheme's assets? (4) Does your fund manager have appropriate legal agreements in place which make clear the obligations of the borrower and the lender? (5) Do you have appropriate controls and expertise in place to understand and monitor the risks involved in lending scheme assets and to ensure that collateral for loaned assets is appropriate to mitigate these risks and is properly secured? From a governance perspective trustees must ensure that they have the power in their scheme documents to enter into stock lending agreements before they actually do so. Should trustees enter into such agreements without having the power to do so, they may incur personal liability. Trustees who have the relevant scheme power and engage in stock lending without assessing the risks and putting in place adequate protection could also potentially expose themselves to legal claims. If a scheme is (or may be) involved in stock lending, appropriate documentation should be in place.

Stock market A place for dealing in stocks and shares [equities] such as the London Stock Exchange. Stocks Equities [shares] and [in the UK] bonds [loan stocks].

Stonefrost Report The NAPF inquiry into investment performance measurement, 1991, named after its chairman Maurice Stonefrost.

Strategic asset allocation The mix of investment regarded as appropriate for an investor over the long run given that investor's circumstances. This often becomes the investment benchmark.

Strike price See exercise price.

Strip Strips [separately traded registered interest and principal securities] are zero-coupon bonds created from the individual cash flows of a coupon-paying bond.

Style See investment style.

Sub-Investment /

Subsisting rights These are a member’s entitlements (pensions and any other benefits already in payment) and accrued rights as set out in the scheme rules. The member’s accrued rights at a particular point in time consist of the value of the benefits accrued to him calculated as if the member’s pensionable service terminated immediately before. See section 67.

Suicide clause A term of a life policy allowing the life company to refuse to admit a death claim resulting from the suicide of the life assured. This can be time bound in that it only applies to suicides committed within the first few years of the start of the policy.

Sum assured In a life assurance policy (for example, whole of life assurance or endowment assurance), the sum assured is the minimum amount payable to the assured or his/her dependants on the death of the life assured.

Summary funding statement Summary funding statement is a document setting out the funding position of the scheme at the last valuation together with any changes since then. Members of schemes subject to the statutory funding objective should be issued with a summary funding statement annually.

Super security Ensures a debt is higher in the corporate debt structure than its usual position with other unsecured creditors. Sometimes used as part of a contingent asset strategy.

Superannuation Used by some schemes, particularly those in the public service, to describe a member’s contributions.

Surchargeable unauthorised member payment This surcharge arises if the amount of the unauthorised payment to the member or employer is 25% or more of the fund value, or if more than one unauthorised payment is made to a member or employer in a specified period. The surcharge is 15% of the amount of the unauthorised surchargeable payment. It is payable by the member, the recipient, or the employer depending on the circumstances of payment. This means a total tax payment of 55% of the value of the unauthorised payment is payable.

Surplus Reassurance A surplus reassurance arrangement whereby the ceding company retains all risks up to a certain level, its retention level, and reassures the excess above this limit.

Surplus The financial result at the end of a financial accounting period expressing the excess funds available after accounting for movement in the liabilities within a fund and therefore potentially available for distribution by way of a bonus declaration, or withheld via the process of smoothing to bolster the estate of a with-profits fund. It occurs where the actuarial value of a scheme’s assets is greater than the actuarial value of its liabilities. The surplus is the difference between the two and is known as an actuarial surplus. (see also Trapped surplus)

Surrender Occurs when an insurance policy is cancelled and the insurance company pays an amount known as the surrender value to the policyholder. It includes for the encashment of a life policy, for example an endowment assurance policy, by the assured, prior to its maturity.

Surrender value Surrender Value is the amount paid when an insurance policy is cancelled before it reaches the agreed maturity date. The sum is calculated by taking into account the total premiums paid and the return on investment earned. Because insurance companies tend to deduct their charges, including setting-up costs, during the early years of the policy, early surrender values are often low and may even be less than the amount actually paid in.

Surveys Innumerable. They include The Pension Fund Barometer (Financial News/Richard Davies Investor Relations) (www.rdir.com) identifies trends within the European pensions industry.

Survivors is the modern term for ‘widows and widowers’; it is shorter and discrimination-free.

Suspension order Order made by the Pensions Regulator suspending a named person from exercising any powers or carrying out any duties as a trustee of an occupational pension scheme covered by the order. See disqualification order; prohibition order.

SUURBS See secured unfunded unapproved retirement benefit scheme. (obs)

Swap transaction An agreement between two counterparties to exchange one cashflow type for another at regular intervals on pre-agreed terms, for a pre-agreed time span. For pension funds, the biggest risk is whether the counterparty (the bank they do they deal with) could go bankrupt. To reduce the risk ‘collateral’ is given by the bank.

Switching The name given to the process of changing the choice of funds in which a policy is invested. Ordinarily the units of one fund are redeemed and units are purchased in another fund. It can also be many funds being redeemed for purchase into one new fund, or alternatively one fund being redeemed and invested in a selection of other funds. The purchase of units as part of a switch is done at the bid price, so preventing another bid/offer spread being incurred by the policyholder. A charge is sometimes levied for this service.

Systematic risk/Market risk The risk attributable to market or macroeconomic factors which cannot be diversified away by stock selection, for example the impact of war on a domestic economy. See also non¬systematic risk.

Tactical asset allocation (TAA) The adoption by an investment manager of an asset allocation different from the benchmark in order to enhance return. Tactical asset allocation is used to reflect the portfolio manager's short-term market views.

