Jargon buster

Active member 
A member who is still employed by the pension scheme’s sponsoring company and is actively making payments into the scheme.

Actuarial valuation 
A process that estimates the cost today of paying benefits to all members of a defined benefit pension scheme.

Alternative investments 
Investments other than equities and bonds, such as real estate, commodities or private equity.

Auto-enrolment 
From 2012 onwards all employees over 22 and earning more than £7,474 a year must be automatically enrolled into either an occupational pension scheme or the Government’s National Employment Savings Trust.

Buyout 
An insurance company acquires the assets of a pension scheme, and in return pays the pensions of all of its members.

Buy-in 
An insurance company acquires part of the assets of a pension scheme and in return pays the pensions of a part of the membership, such as pensioners.

Correlation 
The extent to which one asset class behaves like another. For example commercial property is said to be ‘uncorrelated’ with equities and bonds.

Credit default swap (CDS) 
Similar to an insurance policy, the seller of a CDS compensates the buyer in the event of loan default.

Data cleansing 
Ensuring that a scheme’s records are in good order.

Deferred members 
Members of a pension scheme who have left the company and are no longer contributing (as opposed to active members).

Defined benefit 
A pension scheme which provides its members with a pre-determined level of pension on retirement, usually a proportion of their salary relative to the number of years they have worked for the employer. ‘Final salary’ schemes are the most common type but other forms include career average schemes.

Defined contribution 
Sometimes also called ‘money purchase’ schemes. In a defined contribution scheme, each individual holds his or her own ‘pot’ of money which will be used after retirement to provide an on-going source of pension income. All the investment risk sits with the member, not the employer.

De-risking 
Reducing the volatile assets held by the scheme such as equities, and replacing them with bonds, which are less volatile and more closely mirror the cost of benefits.

Derivative 
Collective name for securities whose prices are based on the price of an underlying investment (like a stock, bond or commodity).

Discount rate 
An estimate of how much your assets will grow over time or of how much it would cost to buy future benefits in bonds at today’s market price.

Diversification 
Reducing a scheme’s dependency on equities and bonds through investing in a variety of different asset classes.

Employer nominated trustee 
A member of the trustee board that has been nominated by the sponsoring employer. Typically, this would be a finance director or an HR director.

Enhanced transfer value 
A means of offering a scheme member (usually a deferred member) an enhanced package in return for leaving the scheme. These are typically offered to deferred members who would receive very small pensions from the scheme.

Fiduciary management 
Delegating investment of some, or all, of a defined benefit scheme’s assets to a third party. See also implemented consulting.

Future 
Agreement for delivery of a specified instrument (like commodities, bonds and shares) at a fixed future date at a pre-determined price.

Gilt 
A bond issued by the UK government.

Hedge fund 
A fund that invests money using a variety of different techniques and can profit from falling prices.

Implemented consulting 
Enabling a pension scheme consultant to make investments on the trustees’ behalf, rather than just providing advice which is then actioned separately by the trustees. This has similarities to fiduciary management (see separate entry).

Interest rate swap 
Pension funds can swap variable rate liabilities for a fixed rate income by entering into a swap agreement with an investment bank (counterparty). Swaps can also be used to reduce inflation and currency risk too.

Liabilities 
The estimated cost of paying all future benefits to members, as calculated by the actuarial valuation, discounted to a value today.

Liability-driven investment 
A strategy for pension fund investment that matches investment choices to a scheme’s liabilities.

Longevity 
The length of time that members of a pension scheme are expected to live and therefore draw pensions and other benefits from the scheme.

Longevity swap 
A form of swap where a pension scheme pays a fixed contribution to a swap provider and in return the swap provider (usually an
insurance company or investment bank) pays the pensions of the member, no matter how long they live.

Member-nominated trustee 
A trustee that has been nominated to the trustee board by the other members of the scheme. Currently, one third of a trustee board has to be made up of MNTs.

Mortality screening 
The process of screening a company’s pension records to identify deceased members. This forms part of data cleansing (see separate entry).

Myners Report

A report produced in 2001 recommending a voluntary code of practice for the pension fund industry.

National Association of Pension Funds 
The body that represents the pensions industry.

Pensioner members 
A member of the pension scheme who is receiving pension payments on a regular basis.

Recovery plan 
A defined benefit scheme must have a recovery plan in place to identify how it will return the scheme to full funding, and over what period of time.

Risk and return 
The potential for returns is often weighted against the potential for losses. Often, investments with high return potential also run the danger of making hefty losses. On the other hand, low risk investments are unlikely to offer high returns.

Risk free rate 
The interest rate paid by the investment with the lowest possible level of risk, which in the UK are gilt-edged (government) bonds.

Statement of investment principles 
A set of objectives that a scheme’s trustees will use as the basis for allocating its assets to different types of investment.

Technical provisions 
See ‘liabilities’

Third party administrator 
A scheme may outsource all of its administration functions to an outside company.

Yield 
The amount of money that a bond produces in interest.