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UK Pensions Information Jargon explained

Introduction

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S

Salary grade scheme

This is a type of career average scheme. The benefits earned each year depend on which range of earnings a member is in, rather than the exact amount they earned. For example, somebody who is paid £15,000 might earn the same benefits as somebody who is paid £15,500.

Salary-related scheme

This is a scheme where the member’s pension depends on their earnings. It is a type of defined benefit scheme.

Salary sacrifice

This is an agreemejargonbuster.cfmnt between an employer and a worker. The employee gives up some of the wages they would have got in the future, and the employer pays the same amount as a contribution to a pension scheme. The Inland Revenue’s rules say this agreement must be in writing. This does not count as an additional voluntary contribution.

Schedule of contributions

This is a particular type of payment schedule. It is signed by an actuary, and designed to make sure the scheme does not have an actuarial deficiency during the time the schedule will be used. A defined benefit scheme must have a schedule of contributions because of the minimum funding requirement.

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Schedule 3 orders

This is when the Government decides how much preserved benefits should increase between a member leaving a scheme and their normal pension date.

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Scheme rules

These are the particular rules of a pension scheme. A member has the right to see the full scheme rules.

Section annuity

A section 32 annuity (also called a section 32 policy) is another name for a buy-out policy.

A section 226 annuity is another name for a retirement annuity.

Section schemes

A section 53 scheme is an occupational pension scheme that used to be contracted out, and still has a guaranteed minimum pension (GMP) or protected rights. This means it is still dealt with by the Contributions Agency. This used to be called a section 49 order.

A section 590 scheme is an occupational pension scheme that gets mandatory approval. This used to be called a section 19 scheme.

A section 608 scheme is an occupational pension scheme that was approved before 6 April 1980 (under old rules), and has not taken any contributions since then.

Section orders

A section 53 order is the old name for a schedule 3 order.

A section 109 order is when the Government decides how much a guaranteed minimum pension (GMP) should rise by each year. It covers GMPs from after 1988. This used to be called a section 37A order.

A section 148 order is when the Government decides how much the earnings factor should rise by each year. This used to be called a section 21 order.

Section policies

A section 32 policy is a buy-out policy. This is also called a section 591 policy.

A section 32A policy is an insurance policy that takes care of protected rights. It is used for an active member or a deferred pensioner when a contracted out money purchase scheme closes.

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Securities and Investments Board (SIB)

This board watched over the organisations which control UK investment businesses. It also controlled, through a set of rules, what the UK investment businesses do. It has now been replaced by the Financial Services Authority.

Segmentation

This is setting up a number of pension schemes at the same time. It lets the member draw the pension benefits at different times. This only applies to personal pension schemes and retirement annuities. It is also called clustering.

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Segregated fund

This is when a pension scheme’s assets are managed by an investment manager from outside the scheme, but are kept separate from other assets that the investment manager controls.

Self-administered personal pension

This is another name for a self-invested personal pension.

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Self-administered scheme

This is an occupational pension scheme where the trustees or an investment manager decide how the assets are invested. ‘Self-administered’ does not mean that the members run the scheme themselves.

Self-employed annuity

This was another name for a retirement annuity. This was a way that self-employed people, or people whose job did not offer an occupational pension scheme, could save for retirement. It was not a pension scheme, but an agreement with an insurance company or friendly society (a special type of financial firm). The agreement could be approved by the Inland Revenue, meaning the member got tax relief. No new retirement annuity agreements have been allowed since 1 July 1988.

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Self-invested personal pension (SIPP)

In this type of pension scheme the member has a say in the scheme’s investments. They may employ somebody to make these decisions for them.

Self investment

This is when an employer invests part of the pension fund in assets used in connection with the employer’s business. For example, this could include buying land to build a new factory. In most cases, only five per cent of a scheme’s assets can be invested in this way. Different rules apply to a small self-administered scheme.

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Service

This is the length of time a person has worked for an employer or connected employers, such as one firm that took over another.

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Short service benefit

This is the pension benefit which must be kept for a person who stops being an active member of a pension scheme, but who does not start to get a pension straightaway.

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Simplified defined contribution scheme (SDCS)

This is a money purchase scheme that is allowed to contract out and become approved under simpler rules and Inland Revenue limits than usual.