Take-over bid An offer made to shareholders of a company by an individual or organisation intending to gain control of that company.

Target date An approach whereby investments are structured in line with a pre-set date whereby risk is gradually eliminated as the target date approaches. Similarly to Lifestyles, Target date aims to cater for members who are unwilling to take investment decisions.

Target Driven Investing [TDI] An investment philosophy which states that DC members should start with establishing a clear pension target and then devise a realistic strategy to achieve that target.

Target return An investment approach whereby the manager aims to achieve a pre-set return over a given period. This differs from the traditional approach whereby the manager aims to mimic [passive management] or outperform [active management] a market or peer index.

Tax Free Cash The tax free lump sum paid to a member of a pension scheme when their benefits come into payment.

Tax privilege Phrase used in Treasury documents as part of a propaganda campaign to suggest that pensions are ‘fiscally privileged’. In fact UK pension arrangements in theory follow the ‘EET’ system, ie tax exemption on contributions into the scheme, tax exemption on the build up, and then taxation on the benefits. Apart from the tax-free lump sums, pension funds are broadly fiscally neutral, and they are not particularly advantageous to the higher-paid, nor do the higher paid receive disproportionately higher tax reliefs.

Tax Relief Alleged ‘incentive’ given to those contributing to pension schemes. The government pays 20% (non-earners and basic rate tax payers) or 40% (higher rate tax payers) of a member’s gross contribution. In fact pension schemes are designed to be fiscally neutral, ie although the government loses tax on the contributions it recovers it on the benefits. Nor does tax relief excessively benefit the higher-paid since they pay higher tax on their benefits in due course.

Tax See Registration.

Tax simplification The Finance Act 2004 was intended to reduce 1300 pages of pensions tax law, and around 14 different tax regimes. In the end it reduced the system to about 4 different regimes, but took about 3,600 pages of tax law to do so. There was some simplification, at least for HMRC, but the dream was broken in 2009 when anti-forestalling was introduced to constrain the mythical excess tax relief for higher earners, and introduced another 400 pages of rules and added astonishing extra complexity. Although anti-forestalling has largely gone, the system is still unnecessarily and grotesquely complex. It is possible to have a simple pensions tax regime; most other countries around the world have it.

Tax-Approved Scheme A pension scheme that was approved to operate by HMRC (obs).

T-Bill/Treasury bill A US Government debt security with a maturity of less than one year. They are sold at a discount to par – where the difference between purchase price and redemption value represents the investor's return.

T-Charter A code of practice 123designed to help pension trustees identify key issues when moving assets to new investment managers, issued by a group of 17 transition management firms in October 2007.

Technical analysis The analysis of historical price movements and trends to predict future price action.

Technical provisions Technical provisions is a term imported from continental regulations under the European Pensions Directive 2003 and which is now used instead of ‘actuarial reserves’. Under the scheme funding provisions of the Pensions Act 2004, it is the amount required, on an actuarial calculation, to meet a scheme’s liabilities. The figure helps to determine the scheme contributions required to cover the liabilities. See statutory funding objective; Liabilities.

Tender A method of issuing securities whereby investors are invited to bid, subject to a minimum price. The allocation of the securities is made according to the prices bid.

Term (of a bond) The time remaining until the final payment on the bond.

Terminal Bonus An additional bonus paid to reflect the overall performance of a with-profits life assurance policy at maturity or prior death of the life assured. It varies from year to year and may be a substantial addition to the value of such a policy.

The Pension Service A part of the DWP. Responsible for administering and paying the state pension.

The Pensions Advisory Service (TPAS) This is an independent and non-profit making organisation that provides free information and guidance to any individual who has a complaint or dispute with his occupational or personal pension arrangement.

The Pensions Regulator (the Regulator) (tPR) The statutory regulator in the UK for pension arrangements set up by employers. Required to be proportionate, sensible and balanced rather than simply procedural. See also Pensions Regulator.

Third country national (TCN) An individual who is a national of one country, employed by a company based in a second country and actually working in a third country (with pension rights possibly based in a fourth country).

Third party notice A notice issued by the Pensions Regulator to a third party. It requires specific action to be taken by that third party within a certain time. It can be issued where a person does not comply with certain pensions legislation as a result of another person (the ‘third party’) failing to do something, but where that failure of the third party does not breach pensions legislation. Civil penalties apply for non-compliance with a third party notice. See improvement notice.

Thoresen HMT sponsored independent review on the cost and benefits of providing generic financial advice (2007/2008) named after chairman Otto Thoresen.

Thornton DWP sponsored independent review on legislative simplification in June 2007, named after its chairman, Paul Thornton. It was broadly ignored by the DWP.

Tied sales force A distribution arm of a life company which can only advise on the products and services of that company.

Time-Weighted Rate of Return The rate of return on an asset or portfolio that adjusts for the effect of cash flows. The time weighted return can be used to compare portfolio performances against each other and against market indices.

TIP Trustee Investment Plan

TKU See Trustee knowledge and understanding.

Top hat pension scheme Also known as an executive pension scheme, a top hat scheme is an occupational pension scheme where membership was restricted to certain employees only (invariably senior management and directors).

Top-down An approach to investment analysis which starts from macro-economic factors [GDP growth, interest rates, inflation etc], and business cycle analysis to identify a portfolio distribution across asset classes, then a country/currency mix, a sector distribution and ultimately a stock selection. Converse of the bottom-up approach. It is a process of investing which prioritises looking at a view of general issues such as the economic condition of the country and the prospects for various sectors, rather than the prospects for a particular company. see also Bottom-up.

