Explore answers to commonly asked questions about pensions.
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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.
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.
This is a swap contract whereby one party agrees to pay a fixed rate of interest in exchange for a floating rate of interest. Interest rate swaps are useful for hedging a pension scheme’s fixed liabilities. For example, where scheme members receive a fixed rate benefit every year, a pension scheme could enter into a swap contract to pay a floating rate of interest and receive a fixed rate of interest. A fall in interest rates would typically increase the scheme’s funding target but the scheme would benefit from an offsetting increase in the value of its interest rate swap.
This refers to (part of) a firm, such as LCP, or to an individual within such a firm that provides investment advice across a wide range of areas such as investment strategy and investment manager selection. Such advice is normally provided to institutional clients, including pension scheme trustees and companies, rather than to individuals.
As part of their governance structure, many pension scheme trustees have set up an Investment Sub-Committee. The ISC is usually a subset of the full trustee board. Its job is to monitor investment-related matters and to recommend action to the trustee board and/or act on its pre-agreed executive powers. Particularly in the case of large trustee boards, having an ISC normally leads to faster decision-making, which can often be beneficial.
DB pension scheme run-on is where you continue to operate a pension scheme beyond the funding level required to fully insure and buy-out pension benefits.
A pension scheme wind-up is the process of formally closing down a pension scheme, after the scheme assets have been used to secure members’ benefits and any residual assets have been distributed. For defined benefit schemes, this usually involves securing members’ benefits with an insurance company through what is known as a “buy-out”.