Small self-administered scheme (SSAS)

This is a self-administered occupational pension scheme with no more than 12 members. The scheme will normally be run for a family business. These schemes must meet special conditions, such as having a pensioneer trustee, before they can be approved.

Solvency test

This is a test done by the actuary. The actuary works out whether the pension scheme has enough assets to pay the pension benefits owed to its members under the scheme rules. This test may be done to check a scheme meets the minimum funding requirement.

Special contributions

These are extra contributions that an employer pays into an occupational pension scheme. This could be to cover new benefits, or to make up an actuarial deficiency.

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Stakeholder

The Government is planning to introduce this new title for pensions. It can be used for a personal pension scheme, or an occupational pension scheme that uses the money purchase method. A stakeholder scheme will have to meet certain conditions, such as how the scheme is run, and what charges it makes. The plans for stakeholder pensions will probably become law during 1999.

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Standard contribution rate

This is the normal contribution rate worked out by a valuation. It does not take into account any actuarial surplus or actuarial deficiency.

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State earnings related pension scheme (SERPS)

This is the extra state pension that employed people can earn. They pay extra national insurance contributions once their earnings reach the lower earnings limit. People can choose to contract out of SERPS by joining an appropriate occupational or personal pension scheme.

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State pension age

This is sometimes used to mean the state pensionable age.

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State pensionable age

This is the age people normally start getting the basic state pension and the benefits from SERPS. At the moment, it is 65 for men and 60 for women. Between the years 2010 and 2020, the age for women will gradually rise to 65.

State pension disregard

This is another name for state pension offset.

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State pension offset

This is when a member’s pensionable earnings or a member’s pension are reduced to take into account the amount of state pension the member will get. It is a type of integration. It is also known as offset.

State scheme premium

This is a special amount paid to the DSS to buy certain SERPS benefits. In most cases, this meant that somebody who had contracted out could get some of the SERPS benefits they would normally have lost by being contracted out. Most state scheme premiums have not been available since 6 April 1997.

State second pension

This is what the Government plans to replace the SERPS scheme with. It has been designed so that people who do not earn a lot should get a higher pension than they would with SERPS.

Statement of recommended practice

This is advice issued by the Accounting Standards Committee on the accounting rules which should be followed for pension schemes.

Statutory discharge

The law says that a member who leaves a scheme has a right for the scheme to pay a certain amount (a cash equivalent). This amount is either put into a new scheme as a transfer payment, or used to buy an insurance policy (a buy-out policy) which later pays benefits straight to the member. Statutory discharge is when somebody uses this right.

Statutory scheme

This is a pension scheme set up by an Act of Parliament, for example the Civil Service scheme.

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Statutory transfer

This is when a member uses a legal right to have their old scheme make a transfer payment to a new scheme.

Superannuation

This is a word which some schemes, particularly those in the public service, use to describe a member’s contributions.

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Superannuation Funds Office (SFO)

This was the part of the Inland Revenue that dealt with approved schemes before 1 April 1992. It is now called the Pension Schemes Office (PSO).

Statutory discharge

The law says that a member who leaves a scheme has a right for the scheme to pay a certain amount (a cash equivalent). This amount is either put into a new scheme as a transfer payment, or used to buy an insurance policy (a buy-out policy) which later pays benefits straight to the member. Statutory discharge is when somebody uses this right.

Statutory scheme

This is a pension scheme set up by an Act of Parliament, for example the Civil Service scheme.

Supplementary scheme

This is a separate pension scheme which gives a member extra benefits. It is also called a top-up pension scheme.

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Surplus

This is where the actuarial value of a scheme’s assets is more than the actuarial liability . The surplus is the difference between the two.  It is usually called an actuarial surplus.

Surrender

This is when an insurance policy is cancelled and the insurance company pays an amount (called ‘the surrender value’) to the policyholder.

Suspension order

This is an order made by the Occupational Pensions Regulatory Authority (OPRA). It stops a named person from using their powers or carrying out their duties as a trustee of any occupational pension scheme covered by the order. The named person will get back these powers if the order is removed.

On 6 April 2005 the Pensions Regulator took over from Opra (the Occupational Pensions Regulatory Authority). The Pensions Regulator is the new regulatory body for work-based pension schemes in the UK.