Top-up pension scheme Scheme that provides a member with benefits in addition to those provided under another scheme. See funded unapproved retirement benefit scheme; unfunded unapproved retirement benefit scheme; secured unfunded unapproved retirement benefit scheme; employer financed retirement benefits scheme.

Total adjusted pension input amount Pension input amounts relating to an individual that are tested against the special annual allowance (Finance Act 2009).

Total and Permanent Disability Total and Permanent Disability benefit is an additional option for some life assurance and critical illness policies. The definition of being totally and permanently disabled is usually drawn very tightly (ie to the benefit of the life company) and usually means you are permanently unable to work and unable to do some straightforward basic things for yourself such as getting dressed and undressed; washing and bathing; and going to the toilet.

Total earnings scheme Type of career average scheme where a member’s pension is calculated as a specified fraction of his total remuneration while he was in the scheme.

Total pension input amount The aggregation of the pension input amounts in respect of each arrangement relating to an individual under a registered pension scheme of which the individual is a member.(HMRC) It is the aggregation of the pension input amounts in respect of each arrangement relating to an individual under a registered pension scheme of which the individual is a member.

Total return See return.

Total risk The overall volatility of a portfolio [perhaps relative to the 'safe harbour']. Tracing service see Pension Tracing Service

Tracking error A measure of the variability of investment returns relative to a benchmark or index. It is usually expressed as the annualised standard deviation of relative returns. Can be expressed as either ex-post, which is simply the historical tracking error, or ex-ante, which is a forward looking estimate of the future tracking error. See also active risk.

Trail commission An ongoing financial reward to a financial adviser on a single premium policy, expressed as a percentage of the value of the investment, typically 0.5%. This is payable on an annual basis and is a reward for the continuing investment and the work done by the adviser managing the investments on behalf of his client.

Transaction costs The costs incurred in buying or selling an asset notably brokerage costs and transaction taxes such as stamp duty.

Transfer in Transferring the value of pension benefits from an existing pension scheme to another scheme (commonly a SIPP or SSAS) either in cash or in specie.

Transfer lump sum death benefit A lump sum benefit paid from a money purchase arrangement for the benefit of another member of the same pension scheme following the death of a scheme member (or a dependant of such a member), who is aged 75 or over, which meets the conditions of paragraph 19, Schedule 29 to the Finance Act 2004. Such a lump sum cannot be paid where there is still a surviving dependant of the member. (HMRC)

Transfer payment Payment of a capital sum from a pension scheme when a member leaves a scheme. It is paid to another pension scheme, or to an insurance company if a buy-out policy is purchased for the member, or it can be used to purchase a buy-out policy for the member in lieu of benefits that have accrued to the member. A transfer payment may either be made in accordance with the scheme rules or in exercise of a member’s statutory rights. See cash equivalent.

Transfer value Amount paid as a transfer payment. There are rules about how members’ transfer values are calculated to ensure there is a balance of interests between the leaving member and the staying members, and taking into account any scheme deficit and possible future employer default.

Transfers All members of workplace pension schemes have the right to move their rights to another arrangement. It may not, given the way in which transfer values are calculated, be a good idea in most cases.

Transition management see Transition manager.

Transition manager A transition manager takes on the burden associated with the restructuring of a portfolio and seeks to minimise the costs and risks to the owner of the portfolio.

Transitional arrangements As part of the tax simplification regime, transitional arrangements designed to protect the benefits that members accrued before A-day will operate as of A-day. There are two types of transitional protection: primary protection and enhanced protection. Members had three years from A-day in which to register for transitional protection.

Transitional Protection (HMRC) Transitional protection came in two forms – primary and enhanced. It allows an individual to protect accrued pension rights that may exceed the lifetime allowance, thereby avoid a tax charge on the excess.

Transitional regulations Regulations applying since A-day allow trustees (subject to certain conditions being met) flexibility for example to make payments after A-day that would have been permitted by HMRC prior to A-day. Obsolete from 2011.

Trapped surplus Surplus which has arisen because the employer has made contributions which were eventually found to be unnecessary, but which because of flawed regulation cannot be returned. In order to avoid the possibility of this arising, the practice is developing of placing contributions in a fund managed by the company, but which is not the pension fund. Cf Contingent assets. Unlike trapped wind, the release of trapped surplus can often be a sweet and pleasant surprise.

Treasuries Central government bonds, often US government bonds.

Treasury bill A type of zero-coupon government debt security, typically with a maturity of less than one year.

Trigger points Trigger points are instances that highlight when a proposed level of technical provisions or recovery period may concern the Pensions Regulator.

Triple Guarantee Introduced in April 2011, the Government’s indexation method to be used to provide an annual increase to basic State Pension – the higher of the growth in average earnings, price increases or 2.5 per cent.

Trivial commutation lump sum A lump sum benefit paid to a member of a registered pension scheme (who is aged under 75) because their pension entitlements (under both that scheme and other such schemes) are deemed trivial, and which meets the conditions of paragraphs 7 to 9 of Schedule 29 to the Finance Act 2004.(HMRC)

Trivial commutation lump sum death benefit A lump sum benefit paid to a dependant of a scheme member of a registered pension scheme (who died before age 75) because that dependant's entitlement under that scheme is deemed trivial, and which meets the conditions of paragraph 20 of Schedule 29 to the Finance Act 2004.(HMRC)

Trivial commutation lump sum Since A-day, this is a lump sum paid to a member where the total pension rights from all of a member’s registered pension schemes are deemed trivial, that is less than 1 % of the standard lifetime allowance.

