A GUIDE TO PENSIONS JARGON Pensions are a subject that is particularly bedevilled with jargon. The aim of this bulletin is to provide a brief introduction to some common pension terms and make a very important subject more accessible to trade unionists. Accrued rights or benefits These are benefits built up by a member of an occupational pension scheme based on pensionable salary and length of scheme membership. Accrual rate This means the rate at which your pension builds up if you are a member of a defined benefit or final salary scheme. Your pension will be derived from the accrual rate of your scheme multiplied by your length of service and by your final salary (see final remuneration). Actuary and actuarial valuation The primary role of an actuary is to ensure that a pension scheme has sufficient funds to provide the required benefits by advising the contribution level to be paid by the employer and (usually) employees. The actuary will calculate a contribution rate by using information about the scheme members (age, current salaries etc) and assumptions regarding length of service and rates of death. Every three years the actuary will conduct a valuation and recommend the appropriate level of contributions. Additional Voluntary Contributions (AVCs) Additional contributions paid by a member of an occupational pension scheme to secure extra retirement benefits. AVC arrangements may be in-house (part of the main scheme) or free-standing (a separate arrangement between the member and a product provider chosen by the member). Administrator The individual or body responsible to the PSO (Pension Schemes Office) for the operation of an occupational pension scheme. In the case of the Railway Pension Scheme (RPS) the administrator is Pensions Management. Annuities and annuity rates An annuity is a regular pension payment, usually payable until death. In a money purchase scheme a fund builds up based on the members contributions. At retirement this
fund is used to buy an annuity and the annuity rate is the rate at which the capital sum is converted into regular pension payments. Appropriate personal pension A Personal Pension which has the facility to allow members to contract out of SERPS by accepting the national insurance rebate and using it to build up Protected Rights. Basic State Pension (BSP) The BSP is a flat-rate pension provided by the Government. It is paid at 65 for men and 60 for women, but the pension age will be gradually equalised to 65 for all women born after 6 April 1950. The BSP is increased annually in line with the retail price index. It is payable in full to men who have paid National Insurance contributions for 44 years between the ages of 16 and 65, and for women who have paid contributions for 39 years. For further information on the BSP (and to find your eligibility status) the DSS should be contacted on their Pensions Information line on (0345) 313233 or their Pensions Direct line on (0191) 2030203. The other component of state pension provision is SERPS. Contracting out Many occupational schemes are contracted out of SERPS. This means that members pay lower National Insurance contributions because they forfeit their entitlement to SERPS. Contribution holiday Temporary periods when contributions to an occupational scheme, usually by the employer, but sometimes by the members, are suspended. This is one method of reducing or eliminating a surplus. Controlled funding The actuarial costing basis underlying most final salary schemes. It involves building up a fund, which is not earmarked to individual members, with contributions calculated on the basis of benefit assumptions, investment performance assumptions etc. Deferred Pensioner An employee who is no longer an active member of an occupational pension scheme, but has preserved benefits which have not yet come into payment. http://www.tssa.org.uk/work/pens01.rtf 2
Defined Benefit Scheme Sometimes called a final salary scheme. In this arrangement the pension benefits are derived from a proportion of pay at or near retirement, while the level of contributions will fluctuate according to the balance between the scheme s assets and liabilities. Defined contribution scheme Is another name for a money purchase pension. These schemes are different to final salary schemes, because they are based on a defined contribution as opposed to a defined benefit. Money purchase schemes only guarantee to pay a certain level of contribution. They cannot guarantee a specific level of benefits at retirement; these will depend on how much each individual contributes into the scheme, the subsequent investment performance, and what annuity rates are secured at retirement. Exempt approval Most occupational schemes are exempt approved. This is the Inland Revenue term for the special tax status the majority of pension schemes enjoy. With the exception of a tax on company dividends, exempt approved schemes will enjoy tax relief, and the fund will increase without liability to UK income and capital gains taxation. Fiduciary Duty Any pension trustee must conform to fiduciary duty To act in