T

Targeted money purchase

This is a money purchase scheme that says how much benefit it aims to pay. The scheme does not have to pay this amount.

Tax relief at source

This is a way of giving members tax relief. People in occupational pension schemes have their contributions taken out of their pay before their tax is worked out.

Temporary annuity

This is an annuity that is paid until a certain date, or until a certain person dies, whichever happens first.

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Term assurance policy

This is a type of insurance policy which pays out if the insured person dies before a certain date.

Term insurance policy

This is another name for a term assurance policy.

Tied agent

This is somebody who can only give advice on the financial products (such as pensions) sold by one firm or group.

Tied annuity option

This is when an insurance firm pays out on a policy, and the person who gets the money uses it to buy an annuity from the insurance firm. For example, a pension scheme could use the money from a policy to buy an annuity for a member.

The annuity rate will be whatever the insurance firm is offering at the time. This is different from a guaranteed annuity option, where the annuity rate is fixed by the insurance policy.

This is also different to an open market option, where the money from the policy can be used to buy an annuity from a different insurance firm.

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Top hat scheme

This is a pension scheme for specially chosen employees. It is sometimes called an executive scheme.

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Top-up pension scheme

This is where a member joins an extra pension scheme to get extra benefits. The Pension Schemes Office (PSO) uses this name for unapproved schemes.

Total earnings scheme

This is a type of career average scheme. It means the member’s pension is worked out as a fraction (part) of their total earnings while they were in the scheme.

Tracing service

There are two tracing services. One is run by the Pension Schemes Registry to help people keep track of the pension benefits they have earned in the past. The other service is run by the DSS to help schemes keep track of their deferred pensioners.

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Tracker fund

This is another name for a tracking fund.

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Tracking fund

This is a way of investing that means buying a range of investments that should grow at the same rate as a particular market. For example, this could mean buying shares in the 100 biggest companies on the stock market.

A tracking fund could be used for passive investment management.

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Transfer club

This is a group of employers and occupational pension schemes which agree to deal with transfer payments in the same way.

Transfer credit

If a member changes schemes, they may get a transfer payment from their old scheme to the new one. The benefit that the member earns from this payment is called a transfer credit. This will also count towards their qualifying service in the new scheme.

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Transfer payment

This is an amount that a scheme may pay when a member leaves. This amount will either go into a new scheme that the member has joined, or will be used to purchase a buy-out policy for the member. The scheme may make this transfer payment because of the scheme’s rules, or because of the member’s rights under the law (a statutory transfer).

Transfer premium

This is an amount that could have been paid to the Government when a member moved their benefits to an occupational pension scheme that was not contracted out. When working out the figures, an amount was taken off to cover the guaranteed minimum pension (GMP).

In return for the transfer premium, the member got extra benefits from SERPS. The transfer premium has not been available since 6 April 1997.

Transfer value (TV)

This is the amount paid as a transfer payment.

Trivial pension

This is a pension which is so small it can be cashed in without affecting the Pension Schemes Office (PSO) approval.

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Trust

Under a trust, named people (called trustees) hold property on behalf of other people (called beneficiaries). The trustees can be beneficiaries.

Trust corporation

This is a company which acts as a trustee and holds the trust’s assets.

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Trust deed

This is a legal document used to:

Trust instrument

This is the name for the documents which set up the trust and decide the trust’s rules.

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Trustee

This is a person or a company appointed to carry out what the trust must do. They must follow the laws that apply to trusts.

Trustee report

This is a report by the trustees on certain things to do with an occupational pension scheme. It may be part of the annual report.

U

Unallocated assets

These are pension scheme assets which have not yet been used to provide pension benefits.

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Unapproved scheme

This is an occupational pension scheme which is not designed to be approved by the Inland Revenue.

Underfunding

This is when a pension scheme’s assets are less than its liabilities.

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Unfunded scheme

In this type of pension scheme, assets are not saved up before the pension benefits are paid. A pay as you go scheme, such as SERPS, is a type of unfunded scheme.

Unfunded unapproved retirement benefits scheme (UURBS)

This is an unfunded occupational pension scheme that is not designed to be approved by the Pension Schemes Office (PSO).