Trivial Commutation: HMRC impose a limit on £30,000 total pension rights which can be commuted. Because many people have little bits of pensions all over the place, even though it would be sensible and very cost effective to convert these pensions to cash (to cut postage, and administrative costs) trustees can only do so if they are sure that all the other pensions of a member do not breach the limit, which is difficult and expensive to do.

Trust corporation Company that meets the minimum capital requirements under the Public Trustee Act 1906 and is expected to provide professional expertise in managing trusts. In some circumstances, a trust corporation can act as sole trustee where a corporate trustee cannot.

Trust Deed & Rules The legal document that sets up a pension scheme and defines how it should be operated.

Trust This is established when a person gives another cash or assets which are then used for the benefit of a third person. The person who establishes the trust is called the settlor because he ‘settles’ property on another, the trustee. The trustee takes care of the trust property and uses it for the benefit of the beneficiary in whose favour the trust was established. Most occupational pension schemes are set up under trust for three reasons: security, tax relief, and enforceability.

Trust-based scheme A scheme that is set up by the employer as an independent trust and run by a trustee board in line with the rules set out in the trust deed. See also Contract-based scheme.

Trustee approval requirement See section 67. Trustee director Director of a trustee company.

Trustee 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.

Trustee Knowledge and Understanding (see also Trustee Toolkit) The knowledge and understanding as required by Pensions Act 2004 ss247-249. Extensive guidance from the Pensions Regulator sets out the level and extent of such TKU which it expects. Trustees of occupational pension schemes must have knowledge and understanding of their scheme. This includes being conversant with key documents including the scheme rules, statement of investment principles, statement of funding principles, administration related documents. It also includes having knowledge and understanding of the law relating to pensions and trusts, the principles relating to the funding of occupational pension schemes, and the principles relating to the investment of assets. This is a requirement of sections 247 – 249 of the Pensions Act 2004.

Trustee liability Trustees, employers and advisers face increasing exposure to liability both for breach of trust and for breach of statutory requirements. Trustees’ exposure to liability can be reduced using for example, the following methods: • exclusion clause in the scheme rules • exoneration clause in the scheme rules • indemnity clause in the scheme rules • indemnity insurance.

Trustee pay see PricewaterhouseCoopers, Trustee Pay Survey 2007, (www.pwc.com/uk/pensionsassurance)

Trustee Toolkit A trustee training website operated by the Pensions Regulator (www.trusteetoolkit.com; see also www.pensionsgym.com)

Trustees The people appointed to make sure that a pension scheme is run in line with its trust deed and rules in line with the regulations. Trustees are those persons or a corporate body which have been appointed by the settlor of a trust to administer the trust in accordance with its terms and conditions. The trustees are the legal owners of the trust assets but hold them on trust for the benefit of the beneficiaries.

Trusts Trusts are used in many ways and are often used with life assurance policies, particularly where the policy is taken out to provide family protection, inheritance tax funding, partnership and shareholder protection etc. If the life assurance policy is set up under a trust the proceeds are paid to the trustees who then pass them on to the beneficiaries in accordance with the terms of the trust deed. There are advantages in setting up the policy under a trust. These are, first, the proceeds are, subject to certain conditions, paid outside of the deceased's estate and therefore avoid any potential inheritance tax charge. Secondly, the trust funds can be paid to the trustees without the need for Grant of Representation (outside probate). This means that the proceeds can be paid by the insurance company within a matter of days after production of the death certificate. The most commonly used trust for life assurance policies is a flexible power of appointment trust. This gives the settlor power to change beneficial interest and appoint new trustees during his/her lifetime.

T-Standard Also known as implementation shortfall, the T-Standard is the generally accepted method for assessing the overall success of a transition. It considers financial performance, comparing the value of the portfolio at completion with the value that would have been achieved had the transition been implemented instantaneously and at no cost at the outset.

TUPE On a business sale (not share sale), employees’ employment rights are protected by, amongst other things, the provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (the ‘Regulations’). The Regulations implement the EC Acquired Rights Directive in the UK. The Regulations exclude occupational pension rights from protection (but not personal pensions provided or supported by the employer). A revision to the Directive provides that ‘Unless member states provide otherwise, paragraphs 1 and 3 shall not apply in relation to employees’ rights to old-age, invalidity or survivors’ benefits under supplementary company or inter¬company pension schemes outside the statutory social security schemes in member states’. The Pensions Act 2004 and associated regulations cover TUPE transfers where, immediately before the transfer, the transferor operated an occupational pension scheme. In essence, a transferee employer must ensure that one of the following is provided for a transferring employee: * eligibility to join or membership of a final salary scheme which meets the reference scheme test • eligibility to join or membership of a money purchase scheme to which the transferee must make matching contributions of up to 6% • the transferee makes or offers to make up to 6% matching contributions to a stakeholder pension scheme or • the transferee and employee agree something else at any time after the transfer.

Turner The Pensions Commission which lead to the introduction of auto-enrolment and NEST was chaired by Adair Turner, later Lord Turner. Its final report was published in 2005.

Turnover A measure of the level of trading in a market or portfolio. Usually expressed as the sum of the total value of purchases and sales in a period as a percentage of the portfolio value.

Turquoise Turquoise was a trading system backed by nine investment banks, and competes with European established stock exchanges by seeking at least 5% of European share trading when it launched in September 2008. It now belongs to the London Stock Exchange.

