Monday, 16 July 2018

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    Jargon Buster

    Fixed income vs equities

    Traditionally, equities comprised the bulk of pension fund assets. However, a combination of market volatility and the closure of defined benefit pension funds has meant fixed income assets have overtaken holdings in equities.

    Fixed Income

    So called because an issuer of fixed income promises to make regular, fixed payments to investors. The term encompasses gilts, bonds, preference shares and debentures.

    Emerging Markets

    Emerging markets are countries which are still developing, but have fast-growing economies, offering promising growth prospects to investors. Investors can either buy emerging market equities (shares in companies which appear to offer promising returns) or debt (bonds).


    Also known as stocks or shares, when you buy an equity, you are buying a small part of a company. The total number of shares issued, multiplied by the share price, gives the value, or market capitalisation, of the firm.


    These are investments outside the mainstream (e.g. equities and bonds). Commodities, hedge funds and private equity are the most well-known types of alternative investment. Infrastructure is another alternative investment.

    Smart Beta

    Smart beta strategies attempt to provide a 'third way' of investing between expensive active management and cheap passive management. Smart beta effectively means investing in passive indices which are actively managed. Different managers approach it in different ways, and call it different things: smart beta is also sometimes called low volatility investing, risk factor investing, or risk parity. It is mostly used by large schemes in the UK.


    LDI aims to eradicate the mismatch between a pension scheme's assets (the investments it holds) and liabilities (the money it must pay out to pensioners). Strategies are based on fixed income securities and derivatives of those securities.

    DGF / Multi Asset

    Arguably more of a hot investment 'brand' than a specific type of fund, what this broad range of funds have in common is their wide breadth of investments. Some DGFs have a higher exposure to alternatives than others, so trustees should find out what's under the bonnet before making an investment. Typically investment charges are higher than most equity investment funds or index-tracking funds, but lower than a hedge fund.

    Real Estate

    Investing in property is seen as attractive because it offers investors a risk-return profile that sits between the safety (but comparatively low-yield) of bonds and the volatility (but high return potential) of shares. It also has two sources of return – capital appreciation and income, and while property prices and inflation have not always moved hand-in-hand, it is also seen as offering some protection against inflation.

    Absolute Returns

    Absolute return funds seek to deliver positive investment returns, regardless of market conditions.


    Infrastructure refers to projects such as bridges, toll roads, public amenity buildings (such as army barracks) where a governmental institution requires private investment. There are two different types of infrastructure: "greenfield", which refers to projects which have not yet been built, and "brownfield", which refers to existing infrastructure - an already-built toll road, for instance.

    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.


    As members near retirement, their exposure to volatile investments such as equities gradually decreases and is replaced by bonds. The idea is to reduce the risk of members suffering significant losses close to retirement in the event of a financial downturn. De-risking can also happen at a scheme level, as a pension scheme gradually reduces its exposure to risky investments as it journeys towards full funding.

    Fiduciary Management

    In the fiduciary management model, a trustee board hires an external manager - either a specialist fiduciary management provider, a bundled service from actuarial and investment consultants, or services from an asset management firm - then delegates decision-making powers to it. How much a trustee board chooses to delegate varies and depends on the goals and resources of the scheme.

    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.


    Trustees have a key role to play in helping the employer communicate how auto-enrolment and the pensions reforms will affect staff.. Employees need to be informed about the scheme in advance, and once they have been enrolled, must be informed that they can opt out. The Pensions Regulator will monitor employers' compliance and those that breach the regulation face statutory notices, a fixed penalty or an escalating fine.

    Default Funds

    A default fund is the investment fund that members will be put into if they don't choose their own range of investments when they join a pension scheme. The default fund usually aims to meet the needs of the common denominator in terms of risk and investment return preferences.

    DC Regulation

    In both trust and contract-based schemes, the Pensions Regulator is responsible for ensuring that payments are made from an employer to the members' pension funds. The Financial Conduct Authority is responsible for managing the regulation of individual members' pensions (and subsequently annuities) in a contract based scheme.

    Constructing a DC scheme

    The charge cap: From April 2015 a 0.75% cap on charges will be introduced for the default funds of all defined contribution workplace pension schemes. This cap, in combination with the 2014 Budget changes, is prompting a number of DC schemes to redesign their defaults funds. Fund managers are also launching new, cheaper offerings.

    At-retirement Options

    This refers to the options available to members when they retire. In the past, it was typical for members to spend 75% of their accumulated pension pot on an annuity and take 25% as a tax-free lump sum. However, new freedoms announced in the 2014 Budget have removed the compulsion to buy an annuity. It is widely predicted that annuities will be less popular and other options, like drawdown, will become more widely available.

    Member Education

    The establishment of a "guidance guarantee" for workplace defined contribution pension scheme savers was one of George Osborne's landmark announcements in his ground-breaking Budget of 2014. The Pensions Advisory Service (TPAS) and Money Advice Service (MAS) will help deliver the guarantee - which is a promise that every member of a DC scheme will receive free and impartial guidance at the point of retirement.


    The process of how a scheme is monitored. Governance should be a regular agenda item for most trustee boards, and many have governance sub-committees. Preparation of a statement of governance principles is also good practice.


    Every good pension scheme needs to make sure things are running smoothly behind the scenes. The term generally refers to maintaining current data for all the members of a pension scheme (whether current or past employees). Administration could be done internally, especially if the scheme is small. Alternatively, it could be 'outsourced' to a specialist pension scheme administrator, often referred to as a 'third-party administrator'.


    DB to DC transfers: Trustees must navigate tricky issues around transfers from DB to DC in the wake of the Budget freedoms. Trustees should counsel members on the full implications of such a decision, as it may not be in members' best interests. There is also concern that this will lead to an increase in retirees being targeted by fraudsters.

    Independent Trustees

    Independent (or professional) trustees are trustees from outside an organisation, who are paid for their service. They can plug gaps in the knowledge base of member-nominated trustees. Some are lawyers, others have been financial directors of a company. Therefore, it is useful to establish what areas of expertise your trustee board currently lacks and then appoint an independent trustee to fill in the gap.

    Trustee liability insurance

    Trustee liability insurance plays an important role in protecting trustees and pension scheme assets. It provides an external resource of protection in the event of a member claim. If the decision is taken to adopt insurance, however, it is important to check the small print and buy a policy that is specifically designed to respond to the needs of trustees and other individuals involved in the management of pensions.

    DC Governance

    A trust-based DC scheme is operated in-house by an organisation for its own staff and is overseen by a board of trustees, while contract-based DC schemes are overseen by the employer, but the contract is directly between a member and the company which provides the pension scheme. An increasing number of employers are opting to outsource their pension schemes to mastertrusts, which are generally governed by a board of professional trustees.

    Investment Governance

    The Myners Principles: Paul Myners' review of investment decision-making among UK pension schemes, commissioned by the Treasury and published in 2002, became known as the 'Myners Principles'. They provided a set of investment governance best practice principles that trustees are expected to implement. They are not mandatory, but if trustees choose not to implement them they need to show why.

    Investment Strategy

    Segregated mandates and pooled funds
    A segregated mandate refers to a fund run exclusively for a pension scheme by an investment manager. Here, the investment manager can tailor the portfolio specifically for the needs of the scheme but there are additional costs. Under a pooled arrangement, the trustees select a product 'off the shelf', simplifying both the initial documentation and ongoing governance.

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