Your questions answered

A superfund is a type of pension scheme designed to consolidate multiple defined benefit (DB) pension schemes into a single, larger fund. This approach can be used when a pension scheme has no realistic prospect of securing a full buy-out with an insurer in the foreseeable future.

The difference between a given swap rate/return and the return on an equivalent government bond. The spread reflects the relative creditworthiness of the swap counterparty and the government, but in practice is also influenced by supply and demand factors. For example, a pension scheme may have entered into an interest rate swap to receive fixed interest payments (from say an investment bank) and make floating interest payments. Assume that the fixed rate is set at 4.8% pa. If an equivalent government security delivers only 4.5% pa, then the swap spread in this instance is 0.3% pa. If the counterparty meets its side of the swap, then the pension scheme benefits from this additional return.

A collective investment vehicle in which money from a number of investors is pooled together and invested collectively in a spread of investments such as UK equities or bonds. Each investor owns a number of units, the value of which depends on the overall value of the trust’s investments and the total number of units. An authorised unit trust can be sold to the general public. An unauthorised unit trust cannot be sold to the general public and is marketed to institutional investors such as pension scheme trustees.

The term used to describe the rules and principles applied by investors, in particular shareholders, in managing their relationships with the companies in which they invest, including voting powers where relevant. Also used to describe the framework used by company directors in running a business.

A self-regulating business model that helps a company be socially accountable — to itself, its stakeholders and the public. It considers all aspects of society including the economic, social and environmental. It is also known as corporate citizenship and corporate responsibility.

For a bond, covenant refers to the ability and willingness of an issuer to meet the payments due on the bond. For a pension scheme, covenant refers to the ability and willingness of the sponsor to make up any shortfall between the scheme’s assets and the agreed funding target.

Cyber risk can be broadly defined as the risk of loss, disruption, or damage to a scheme, or its members associated with using information technology. Risks can arise not only from the technology itself but also from the people using it and the processes supporting it. It includes risks to information (data security) as well as assets, and both internal risks (for example, from staff) and external risks (such as hacking). Source: TPR

Buy-out funding levels have improved, with 45% of schemes now estimated to be fully funded on buy-out – expected to increase to 80% of schemes within five years. While endgame innovation continues apace, demand for the insurance route remains undiminished – as demonstrated by the £4.3bn buy-in completed by Rolls-Royce scheme this summer.

A legal obligation of one party (a fiduciary) to act in the best interests of another. Fiduciaries are people or legal entities that are entrusted with the care of money or property on behalf of others. They include pension scheme trustees.

Integrated risk management is an approach used by defined benefit (DB) pension scheme trustees to identify, manage and monitor the wide range of risks (relating to investment, funding and covenant) which might impact the chances of meeting their scheme’s overall objectives.

NEST is the name for the personal accounts scheme established as part
of the reforms of the UK pensions system under the Pensions Act 2008. It
is run by the NEST Corporation, a public body accountable to Parliament via the Secretary of State for Work and Pensions. From October 2012 onwards, the government required employers to introduce auto-enrolment, under which most employees joined a workplace pension scheme unless they actively opted out of it. NEST is the default pension scheme for those employees whose employer decided not to offer an appropriate alternative arrangement.

Salary sacrifice describes a process where an employee agrees to forego or ‘sacrifice’ part of their salary in return for their employer making additional pension contributions on their behalf. The lower salary means a lower NI bill for both employer and employee.