UAP Upper accruals point Initially this is the same as the upper earnings limit; it took effect from 6 April 2009. At that date the UEL jumps from £34,840 to £40,040 an increase of £5,200 and which involved an additional £500 in NI contributions. The UAP remains at £40,040 for 2014/15. The change involved a change of policy, since the contributions linked to benefits changes and the contributions become more of a tax than a related-contributions benefit.

UCITS Undertakings for Collective Investments in Transferable Securities. The UCITS legislation governs how a fund can be marketed within the European Union and is designed to allow cross border fund sales to investors of different nationalities. To obtain UCITS status a fund must invest within defined but wide parameters.

UK Corporate Governance Code The current version of what used to be called the Combined Code, agreed by the investing institutions such as the NAPF and published by the Financial Reporting Council (http://www.frc.org.uk/documents/pagemanager/Corporate_Governance/U K%20Corp%20Gov%20Code%20June %202010.pdf)

UKSC (1) United Kingdom Supreme Court (2) United Kingdom Steering Committee on local government pensions is the trade body for local authority pension arrangements (www.lge.gov.uk). See also LGPC, which represents councillors interested in local government pensions.

UMP Unauthorised member payment

Unauthorised employer payment Any payment from a registered pension scheme to or in respect of a sponsoring employer or a former sponsoring employer that is not an authorised employer payment. Includes any unauthorised payment to a sponsoring employer or a former sponsoring employer as set out in Part 4 of the Finance Act 2004.

Unauthorised Member Payment (UMP) A payment made from a UK Registered Pension Scheme, to a member that is not authorised under the UK Finance Act 2004. Unauthorised member payment An unauthorised member payment is (1) a payment by a registered pension scheme to or in respect of a member or a former member of that pension scheme that is not an authorised member payment, or (2) anything which is treated as being an unauthorised payment to or in respect of a member or former member under Part 4 of Finance Act 2004. (HMRC) Any payment from a registered pension scheme to or in respect of a member that is not an authorised member payment. Includes any unauthorised payment from the pension scheme to the member as set out in Part 4 of the Finance Act 2004.

Unauthorised Payment A payment made to a member or employer by a pension scheme that is not authorised by HMRC. This is subject to a tax charge. Any payment made to a member that does not fall within the definition of an authorised member payment is considered to be an unauthorised member payment. Examples of unauthorised payments include paying a pension commencement lump sum of more than 25% of the value of the benefits (where protection does not apply), or paying a child’s pension beyond age 23 (though this is acceptable in some circumstances). Unauthorised payments automatically attract a tax charge known as an unauthorised payments charge and in some circumstances an additional surcharge (see surchargeable unauthorised member payment).

Unauthorised Payments Charge (UPC) A charge in respect of an Unauthorised Member Payment from a UK Registered Pension Scheme, or an Overseas Retirement Benefits Scheme in respect of which UK tax relief has occurred after 5 April 2006. Can be up to 82% of the amount, which some expert observers consider to be illegal under human rights legislation, which requires certain penalties to be treated as criminal penalties and subject to necessary checks and balances (such as a right to appeal) which do not exist with UACs.

Unauthorised payments surcharge Tax charge that arises when a surchargeable unauthorised member payment or a surchargeable unauthorised employer payment is made by a registered pension scheme. The rate of the charge is 15% of the surchargeable unauthorised payment. Tax due under section 209 Finance Act that is paid in addition to the unauthorised payments charge. The tax will be due where total unauthorised payments go over a set limit in a set period of time of no more than 12 months. The rate of tax is 15% of the unauthorised payments. (HMRC)

Unauthorised unit trust A unit trust that is suited to the needs of institutional investors, but cannot be marketed to the general public.

Unconstrained/Focus investing A long-only, 'best ideas' investment approach that completely removes the constraints imposed by the benchmark. This means managers no longer have to hold stock positions simply because of index constraints. The 'dead money' that is thus freed up can be invested in the managers' best ideas, thereby increasing the portfolio's return potential. Unconstrained portfolios tend to be more concentrated, but within a risk-controlled environment still offer appropriate diversification.

Uncrystallised funds Funds held in respect of the member under a money purchase arrangement that have not as yet been used to provide that member with a benefit under the scheme (so have not crystallised), as defined in paragraph 8(3) of Schedule 28 to the Finance Act 2004. These are defined differently for cash balance arrangements. Here it is what funds there would be if the member decided to draw benefits on a particular date not the funds actually held in the cash balance arrangement at that time. (HMRC)

Uncrystallised funds lump sum death benefit A lump sum benefit paid from a money purchase arrangement following the death of the scheme member before the age of 75 (and within two years of that date of death) from any uncrystallised funds the member held in that arrangement at the point of death, and as defined in paragraph 15, Schedule 29 to the Finance Act 2004. (HMRC)

Underfunding Describes the situation in which a scheme’s assets are insufficient to meet its liabilities. Underlying security The shares [or other securities] on which a derivative instrument is based.

Underweight Exposure to a given asset or asset class less than that implied by its weight within a market index or benchmark.

Underwriting (1) A guarantee by an investor [usually an investment bank] to a company issuing new shares or bonds that it will buy any remaining shares or bonds that are not bought by other investors. For providing this service, the underwriter will receive a fee but bears the risk that investors will not fully take up the issue and the underwriter is left with a large holding of stock. (2) The risk assessment process by which the data provided by the applicant including age, sex, height, weight, alcohol and tobacco consumption, plus the answers to detailed health questions are assessed to determine the risk that a particular life presents to a life company in a protection policy.

