Jargon buster
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Affordability
How much it costs the pension scheme to buy insurance, relative to the value of the assets they already hold.
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All-risk transfer
A market-leading solution whereby PIC takes on full responsibility for the costs and actions needed to wind up a pension fund. This allows sponsors to be fully separated from the pension fund within days of signing the insurance policy. Risks arising from sources such as inaccurate data become the responsibility of PIC sooner than in a normal transaction.
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Annuity / annuity policy
A policy with an insurance company that pays an amount to the policyholder every year for life, similar to a pension.
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Asset class
There are four main asset classes:
Cash - the least risky of the four asset classes, but this lower risk is offset by often modest returns on investment.
Equities - shares issued by a company normally listed on a stock exchange. Shares in that company entitle the owner to dividend payments and voting rights.
Fixed interest - a fixed interest security is a way of 'lending' money to a government, or to a company, in return for a fixed rate of interest over a set period. This type of investment aims to provide a regular, reliable income. See bond and gilts.
Property - investments in commercial property such as office blocks, retail parks.
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Asset-Liability Management
The Asset-Liability Management (A-LM) team at Pension Insurance Corporation is responsible for making strategic decisions on the investments held by the insurance company. Relentless in managing risk, it is their responsibility to make sure the assets we hold are sufficient to pay our policyholders' annuities as they fall due.
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Balance sheet
A statement that shows the assets and liabilities of a company.
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Bond
A fixed interest financial instrument repayable at the end of a pre-determined period. Classified as debt, bonds are issued for the purpose of raising capital. They can be issued by government, companies and other large entities.
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Bulk insurance policy
A single insurance policy, issued by an insurance company to the Trustees of a pension scheme and held as an asset of that scheme. It covers the pension payments to be made to the insured scheme members, perhaps hundreds or thousands of them.
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Capital
The working funds of an insurance company can be provided by investors or reinvested from profit. The insurance company’s capital is added to the assets received from pension schemes to provide extra security for policyholder annuities inline with FSA requirements.
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Capital buffer
The insurance company has to put up its own money to back the promise to pay insured pensions, in addition to the amount it receives from the pension scheme. This level is set by the Financial Services Authority. Pension Insurance Corporation puts up significantly more than the required minimum to ensure that all pensions can be paid in even the most extreme downturns in the financial markets.
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Corporate bond
Corporate bonds are a type of bond issued by a company.
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Corporate Social Responsibility (CSR)
Corporate Social Responsibility (CSR) is about how businesses align their values and behaviour with the expectations and needs of stakeholders - not just customers and investors, but also employees, suppliers, communities, regulators, special interest groups and society as a whole. CSR describes a company's commitment to be accountable. CSR demands that businesses manage the economic, social and environmental impacts of their operations to maximise the benefits and minimise the downsides.
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Covenant risk
Covenant is the continuing financial support a pension scheme has from its sponsor company. The risk of this being withdrawn, either through an insolvency event or other reason for not being able to afford further payments to the scheme, should be a key consideration for a pension fund, given the high value of this to the trustees.
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Deferred premium
In most pension insurance transactions the premium, or cost of the insurance, is paid up front. When the solution encompasses a deferred premium, Pension Insurance Corporation agrees that the trustees and / or sponsor company pay some of the cost at a later date, or spread the payments over a number of years. This may tie in with a previously-agreed contribution schedule designed to make good a deficit in the pension fund. The members' pensions are insured at the outset.
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Defined benefit (DB)
A pension fund where the rules define the benefits to be paid. The most common of these are known as final salary pension schemes. The pension benefits are known in advance, but the cost is not. The benefits are normally expressed as a fraction (often called the accrual rate), of final salary for each year's membership of the scheme.
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Defined contribution (DC)
The eventual benefits to the fund member are not known until they are taken, although the contributions are clearly defined,. Contributions are paid to the pension scheme and invested in the chosen investment funds. The value of the fund when the member takes their benefits will be used to provide their pension benefits, usually by buying an annuity. These are also called money purchase schemes.
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Equities
Shares issued by a company normally listed on a stock exchange. Shares in that company entitle the owner to dividend payments and voting rights.
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FSA
The FSA is an independent non-governmental body, quasi-judicial body and a company limited by guarantee that regulates the financial services industry in the United Kingdom. Its board is appointed by the Treasury. Its main office is based in Canary Wharf, London, with another office in Edinburgh. The FSA oversees insurance companies to ensure they hold sufficient funds to make payments to policyholders.
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FTSE
The Financial Times Stock Exchange, is an independent company jointly owned by the Financial Times and the London Stock Exchange. The FTSE researches and publishes thousands of indices, securities and other investment vehicles, including the FTSE100 of leading companies.
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Gilts
Fixed income or index-linked bonds issued by the UK Government. They are usually safe and secure (known as 'gilt-edged') but they are not entirely without risk. This type of investment is intended to provide a safer return on your investment than that available from Corporate bonds over a set period of time.