accordance to the trust rules and deed and in the best interests of all the beneficiaries. Final salary scheme see defined benefit schemes Guaranteed minimum pension (GMP) The level of pension an occupational final salary scheme must provide in order to contractout of SERPS; a requirement that ceased in 1997. Group Personal Pensions (GPPs) These operate on a money purchase basis and are simply a series of personal pension plans administratively linked for cost efficiency with an optional facility to accept an employer contribution in addition to a member s contribution. Incapacity Pension Benefits can be granted before the age of 50 if the individual is incapacitated, i.e. is no longer able to fulfil future work requirements. This applies both to personal pension plans and occupational schemes. http://www.tssa.org.uk/work/pens01.rtf 3
Internal Dispute Resolution (IDR) Procedure This is a mechanism that every occupational pension scheme should have available and allows a member to appeal to the scheme trustees on any decision that they are dissatisfied with. Integration The practice whereby some schemes reduce pensionable pay or benefits by an amount that takes into account the state pension the amount is usually equivalent to a multiple of the basic state pension or lower earnings limit. Headroom check A check to ensure that payment of AVCs does not infringe Inland Revenue limits on projected benefits. Most commonly used with free-standing AVCs, where a headroom check is required only if contributions exceed 2,400 per annum. Limited Price indexation (LPI) The basis on which (as a minimum) preserved pensions and pensions in payment are required to be increased to counteract inflation. Most preserved pensions are covered, but pensions in payment only to the extent they are built up after April 1997. The rate of increase is in line with the retail price index, but with a maximum of 5% per annum. Lower earnings limit (LEL) This is the weekly amount (currently 64 per week) above which workers start paying national insurance contributions. It is often the deduction made from pensionable pay when schemes are integrated with the state scheme. Relevant earnings for SERPS are between the lower and upper earnings limits. Maximum benefits In very general terms, the maximum Inland Revenue benefits permissible for occupational schemes are two-thirds of final remuneration which is your pay at or near retirement (or leaving the scheme) on which your benefits are calculated according to the individual scheme rules. For personal pensions the Inland Revenue does not cap benefits, only the amounts that can be contributed by an individual. Maximum contributions For occupational schemes a members contributions cannot exceed 15% of your earnings. For personal pensions, contribution levels are capped to a specific percentage of net relevant earnings (up to a maximum salary level) according to an individuals age. http://www.tssa.org.uk/work/pens01.rtf 4
Member nominated trustees (MNT) The legal requirement that occupational pension schemes must provide member representation on the trustee board of a scheme. When acting as an MNT, the fiducial obligations of a trustee apply Money purchase pensions schemes see defined benefit schemes Nomination A form completed by a member of an occupational pension scheme of personal pension plan to guide the trustees as to the member s wishes regarding the distribution of death benefits under discretionary disposal provisions. The nomination does not bind the trustees, but it is normally used as a basis of their decision, and should always be kept up to date. Normal Retirement Date (NRD) The date of expected retirement under an occupational pension scheme. This is the date to which benefit projections are made when testing Inland Revenue limits. Occupational Pension Scheme Their full title is employer sponsored retirement benefit schemes. Employers must contribute to these schemes (otherwise they would not be employer sponsored), and the Inland Revenue require their contribution to be non-trivial. This is normally interpreted as being at least 10% of the total contributions of the scheme. Occupational schemes are normally either money purchase or final salary. OPAS (Occupational Pensions Advisory Service) OPAS is an independent organisation funded by the DSS, whose remit is to assist members and beneficiaries of a pension scheme with any difficulties they have failed to resolve with the trustee or administrators. OPRA (Occupational Pensions Regulatory Authority) The regulation of occupational pension schemes is the responsibility of the Occupational Pensions Regulatory Authority (OPRA). Pay as you go funding The method of benefit provision underpinning SERPS and state pensions in general, where there is no invested fund, but benefits are funded from current contributions via the tax system. http://www.tssa.org.uk/work/pens01.rtf 5