Underwriting commissions One of the ways in which pension funds, particularly those that are large, can increase their returns through sub-underwriting for investment banks. The procedure is that the pension fund, usually through its fund managers, agrees to buy some new shares of a company being issued to raise new capital. HMRC in recent years has argued that such activity is a trade rather than an investment and is therefore taxable.

Unfunded unapproved retirement benefits scheme (UURBS) Prior to A-day, these schemes operated in a similar manner to FURBS but held no funds to back the promise. If the employer became insolvent, the pension could not be paid. Since A-day, UURBS have been treated as employer-financed retirement benefit schemes, receiving similar treatment to other pension schemes that provide taxable benefits to employees. See funded unapproved retirement benefit scheme; secured unfunded unapproved retirement benefit scheme; employer-financed retirement benefit scheme.

Unit The way in which holdings in a unit-linked fund are described to facilitate understanding what share of a fund is owned by each individual investor. Units do not exist other than as the notional, mathematical representations of a share in the fund.

Unit trust scheme manager This means one of the following(a) a person who has permission under Part 4 of the Financial Services and Markets Act 2000 to manage unit trust schemes authorised under section 243 of that Act, or(b) a firm which has permission under paragraph 4 of Schedule 4 to the Financial Services and Markets Act 2000 (as a result of qualifying for authorisation under paragraph of that Schedule; Treaty firms) to manage unit trust schemes authorised under that section. (HMRC)

Unit trust Trust set up as a pooled fund in which investors purchase units. It is supervised by the FSA. The fund/investment manager determines the price of the units based on the net asset value of the fund.

United Kingdom Investment Performance Standard (UKIPS) This is a localised adoption of the US code known as the Global Investment Performance Standards (GIPS). UKIPS shares GIPS’ objectives: • to conform to a global standard for the calculation and presentation of investment performance • to ensure accurate and consistent investment performance data for reporting, record-keeping, etc • to promote fair competition between investment firms without barriers to entry for international firms • to foster a notion of self regulation within the investment management industry. The UKIPS replaced the Pension Fund Investment Performance Codes (PFIPC) in April 2000. The National Association of Pension Funds (NAPF), which produced the UK edition, also approves the GIPS for globalised funds, so enabling performance measurers to compare like with like. It assists trustees and others to ensure that asset managers do not manipulate their performance statistics and that their advisers select well performing fund managers.

Unitised with-profits A version of a with-profits fund expressed in units which allows a policyholder to see the value of their with-profits holding more easily and transparently. It also allows with-profits to be available within a unit-linked policy and facilitates switching between with-profits and other funds.

Unit-linked policy An insurance or pension plan whose investment performance is directly linked to the performance of the funds selected by the policyholder. These funds are run by the life company.

Unquoted assets Assets which are not quoted on a stock exchange.

Unsecured debt A debt obligation with no collateral, and backed only by the debtor's creditworthiness.

Unsecured Pension Also known as income drawdown or income withdrawal. Allows a pension scheme member to continue to invest a fund whilst drawing a limited income. Available to under 75s only. (obs) Payment of income withdrawals direct from a money purchase arrangement, or income paid from a short-term annuity contract purchased from such an arrangement, to the member of the arrangement (who is aged under 75) and that meet the conditions laid down in paragraph 6 and 8 to 10 of Schedule 28 to the Finance Act 2004. (HMRC) Unsecured pension The pension monies a member elects to operate income drawdown from while deferring either the purchase of a lifetime annuity or drawing it as pension. See alternatively secured pension; short-term annuity. (See now drawndown pension fund)

Unsecured pension fund Funds (whether sums or assets) held under a money purchase arrangement that have been 'designated' to provide a scheme member (who is aged under 75) with an unsecured pension, as identified in paragraph 8 of Schedule 28 to the Finance Act 2004. Once sums or assets have been 'designated' as part of an 'unsecured pension fund' any capital growth or income generated from such sums or assets are equally treated as being part of the 'unsecured pension fund'. Similarly where assets are purchased at a later date from such funds, or 'sums' generated by the sale of assets held in such funds, those replacement assets or sums also fall as part of the 'unsecured pension fund' (as do any future growth or income generated by those assets or sums). (HMRC) (See now drawndown pension fund)

Unsecured pension fund lump sum death benefit A lump sum benefit paid from a money purchase arrangement following the death of the scheme member before the age of 75 from any unsecured pension fund the member held in that arrangement at the point of death, and as defined in paragraph 17, Schedule 29 to the Finance Act 2004. (HMRC) (See now drawndown pension fund)

Unsecured pension year The twelve month period from when a member first became entitled to an unsecured pension. (See now drawndown pension fund)

Untraceable member A member of a registered pension scheme who cannot be traced prior to their 75t h birthday. (HMRC)

UPC Unauthorised payments charge

Upper Accruals Point (UAP) The upper limit for state pension accruals.

Upper band earnings Earnings between the lower earnings limit and the upper earnings limit for national insurance contribution purposes.

Upper earnings limit (UEL) Earnings limit above which employees (but not employers) pay reduced rate (1%) national insurance contributions. Further details are set out at the front of this handbook.

Upper Earnings Threshold: In relation only to the State Second Pension is the top band of earnings over the Lower Earnings Threshold (qv) on which the state second pension accrues at the 10% rate. The UET is set at three times the LET minus twice the Qualifying Earnings Factor (qv).

Valuation (1) A summary of an investment portfolio showing the holdings and their value as at a certain date. (2) A valuation predicts future scheme payments then compares these with assets. The result determines whether the scheme has a funding surplus or deficit.

