Explore answers to commonly asked questions about pensions.
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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.
Several factors limit investment in productive finance, including externalities that are not fully reflected in returns, information gaps in which investors lack sufficient data or expertise, and coordination challenges in which action depends on multiple parties moving together. Regulatory and structural constraints can also restrict access, particularly for smaller schemes. Scale is important because larger schemes are generally better able to diversify, build specialist capability and access private markets on more efficient terms.
First produced in 2001 by Paul (now Lord) Myners, there are two sets of investment principles, one for defined benefit (DB) and one for defined contribution (DC) pension schemes. The original principles have since been modified. They are now known as the (2008) Myners Investment Principles for DB schemes and the Investment Governance Group Principles for DC schemes, each comprising six principles. They are designed to improve the overall level of UK institutional pension scheme governance, in particular with respect to investment decision making.
Key risks of run-on include:
Covenant: Conditions may change meaning the scheme sponsor becomes unable to support the scheme.
Longevity: Pension scheme members may live longer than expected leading to an increase in pension payments.
Investment: Asset returns may be lower than anticipated.
Regulatory: New policy and legal decisions could impact how schemes need to be run.
UK pension trustees that are required to produce a Statement of Investment Principles must set out their policy on voting rights and on how they monitor and engage with relevant persons, including issuers and asset managers. Where an implementation statement is required, trustees must explain how those stewardship policies have been followed, describe voting behaviour including the most significant votes, and state any use of a proxy voter.
The administrator of an investment fund is responsible for carrying out day to day administration. This includes activities such as calculating the fund’s Net Asset Value and preparing its accounts and maintaining its financial records.
This is the measure of the sensitivity of the value of an asset (such as a bond) or a liability (such as a pension scheme cash flow) to changes in interest rates. For example, an asset or liability with a duration of 10 is expected to rise (fall) in value by 10% following a 1% fall (rise) in interest rates. Pension schemes can reduce the sensitivity of their funding level (the value of assets held relative to the target value of assets) to changes in interest rates by purchasing assets of similar duration to the liabilities, a technique that underlies Liability Driven Investment (LDI).