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Hedging
A process by which an asset is purchased where its value is expected to move in line with a specified liability. In practice this can mean that both the upside and downside of an unknown risk are removed by matching assets to liabilities – for example, if a pension increases in line with inflation then an inflation-linked government bond can be bought to match that risk. Even if inflation is higher or lower than expected, the income from the asset will meet the required outgoing and neither a profit nor loss will be made – a good example of this is a pension insurance buy-in.
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In specie
The distribution of an asset in its present form, rather than selling it and distributing the cash. In specie distribution is made when cash is not readily available, or allocating the physical asset is the better alternative.
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Independent trustees
These are trustees who are pension industry professionals and who act as trustees of a pension fund or funds for a fee.
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Liabilities
The cost of paying all future pensions promised to pension scheme members, expressed in present day terms.
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Longevity
Longevity is the probability of someone living longer (the opposite of mortality). Longevity risk is the risk of a pension scheme member living longer than expected and thus not having sufficient funds to pay their benefits until their death.
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Longevity risk insurance
Pension schemes have the risk that if their pensioners live longer than expected, it costs more to pay their pensions and the scheme may not have sufficient assets. In longevity risk insurance, the Trustees agree to fix an assumption for longevity with an insurance company that removes this risk for the scheme. If the pensioners live longer than expected then the insurance company has to make up any shortfall.
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Market volatility
Movements in financial markets can create difficulties, and opportunities, for investors. They can potentially lead to increased deficits (or surpluses) developing in pension schemes due to a change in the value of either assets or liabilities (or both, in opposite directions).
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Pension Corporation
Pension Corporation provides innovative, bespoke risk management solutions to the trustees and sponsors of defined benefit pension funds, bringing safety and security to member benefits.
It is the umbrella brand for:- Pension Insurance Corporation (PIC), an insurance company authorised and regulated by the Financial Services Authority (FSA).
- Pension Security Insurance Corporation Ltd (PSIC), a fully authorised Guernsey reinsurer. PSIC provides the capability to reinsure specific risks for pension funds and pension sponsors.
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Pension insurance buy-in
The process by which the trustees of a pension scheme buy a bulk insurance policy to cover some of their members, for example the current pensioners already in payment. The trustees hold the policy as an asset and remain responsible for paying the pensions. The members remain within the scheme.
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Pension insurance buyout
The process by which a pension scheme pays an insurance company to take over responsibility for paying its members' benefits. Each pension scheme member gets an individual policy with the insurance company securing and paying their benefits.
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Pension Insurance Corporation
Pension Insurance Corporation is an insurance company authorised and regulated by the Financial Services Authority (FSA).
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Pension Security Insurance Corporation
Pension Security Insurance Corporation Ltd (PSIC) is a fully authorised Guernsey reinsurer. PSIC provides the capability to reinsure specific risks for pension funds and pension sponsors.
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Pensioner-only buyouts / buy-ins
Insurance which only covers the members in a pension scheme who are currently receiving their pensions and not those who still work for the company, or have left but not yet retired.
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PICH
PICH stands for Pension Insurance Corporation Holding company. It is the parent company of:
- Pension Insurance Corporation (PIC), an insurance company authorised and regulated by the Financial Services Authority (FSA)
- Pension Security Insurance Corporation Ltd (PSIC), a fully authorised Guernsey reinsurer, providing reinsurance only to PIC
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Policyholder
The owner of an insurance policy and the customer of an insurance company. They hold a policy document in which the insurance company states what benefits it is going to pay out and under what circumstances.
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Premium
The amount of money paid by a pension scheme to an insurance company to purchase an insurance policy to secure the insurance of its members' pensions
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Scheme technical provisions (STP)
The assessment made by a pension scheme's trustees as to the amount of assets they would need today to pay all their future pensions. The trustees are responsible for setting the assumptions to determine this amount and they and the scheme's sponsoring employer will agree a contribution plan to address any shortfall.
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Solvency
The measure of the financial health of an insurance company. The assets held must be larger than the expected payments to be made (measured on a very prudent basis). See solvency margin.
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Solvency margin
The additional assets held by an insurance company to provide extra security for its policyholders above the level required by the FSA.
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Sponsor
The company that is responsible for a pension fund.
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Transition process
Moving the responsibility for paying the pensions from the pension scheme trustees to the insurer in a manner that ensures the correct benefits are paid and without interruption. This process involves verifying the correct benefits to be paid and testing any changes to computer systems. This process typically takes 6-12 months or more.
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Trustees
Trustees of occupational or workplace pension funds are generally employees or former employees who can be appointed by the company or elected by the scheme membership. They may also be independent. They are legally responsible for overseeing every element of the pension scheme.
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Wound-up (pension scheme)
A pension scheme which no longer has any responsibility to pay pensions because all of those pensions have been insured with another provider is closed and can cease to be a legal entity.
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Yield
In general, yield is a term that defines a return on a capital investment of various forms. Typically, yield is expressed as a percentage and is used as an annual figure. If an investor holds a bond purchased for £100 and it pays £5 in interest, the yield is 5%.
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