Glossary:Acronyms and jargon clarified

• Asset backed contributions (ABCs):
  An ABC is a contractual arrangement between trustees and one or more entities within the sponsoring employer. An ABC involves regular payments to the scheme for the duration of the arrangement. The payment stream derives from an underlying asset and is usually given a net present value by the trustees and is treated as an asset, thus reducing or eliminating the scheme deficit.
• Bulk Annuity Policy:
  A policy offered by UK insurers and purchased by pension scheme trustees to better secure members' benefits by removing risks associated with defined benefit pension schemes.
• Buy-in / Buy-out:
  Both options are 'de-risking' investment decisions taken by the trustees of a defined benefit pension plan to match the pension benefits promised to a group of members by purchasing bulk annuity policies with an insurance company. A buy-in is an investment contract with the trustees still retaining legal responsibility to pay members' benefits while a buyout means the insurer would take legal responsibility for paying monthly pensions directly to each individual scheme member.
• Consolidation vehicle:
  Also known as 'superfunds', pension consolidation vehicles for DB plans are an alternative to a buyout for companies seeking to settle their UK pension liabilities. Pension plan trustees would be able to transfer part or all of the DB pension plan liabilities to a consolidation vehicle, which would take on full responsibility for those liabilities. The term 'superfund' covers the overall structure of the vehicle, including the corporate entity, the pension scheme and the capital buffer.
• Deficit contributions:
  Additional contributions from sponsoring employers; these are extra payments made to reduce the shortfall of funding in a pension scheme.
• Diversified Growth Fund:
  Diversified growth funds invest in asset classes in order to provide investors with returns over the medium to long term, whilst limiting the fund’s exposure to market fluctuations. Investment performance targets are often set as a margin over LIBOR, a benchmark interest rate, or an inflation index.
• Funding level:
  The funding level reflects a pension fund's current financial position, expressing the ratio between available assets and liabilities (also known as the ‘funding ratio’).
• Gradual run-off:
  In the context of a pension plan that is closed to new benefit accrual, the plan continues to operate and pay benefits until the last beneficiary dies.
• Guaranteed Annuity Rate (GAR):
  A guaranteed annuity rate is one that was set in the original policy terms and conditions where a defined benefit scheme was set up as an insured pension arrangement. It provides guaranteed annuity terms for benefits covered by the guaranteed rates, which can be beneficial compared to market annuity rates depending on market conditions when members retire.
• Liabilities:
  The estimated value, using actuarial methods and assumptions, placed on the defined benefit obligations (the benefits promised to members) of a pension plan; obligations include the present value of future pension instalments and contingent benefits (e.g. benefits paid to family members on the member’s death). This may include the expected value of future expenses.
• Liability driven investment (LDI):
  LDI aims to manage funding level risk using a range of assets, such as swaps and bonds, to construct an investment strategy that closely matches the behaviour of the pension liabilities; these assets are often referred to as 'LDI assets'. The use of swaps allows for the option of 'gearing' so that the portfolio is more fully immunised against interest rate and inflation movements, but some of the assets are still available to invest in risk-seeking assets (which then adds risk back in to the portfolio).
• Liability management exercise:
  Liability management exercises are a method of reducing and re-shaping the size of liabilities and risks associated with defined benefit pensions. The main types of liability management exercises are: pension increase exchange (PIE), enhanced transfer values (ETV), retirement transfer offers, early retirement exercises and DB to DC enhanced opt-outs.
• Parent company guarantee:
  A PCG is a contractual promise to ensure the guaranteed party performs their obligations under a contract, e.g. when a company’s subsidiary participates in a DB pension plan, the parent company can provide a guarantee to the pension plan that it will meet some or all of the subsidiary’s financial responsibilities should the subsidiary not be able to meet them itself. This improves the security of the plan and, during funding negotiations, may offer sufficient confidence for agreement of lower deficit contributions to be paid over a longer period.
• Pension flexibilities (or DC flexibilities):
  Since the Freedom and Choice legislation in 2015, DC plan members are not required to use their DC pension savings to buy an annuity at retirement; there are now options to take their DC pension savings as single lump sum or as regular withdrawals from the fund.
• Pension increase exchange (PIE):
  A PIE is an offer under which a member would give up future (non-statutory) pension increases in exchange for a higher starting pension.
• Transfer value exercise:
  In transfer exercises, the sponsoring employer offers the member the chance to transfer their benefits out to another scheme. They will usually pay an incentive to encourage them to do so. Plan members are provided with a quotation of the transfer value of their benefits in the plan and offered access to independent financial advice. The offer may include an enhancement to the standard transfer value level (known as enhanced transfer value or ETV exercises). Pension transfer is a complex area.
• Trivial commutation exercise:
  Within DB pension plans it is possible to convert the whole of a small pension into a one-off cash lump sum payment to the plan member, subject to certain eligibility criteria. The offer can be made to pensioners and deferred members over the age of 55 years. These exercises can reduce the level of pension liabilities (and therefore risk) for the company as well as reducing future administration costs.
• Uncrystallised pension fund:
  A pension fund that has not yet been accessed for retirement income.