Explore answers to commonly asked questions about pensions.
Curious? Your questions answered
The Pensions Administration Standards Association (PASA) Accreditation programme is an independent assessment of compliance with their standards, which cover a broad range of administration activities. You can check if your administrator has been accredited at the PASA website.
When choosing a pensions administrator, consider whether they regularly seek feedback from members, whether they use technology to enhance members’ experiences, whether they proactively look after members’ data, and what accreditations they have been awarded.
For sponsors, buying-out a closed defined benefit pension scheme can remove balance sheet risks and completing the wind-up process will remove the ongoing expenses of running the scheme.
Key areas to consider include:
Solvency metrics: How does the insurer’s capital buffer compare to industry benchmarks?
Risk exposure: What are the key risks in their investment and reinsurance strategies?
Ownership model: Does their structure support long-term financial resilience?
A Collective Defined Contribution (CDC) pension scheme combines the structure of a DB scheme with the cost certainty of a DC scheme.
Benefits are funded by a regular and fixed contribution rate, but the investments are managed collectively. This allows members to share risk and achieve better outcomes at retirement than traditional DC and potentially DB arrangements.
Members accrue a target benefit, in the form of a pension (that can be commuted to a lump sum) payable from the scheme. Importantly, this benefit is not guaranteed. Every year, the trustee reviews the funding level. If the scheme is under or over funded, the trustee can adjust benefits, usually through amending the target for future pension increases. The process follows:
Members and employers pay in a defined contribution.
Contribution converted to 'target pension'. Conversion terms set annually and vary by age (younger members build up more pension).
Scheme valuation every year. If surplus, future target pension increases go up. If deficit, they go down. One-off cuts and uplifts possible for large surplus or deficit. Experience reflected in full with no buffer.
Funding level is rebased each year to 100% (by adjusting the pension increases) so no surplus or deficit emerges. Conversion terms set the following year.
A wind-up process can be an unsettling time for members if the process isn’t managed well. Receiving their benefits from a different party, changes to terms for certain benefit options and losing the familiarity of regular scheme newsletters could make members feel uneasy.
Communicating clearly about each stage of the process so that members understand what the wind-up means for them is key to allay any concerns and ensure they have confidence in the action being taken. Key steps to help with this are:
Agreeing a clear member communication strategy to keep all members informed and reassured throughout the process from buy-in to wind-up;
Implementing a well-managed project plan to ensure you deliver what you’ve told members you’ll do; and
Managing a smooth payroll and administration transfer to the insurer so that members have confidence in the insurer from day one.
Extra contributions paid by pension scheme members to secure benefits in excess of the standard scheme benefits.
CDC schemes combine:
for members, a target pension at retirement and an income for life after retirement, like a defined benefit (DB) scheme; with
for employers, the cost certainty of a defined contribution (DC) scheme.
Like a DC scheme, benefits are funded by a regular, fixed contribution from employers and employees but, unlike a DC scheme, the investments are managed collectively. Members share risk, enabling CDC schemes to invest in growth assets for much longer than either a typical DB or DC scheme.
The asset class comprising a range of physical goods. Examples include foodstuffs such as wheat, metals such as copper as well as energy sources such as oil. Commodity prices can be volatile, often as a result of geopolitical and weather events. Commodity prices can rise in response to inflation and can also cause inflation to rise. They can be used potentially to mitigate a pension scheme’s inflation risk.
The amounts paid into a pension scheme by the sponsor and, often, the members as well. Contributions may take the form of regular payments which are part of the sponsor’s normal payroll expenses or may be “special contributions” which a sponsor makes, typically to eliminate a defined benefit (DB) funding deficit (ie the amount by which a scheme’s assets fall short of the target value of assets to meet the scheme’s accrued liabilities).
These are factors which could have a significant impact on the value of an investment and should be considered by investors when making decisions. Legislation means that UK pension scheme trustees must take such factors into account. The term is often used when referring to environmental, social and governance (ESG) considerations although it is not limited to these issues.
ISDA agreements provide the legal structure allowing an investment manager to transact over-the-counter derivatives (such as an interest rate swap or an inflation swap) with third parties (eg an investment bank) on behalf of their segregated pension scheme clients. These derivative instruments are often used as part of a Liability Driven Investment (LDI) strategy.
