Your questions answered

A Group Personal Pension (sometimes called a 'GPP') is a type of defined contribution (DC) pension arrangement. It is normally established by a company with a pension provider – typically an insurance company – on behalf of a group of employees. This grouping allows the company to negotiate better terms – eg lower investment management charges – than individuals would receive from the provider directly. However, while termed a group arrangement, it is important to note that in practice, each employee has their own individual contract with the pension provider. A GPP is sometimes referred to as a form of contract-based DC scheme so as to distinguish it from a trust based DC scheme.

An obligation to make a payment in future. An example of a liability is the pension benefit “promise” made to a defined benefit (DB) pension scheme member, such as the series of cash payments made to the member in retirement. The more distant the liability payment, the more difficult it often is to predict what it will actually be and hence what assets need to be held to meet it.

An investment approach which focuses more (than has traditionally been the case) on matching the sensitivities of a pension scheme’s assets to those of its underlying liabilities; this may be in response to changes in certain factors, most notably interest rates and inflation expectations.

A life fund is a type of pooled investment vehicle offered as an investment option under a life insurance policy. Access to this type of arrangement is restricted typically to certain types of investors, for example pension scheme trustees.

A longevity swap is an agreement between two parties (typically a pension scheme and either an investment bank or insurance company) to exchange streams of payments; one of which is “fixed”, based on a pre-agreed set of demographic and other assumptions and the other of which is variable, or “floating”. Typically, the pension scheme will receive the floating stream of payments (which corresponds to the pension payments it is obliged
to pay based on its actual experience) and the bank/insurer receives the fixed stream. The floating stream of payments will continue until pension payments cease, regardless of how long the members covered by the swap actually live. As a result, the longevity swap eliminates the risk to the pension scheme that members covered by the payments live longer than expected. Of course the pension scheme will be worse off (compared to not entering the swap) if scheme members do not live as long as predicted under the longevity swap.

A longevity swap is a financial arrangement used by pension schemes to manage the risk associated with members living longer than expected. Essentially, it involves the pension scheme making regular fixed payments to an insurer or reinsurer, who in return agrees to cover the actual pension payments to the scheme's members. This way, the insurer takes on the longevity risk, meaning if members live longer than anticipated, the insurer bears the cost.

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A Master Trust is a defined contribution (DC) investment scheme which has a series of separate underlying sections to which unrelated employers can make contributions on behalf of their workforce. Overall, governance and oversight of the Master Trust is provided by a trustee board (the master trust trustees).

An active member is a person who is accruing benefits under a pension scheme as a result of their current employment.

An escrow account is a bank account held independently of two parties, the funds in which can be released to either party based on certain pre-agreed conditions, for example the funding level of the scheme.

An Implementation Statement must be produced by trustees of defined benefit (DB), defined contribution (DC) and hybrid pension schemes with at least 100 members. It has to be included as part of the annual scheme report and accounts and be published online. Its purpose is to explain how over the course of the year, the trustees have acted in accordance with the policies and objectives detailed in the scheme’s Statement of Investment Principles (SIP). The details of what has to be included differ between DB schemes and DC/hybrid schemes.

This is a swap contract whereby one party pays a fixed stream of payments in exchange for a stream of payments that varies with actual inflation rates. Inflation swaps are useful for hedging a pension scheme’s inflation risk – to do so, the pension scheme would pay a fixed amount and receive an inflation-linked amount. A rise in inflation expectations would typically increase the scheme’s funding target but the scheme would benefit from an offsetting increase in the value of its inflation swap.

An insurance buy-in transaction involves purchasing a policy from an insurance company that matches the benefits due from the pension scheme. This policy is held as an asset of the scheme and provides a regular income to the scheme to cover the benefit payments that need to be made to members. It is a step towards eventually buying out the benefits completely with the insurance company ahead of winding up the scheme.