Valuation assumptions In practice it is not possible to forecast accurately future benefits, investment growth and benefit payment dates in a pension scheme. Scheme actuaries therefore make valuation assumptions, including financial assumptions and demographic assumptions when they prepare valuations, but they are only assumptions.

Valuation assumptions The valuation assumptions in relation to a person, benefits and a date are assumptions (1) if the person has not reached such age (if any) as must have been reached to avoid any reduction in the benefits on account of age, that the person reached that age on the date, and (2) that the person’s right to receive the benefits had not been occasioned by physical or mental impairment (HMRC).

Valuation method A valuation method is the approach used to calculate a scheme’s technical provisions. This, together with

Valuation summary When a recovery plan is required a valuation summary is sent to the Pensions Regulator along with the recovery plan.

Valuation Most pension schemes assets are relatively easy to value; much harder as pension scheme liabilities, which are valued in a variety of ways, each one giving a different number. There are technical provisions, s75 valuations, s179 valuations, FRS17 valuations and many others. Several regulators issue pointless monthly statistics with cumulative deficits or surpluses for the pensions industry, based on particular valuations which are usually not relevant in practice.

Value added tax (VAT) VAT is an issue for UK pension funds since in the past they have had to pay VAT on the services they receive, and it is recoverable if they are part of their employer’s group. There have been two big issues; one is that if they become part of the group HMRC say they put the assets of the scheme at risk if the employer fails to pay VAT. This is highly improbable. The second is that even employers cannot set off the VAT on the investment management expenses. The latter is the subject of a challenge (2008) managed by the NAPF in the European Court of Justice and HMRC will almost certainly lose. The key case is JP Morgan Claverhouse v HMRC 2007; pension schemes should put in protective claims to guard against being out of time.

Value at risk [VAR] A measure of the risk of loss on a portfolio.

Value Investment/Style An approach to investment that places emphasis on identifying shares that are believed to be underpriced [on the basis of indicators such as P/E ratio and dividend yield] by the market.

Value stock A stock that appears cheap when compared with other stocks because the share price is low relative to the book value of the equity [or earnings or dividends].

Variance The degree to which a given set of number/data points vary around the mean. It is the square of the standard deviation.

VAT see Value added tax

Venture capital A element of private equity activity that specialises in investment in companies that are start-ups, or higher risk.

Vested rights In relation to active members, these are benefits they can unconditionally receive on leaving the scheme. In relation to deferred pensioners, they are preserved benefits. In relation to pensioners, these are pensions to which they are entitled including, where appropriate, the related benefits for spouses, civil partners or other dependants.

Vesting See preservation.

Volatility The fluctuations in an asset's return. See standard deviation.

Voting rights The entitlement of an ordinary shareholder to participate in the running of a company by voting on resolutions.

Waiver of Premium A feature of a life assurance policy (and other plans e.g. personal pension) which is designed to protect payment of the premiums. If the assured should lose his or her income due to illness/disability for usually more than 6 months, the insurance company will pay (waive) the premiums until the assured returns to work or the policy comes to an end. The waiver of premium feature is designed to cover the risk either on an own occupation basis or any occupation. If it is on an 'any occupation' basis, the insurance company may consider that the assured can follow another occupation. In this case the company would not normally meet the claim unless the assured were unable to work at all.

Walker Guidelines A code governing the way in which the managers of private equity investments are supposed to disclose information to pension fund investors and others, named after the chairman of the committee that prepared it, Sir David Walker (www.walkerworkinggroup.com) and issued in November 2007. For reasons that are not very clear, the report is not on the website of the group that commissioned and paid for the Report, the BVCA (British Venture Capital Association). It received mixed reviews when it was published but remains the only document of its kind.

Warrant A certificate, attached to a security, which gives the holder the right [but not the obligation] to purchase either a number of shares of the borrower's common stock or specific bonds at a stipulated price. Warrants are valid for a specified period of time which may lapse either before or, in the case of warrants to purchase common stock, on or after the maturity of the debt security. Warrants are usually detachable and may be traded independently of the debt security. Effectively, warrants are long-term call options.

Weighted average return A rate of return that is weighted to take into account the relative sizes of the various assets or funds which make up the sample.

Weighting Proportion of an index or portfolio made up of an individual or group of items, usually expressed as a percentage e.g. the percentage of a portfolio invested in a region or in any one stock. See also underweight and overweight.

Whistleblowing The Pensions Act 2004 imposes a statutory whistleblowing obligation on trustees, scheme administrators, employers and professional advisers. A report must be made in writing to the Pensions Regulator, as soon as reasonably practicable, of any breach of legislation relating to the scheme’s administration and which could be materially significant to the exercise of any of the Pensions Regulator’s functions.

Whole of Life Assurance Life assurance which is for all of life, i.e. no fixed or specified term. Most of these policies are investment based. The premiums buy units in a fund(s) and grow in value depending on the performance of the fund(s). The cost of the risk is paid for by the insurance company by cancelling some of the units to pay for the life cover. Premiums are subject to review, normally after 10 years and every 5 years thereafter. If the premiums being paid are insufficient to support the chosen level of life assurance then, following the review, the premiums may need to increase or the sum assured reduce. Often there are guaranteed options built in to these policies which permit the sum assured to be increased without further evidence of health. These events are usually confined to childbirth, an increased mortgage and marriage.

Wholly-insured scheme See Fully-insured scheme.

