Explore answers to commonly asked questions about pensions.
Curious? Your questions answered
The Pension Schemes Bill is introducing new surplus sharing flexibilities to facilitate run-on strategies and a legal framework for DB superfunds, providing an alternative to insurance for schemes that are not fully funded.
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.
For the purpose of UK pension scheme legislation, these are deemed to be the views of pension scheme members or beneficiaries including (but not limited to) their ethical views, their views in relation to social and environmental impact, and the present and future quality of life of the members and beneficiaries. Pension scheme trustees may choose, but are not required, to have a policy on taking into account non-financial factors when making investment decisions.
Pensions dashboards are digital services — apps, websites or other tools — which savers will be able to use to see their pension information in one place.
Systemic risks are those that cannot be diversified away as they do not just affect one company or holding, but instead can have a broader impact on the wider economy.
Some of the benefits of CDC for employers include:
Certainty on the costs to the scheme provided by fixed contribution rate with no risk of future deficits (as future indexation adjusted annually to balance the scheme).
Employers are free to choose contribution rates (subject to DC auto-enrolment requirements).
Support from trade unions, who have been closely involved in the development of CDC schemes.
The higher expected benefits provided by CDC are attractive to members. This could aid recruitment and retention and help with workforce management.
