Glossary

Accrual rate - The rate at which benefits build up for each year of pensionable service in a final salary scheme.

Accrued benefits - These are benefits that have built up for service up to a certain date and are calculated in relation to pensionable earnings.

Active member - A member of a scheme who is presently accruing benefit under that scheme in respect of current service.

Actuarial assumptions - The actuary’s view of the future trends that will affect the Scheme’s assets and liabilities.

Actuarial certificate - This is required to be given by the actuary in certain circumstances, eg if there is a surplus or if there is a bulk transfer.

Actuary - An actuary advises on financial questions involving probabilities relating to mortality and other contingencies. In relation to pension schemes, an actuary is a professional adviser who must be appointed by trustees under the Pensions Act 1995. The actuary assists the trustees (or managers) of a scheme on funding issues and conducts a regular actuarial valuation. Actuaries must be members of the Institute and Faculty of Actuaries.

Additional voluntary contributions (AVCs) - Members can make AVCs to their occupational scheme. This enables them to have top-up benefits.

Augmentation - This is the process by which a member or other person has his/her benefits increased by the Trustee, subject always to the consent of Invensys plc as Founder of the Scheme and the payment of additional contributions as determined by the Trustee on the advice of the actuary.

Basic State pension - This is the State pension which is paid to all those who have met the minimum National Insurance contribution requirements and is not related to earnings, unlike the state second pension.

Beneficiary - A person entitled to benefit under a pension scheme or who will become entitled on the happening of a specific event.

Bond futures - is a contract between two parties to buy or sell a specified quantity of a specified bond at a specific price and date in the future. Bond futures contracts are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements. The economic exposure under the contract corresponds to the market value of the bond underlying the contract.

Closed fund - This is a scheme which does not admit new members or receive contributions although benefits are still paid to existing members.

Contracted out/contracted in - A pension scheme is contracted out where it provides benefits in place of the State Second Pension in exchange for paying lower National Insurance contributions and has been given a contracting out certificate or appropriate scheme certificate by the HM Revenue & Customs.

Contributions - The regular amounts paid into a scheme by a member and the regular and lump sum payments made by an employer to the scheme.

Corporate governance - Corporate governance is the increasingly important principle that shareholders should take 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 swung in favour of shareholders. Corporate governance principles are now often expressed in customer agreements, so that investment managers are required to consider shareholders’ votes (called “proxy votes”) when they can.

Deed of amendment - A legal document that amends the scheme’s trust deed and rules.

Deficit - The amount by which the value of future liabilities is greater than the value of the assets of the scheme.

Derivatives - are investment assets and investment liabilities that derive their value from the price or rate of some underlying item.

Early leaver (deferred member) - This is a person who ceases to be an active member of a pension scheme, but does not receive their pension immediately.

Equity markets - Stock markets throughout the world where you are able to buy and sell companies’ stocks and shares.

Foreign exchange forward contracts - are contractual agreements to exchange specified currency amounts at a specific date in the future. The contracts are transacted in the OTC market.

Fully funded - The point when the value of the scheme’s assets meet its future liabilities.

Fully funded scheme - A scheme that has a 100% or greater funding level.

Governance - The management and control of a scheme.

Guaranteed Minimum Pension or GMP - The minimum amount of pension that must be paid by a scheme in respect of contracted out service. GMP relates to service between 6 April 1978 and 5 April 1997. The GMP is broadly equivalent to the amount that would have been payable by the State Earnings Related Pension Scheme (SERPS) if the member had not joined a contracted out occupational pension scheme.

Liability matched benchmark - A rate of return expected from the assets that will match the change in the scheme’s liabilities.

Mortality - The assumption made for the probability of death at each age which determines how long a pension will be paid.

Myners review - The Myners review investigated the investment practice of pension schemes. The report, which was published on 6 March 2001, raised several concerns for pension schemes including the redefinition of the prudent man rule to raise it to a higher level, changes to standard benchmarks, and a review of the measurement of investment performance and whether soft commissions should be permitted in the future.

Options - are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.

Pension Protection Fund - A fund set up under the Pensions Act 2004 that will provide pension payments, at a reduced rate, for pension schemes of insolvent companies.

Pensioner - This is a person who is currently receiving a pension from a scheme.

Remuneration - In final salary schemes the amount of pension earned is invariably related to the amount of salary; HM Revenue & Customs 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”. However, HM Revenue & Customs rules also apply, and insist that final remuneration can only be determined on the basis of the amount earned in a particular year, regardless of the fact that it may actually be received and assessed to tax in a subsequent year, ie calculated on an “earned” rather than a “paid” basis.

Repurchase Agreement - A repurchase agreement, also known as a repo, is the sale of, together with an agreement for the seller to buy back the securities at a pre-agreed later date and price.

Reservoir Trust - The Reservoir Trust is a trust that has been created to provide funding to the Scheme should it be required. From 2018 an annual calculation is undertaken to determine if the scheme is fully funded and if it is not assets are transferred from the Reservoir Trust to the Scheme.

Schedule of Contributions - A formal agreement between the company and the trustee(s) which states the level of contributions to be paid to the scheme by the company and the members in the future.

Scheme actuary - This is the named actuary appointed by the trustees or managers of an occupational pension scheme under Section 47 of the Pensions Act 1995.

Scheme deficit/surplus - The difference between the assets and liabilities of the scheme as assessed by the actuary at a valuation using a series of assumptions, that may give different results depending on the basis of the assumptions.

Scheme maturity - The relative number of active members with future benefits to accrue, compared to the number of deferred members and pensioners with known benefits.

SERPS/Additional State pensions - This is the State Earnings Related Pension, 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 scheme, which provides alternative and equivalent benefits. SERPS was replaced by the State Second Pension from 6 April 2002.

State Second Pension (S2P) - Also known as S2P, the State Second Pension is an additional State pension, which replaced SERPS. There are two main differences with SERPS. First of all earners below the low earnings limit will have pension credits as though they were earning up to the low earnings limit. Secondly, it is a flat rate, rather than an earnings related scheme.

Surplus - The amount by which the value of the scheme’s assets is greater than its future liabilities.

Swaps - are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts. Interest rate swaps relate to contracts taken out by the Scheme with major brokers in which the Scheme either receives or pays a floating rate of interest in return for paying or receiving, respectively, a fixed rate of interest. The payment flows are usually netted against each other, with the difference being paid by one party to the other. In an inflation swap, the Scheme pays or receives a fixed inflation rate in return for receiving or paying the actual inflation rate. In a gilt total return swap, the Scheme pays or receives a fixed or floating interest rate in return for receiving or paying the total return on a gilt specified in the contract. In a credit default swap, the Scheme pays or receives a premium in return for receiving or paying an amount if and when a credit event occurs, which may include a bankruptcy, a default, or a restructuring of an entity as specified in the contract.

Swaptions - are contractual agreements that convey the right, but not the obligation, for the purchaser to enter into a swap, usually an interest rate swap, at a pre-agreed rate and for a pre-agreed tenor.

Technical Provisions - A prudent estimate, made on actuarial principles, of the assets needed at any particular time to make provision for benefits already accrued under the scheme. These include pensions in payment (including those payable to survivors of former members) and benefits accrued by other members which will become payable in future.

Valuation - An exercise undertaken to assess the scheme’s assets and to determine its ability to meet its future liabilities.