Uniform accrual

This is the assumption that pension benefits are earned at the same rate over the whole time a member is expected to work.

Unisex annuity rates

These are annuity rates which are the same for men and women.

Unistatus annuity rates

These are annuity rates which are not affected by whether somebody is a man or a woman, whether they are married, single, separated or divorced, or whether they have any dependants.

Unit linked pension

In this type of pension scheme the pension scheme benefits depend on what happens to a unitised fund. The scheme is usually linked to the unitised fund through an insurance policy.

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Unit trust

This is a trust which people can invest in by buying units. The trust uses investors’ money to buy investments. The fund manager values the fund’s assets from time to time and puts a new price on the fund’s units.

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Unitised fund

This is where a group of different people or companies have their money invested together, instead of separately (as with a segregated fund). The scheme is split up into units. A unit trust is a unitised fund.

Unitised with profits policy

This is a with-profits policy where each person or firm’s investment is a share of the fund, rather than a particular amount of money.

Untied annuity option

This name is sometimes used for an open market option. This is the option to use the money from an insurance contract to buy an annuity from any insurance scheme at whatever annuity rate they offer. It could apply to a member’s share of a pension fund, meaning they can shop around for the best deal.

Unused relief

This is the amount of tax relief that a member of a personal pension scheme has available for their contributions, but has not yet used. They may choose to count this unused relief for a different tax year, which is called carry back or carry forward.

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Upper band earnings

These are earnings between the lower earnings limit for national insurance and the upper earnings limit. People in SERPS have to pay extra national insurance based on these earnings.

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Upper earnings limit (UEL)

This is the highest amount of earnings on which employees pay national insurance. The employer still pays national insurance for earnings above this limit.

Upper tier earnings

This is another name for upper band earnings.

V

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Valuation

This word is sometimes used to mean an actuarial valuation. This is when an actuary checks what the pension scheme assets are worth and compares them with the scheme’s liabilities. The actuary works out how much the contributions from employers and members must be so that there will be enough money in the scheme when people get their pensions. With defined benefit schemes, there must be an actuarial valuation every three years.

Valuation balance sheet

This is a way of showing actuarial assets and actuarial liabilities. An actuarial surplus or actuarial deficiency is listed to balance the figures.

Valuation basis

This is the name for the way the actuary values a scheme’s assets and liabilities, and the estimates they make.

Valuation date

This is the date used for the actuarial valuation. The figures shown will be for this date.

Valuation method

There are several ways that actuaries can value pension scheme assets and liabilities. The actuarial report must say which way was used.

Valuation report

This is a report on an actuarial valuation. It is also called an actuarial report.

Variable pension

This is another name for income withdrawal. This is when a member retires, but chooses not to buy an annuity straightaway. In the meantime, they take an income from the scheme. This could apply to a member of a small self-administered scheme, a personal pension scheme or a defined contribution occupational pension scheme.

Vested rights

These are:

W

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Waiting period

This is the length of time an employee has to work for an employer before they can join the employer’s pension scheme. It is also called a qualifying period.

Waiver of premium

This is a benefit that a personal pension scheme or a retirement annuity may offer. It means that an insurance company will pay extra money into the scheme if the member cannot pay their usual contributions because of ill-health or disability.

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Whistle blowing

An occupational pension scheme’s actuary or auditor (the person who checks the accounts) must by law tell Occupational Pensions Regulatory Authority (OPRA) if they believe the scheme is breaking certain rules. Other people can tell OPRA this, but they do not legally have to do so.

Widow’s (or widower’s) guaranteed minimum pension (WGMP)

A contracted out occupational pension scheme must pay at least this amount in pension benefits to the widow or widower of a member who dies. This applies for any benefits earned before 6 April 1997. It does not apply to a scheme that has contracted out under the protected rights rule.

Winding up

This is closing an occupational pension scheme. It can done by buying annuities for all the members. These will be deferred annuities in some cases.

Another way of winding up a scheme is to move all its assets and liabilities into another scheme. This will be done by following the scheme rules, or any laws that apply.

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With-profits policy

This is a type of insurance policy. It means that a policyholder will get a share of any surplus in the insurance company’s life insurance and pensions business.

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