Widower’s/widow’s guaranteed minimum pension (WGMP) Minimum pension that an Occupational pension scheme is required to provide for the surviving spouse of a member as one of the conditions of contracting-out (unless it is contracted-out through the provision of protected rights) for pensionable service before 6 April 1997.

Widows/widowers Now more usually referred to as survivors. A widow/er is a person married to a member at the time of the member’s death.

Winding Up Priority Order The order in which members' benefits are distributed on the winding up of a defined benefit scheme with an insolvent employer and a funding shortfall. The pension scheme and associates directly or indirectly own 10% or less of the taxable property and have no rights to personal use. The assets held by the GDCV must be in excess of £1 million pounds, the GDCV must hold at last 3 assets directly and no one asset can exceed 40% of the total value of the assets.

Winding Up The process of terminating an occupational pension scheme, usually by transferring member's benefits to individual arrangements.

Winding-up lump sum A lump sum benefit paid to a member of an occupational pension scheme because the scheme is being wound-up and their accrued benefits under the scheme are deemed ‘trivial’, and which meets the conditions of paragraph 10, Schedule 29 to the Finance Act 2004 (HMRC). A member of a scheme that is winding-up may commute their benefits under that scheme on the grounds of triviality as a winding-up lump sum. Unlike the trivial lump sum payments at retirement, there is no minimum age before the benefits can be commuted. These payment are subject to several conditions including: • the employer is not making contributions under any other registered pension scheme in respect of the member, and the employer agrees not to make any contributions during the period of one year from the date the lump sum is paid • the member must have some of the standard lifetime allowance available • the total value of the member’s benefits under that scheme is not more than 1 % the standard lifetime allowance in force at that point eg £16,000 for the tax year 2007/08 • after the winding-up lump sum is paid, the member has no benefit rights left in that scheme.

Winding-up lump sum death benefit A lump sum benefit paid to a dependant of a member of an occupational pension scheme because the scheme is being wound-up and their accrued benefits under the scheme are deemed 'trivial' , and which meets the conditions of paragraph 21, Schedule 29 to the Finance Act 2004 (HMRC).

Winding-up There is a three-module learning kit on the Pension Regulator’s website on winding-up; one for winding up a DB scheme with a solvent employer, one for winding up a DB scheme with an insolvent employer, and one for winding up a DC scheme (www.trusteetoolkit.com). Winding-up refers to the process of terminating a scheme. The scheme’s assets are realised and used to meet the scheme’s liabilities. This is generally done by purchasing annuities for pensioners and deferred annuities for active and deferred members, or by transferring the assets and liabilities to another pension scheme, in accordance with statute (see section 75 of the Pensions Act 1995) and the scheme documentation. Employers sponsoring defined benefit schemes are no longer able to wind them up leaving non-pensioner members with only rights to cash equivalent transfer values (CETVs). Regulations set out that generally employers must now ensure that the rights accrued by members will be met in full where schemes commence winding-up on or after 11 June 2003. See priority liabilities; priority rule.

Withholding tax A tax deducted from foreign investment income. The tax can often be claimed back, either at source or via a reclaim process.

With-profits policy A savings plan, often an endowment linked to a mortgage, which is sold as low risk because the premium is invested in a mix of shares, property and bonds. Each year, the insurance company running the plan announces a bonus which is added to the policy and cannot be taken away. And when the plan matures, a terminal bonus is paid. The bonuses are based on the surplus emerging within the with-profits fund and reflect the investment performance and other profits emerging. The intention is to smooth out the ups and downs of the stock market, because the company holds back money in good years to boost poor returns in bad years. It is possible that the insurance company may therefore announce either a low bonus or a nil bonus if the economic climate is poor and the fund has performed badly or is in deficit. It is an insurance policy where the policyholder will receive a share of any surplus in the insurance company’s life insurance and pensions business.

Wrap account An administrative offering to a client to aggregate his financial assets in one place for ease of presentation and management. For instance, various product wrappers such as ISA, PEP, pension and unit trust holdings can be aggregated to present the client with a collective view of their whole net worth. There may be a charge levied at the wrap level for this service. This presentation also allows a financial adviser to look across his client bank and make changes in investments where required at one stroke rather than on an individual investor by investor basis

Yield A measure of the income return earned on an investment. In the case of a share the yield expresses the annual dividend payment as the percentage of the market price of the share. In the case of a property, it is the rental income as a percentage of the capital value. in the case of a bond the running yield [or flat or current yield] is the annual interest payable as a percentage of the current market price. The redemption yield [or yield to maturity] allows for any gain or loss of capital which will be realised at the maturity date.

Yield curve A curve showing the relationship between the time to maturity of a bond and its redemption yield. The yield curve can take different shapes:Normal, or positive. In this case yields rise as maturities lengthen, since lenders would normally expect to be paid more for the greater uncertainty of lending money for a longer period. Flat, when similar yields are observed for all maturities. Inverted, or negative, when long bonds offer lower yields than short or medium bonds. Yields at the short end are influenced by interest rate expectations. Yields at the longer end are influenced by inflation expectations and the supply/demand balance.

Yield gap The difference in yield between different assets; the most frequently quoted yield gap is that between gilts and equities.

Yield spread The difference in yields available on different types of bonds, for example government and corporate bonds.

Yield to maturity The annualised return [internal rate of return] that would be earned on a bond if held to maturity. See redemption yield.

Z bond See collateralised mortgage obligation.

Zero-coupon bond A bond which does not pay interest [coupon]. It is issued at a discount to face value, and is redeemed at face value when held to maturity.