Pensions jargon and what it means

Auto-enrolment: the process under which employers with employees earning between certain bands must enrol them into a qualifying pension scheme.

Buy-out: a process under which final salary liabilities are discharged by the use of an insurance policy.

Buy-out debt: another name for a Section 75 Debt (see below).

Buy-in: a process through which final salary liabilities are matched with insurance policies, but without discharging the scheme’s responsibility for promised benefits.

Clearance: the process of obtaining confirmation from the Pensions Regulator that a proposed transaction will not result in a contribution notice or financial support direction.

Company (or employer) covenant: a concept promoted by the Pensions Regulator of assessing or measuring the strength of the sponsor’s ability to absorb funding and investment risk.

Contract-based scheme: a pension contract between an individual and a provider to which the employer is not a party.

Contribution notice: a notice issued by the Pensions Regulator requiring the payment of the sum specified in the notice. Part of the Regulator’s moral hazard powers (see below).

Defined benefit (or DB) scheme: another name for a final salary scheme (see below).

Defined contribution or (DC) scheme: another name for a money purchase scheme (see below).

Equalisation: most often used in connection with putting retirement dates on a common footing for men and women following the famous court case of Barber v GRE.

Final salary scheme: a scheme in which a member’s benefits are calculated by reference to his or her salary at or near retirement, or the earlier date of leaving employment. Also known as a defined benefit scheme.

Financial support direction: a direction issued by the Pensions Regulator that financial support for a pension scheme is put in place for a specified period. Part of the Regulator’s moral hazard powers (see below).

Group scheme: a scheme in which several employers within a group of companies participate. Also termed a multi-employer scheme.

Mitigation: the term used by the Pensions Regulator to mean additional funding or security requested to compensate for a material detriment to the company covenant.

Moral hazard powers: the powers given to the Pensions Regulator designed to prevent employers from unfairly transferring final salary liabilities to the Pension Protection Fund.

Money purchase scheme: a scheme in which a member’s benefits depend on the accumulated value from time to time of contributions made to the scheme and the investment return on them. Also known as a defined contribution scheme.

Pension Protection Fund: a statutory safety net for final salary schemes set up under the Pensions Act 2004 for members whose sponsoring employer has become insolvent. It is funded by a levy on schemes and does not provide complete protection for all benefits.

Pension freedom: the ability under April 2015 legislation for members to access their pension savings without the necessity of buying an annuity.

Personal pensions: insurance contracts between individuals and providers on a money purchase basis to which an employer is not party. Group personal pensions are groups of such contracts set up for a company’s employees and often branded under an employer’s logo.

Principal employer: the lead employer within a group scheme in which particular decision-making powers are often vested.

Section 75 debt: the difference between the cost of purchasing buy-out policies for all members and the assets in the employer’s scheme. Also known as the buy-out debt.

Sponsor: general term for the employer or group of employers that stands behind a pension scheme.

Trust: a legal mechanism that separates the assets of the pension scheme from those of the sponsor’s underlying business.

Trustees: Individuals or corporate bodies who are legally responsible for the management of employer-sponsored pension schemes.

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