Pensions Ombudsman Funded by the levy and charged with investigating complaints of maladminstration and other disputes between members or beneficiaries and the trustees or managers of pension schemes. Pension Provider A requirement of setting up a PPP or FSAVC is the existence of the Pension Provider who is responsible for the scheme, and must be an insurance company, bank, building society or unit trust manager. Pension Schemes Office (PSO) The Government department responsible for the approval of occupational pension schemes. Personal Pension Plan (PPP) A pension arrangement available to individuals, who are self employed or employed but who are not members of an occupational scheme. All PPP s operate on a money purchase basis. Preserved benefits Members who leave an occupational scheme before normal retirement age can leave their benefit entitlement with the scheme and wait for it to become payable at a later date. Protected Rights This is the part of a contracted out money purchase pension or appropriate personal pension which is produced by the minimum level of contributions stipulated by the contracting out requirements. SERPS The state earnings related pension scheme, which pays a pension, based on revalued career earnings. The maximum amount for those retiring from 2010 is 20% of earnings. Surplus This is a notional amount of money, which arises when the actuary s assumptions about a scheme prove too cautious, and in theory the assets exceed the liabilities. Support Ratio Is the term that describes the relationship between the number of national insurance contributors and the number of people receiving retirement benefits from the state. The decrease in the support ratio since the inception of the modern Welfare State in 1945 is http://www.tssa.org.uk/work/pens01.rtf 6
one of the main reasons why successive governments have sought to restrict universal benefits and pay as you go funded schemes. Tax Relief Member contributions to an occupational scheme, a PPP or a FSAVC all enjoy tax relief. The Government grants tax relief as an encouragement for people to make financial provision for their retirement. If you contribute to an occupational scheme, tax relief is automatically given through the PAYE system and you do not need to take any action. Your employer will deduct your contributions from your pay before income tax is calculated on the balance. If you are a higher rate tax taxpayer you also receive tax relief by this method. Example Gross Pay 15,000 Pension contribution at (e.g.) 6% 900 Net Pay 14,100 Subject to your other allowances or relief s, your tax bill will be calculated on 14,100. For PPP s and FSAVCS the method is different and is obtained in a similar way to mortgage interest relief. The contribution you pay to your FSAVC or PPP is the gross contribution less an amount equal to basic rate income tax. The administrator of the PPP or FSAVC then claims back from the Inland Revenue the amount you withheld. For example, using an assumed rate of 23%: Contribution to be paid 2,000 You pay ( 2,000 less 460 tax at 23%) 1,540 The Administrator reclaims from the I.R 460 Total received by FSAVC/PPP 2,000 If you are a higher rate taxpayer you must use your annual tax return to claim relief above the basic rate. Transfer value This is an actuarial calculation of an early leaver s pension entitlement and should allow the member to effectively purchase rights in the pension scheme run by the new employer or transfer to a personal pension. Trust deed and rules The legal documents, which prescribe the rules of most occupational pension schemes. http://www.tssa.org.uk/work/pens01.rtf 7
Trustee The people appointed or elected to ensure that schemes are administered in accordance to the trust deed and rules and in line with statutory and Inland revenue obligations. Upper earnings limit This is the weekly amount above which workers are exempt from paying national insurance contributions. Relevant earnings for SERPS are between the lower and upper earnings limit. Further Information TUC Congress House, Great Russell Street, London WC1B 3LS. Tel: 0171 636 4030 The TUC co-ordinates a network of trade union trustees, arranges training and publishes a range of very useful guides, including Pensions Briefing which is produced quarterly and contains the latest information and TUC views on pension matters. Labour Research Department 78 Blackfriars Road, London SE1 8HF. Tel: 0171 928 3649 The LRD is an independent trade union based research department, which supplies the trade union and labour movement with information on issues concerning the economic, political and industrial fields. It has published several excellent pension guides. Department of Social Security The DSS publishes an extensive range of leaflets on pensions, personal pensions and occupational schemes. The DSS can be contacted on their Pensions Information line on (0345) 313233 or their Pensions Direct line on (0191) 2030203. Commercial Organisations Union Pensions Services 50 Trinity Gardens, London, SW9 8DR. Tel: 0171 737 0682 Can provide actuarial and collective bargaining advice, particularly in respect of occupational schemes. Unity Pensions Services This is a subsidiary of the trade union-owned Unity Trust Bank. UPS provide advice only on personal and occupational pensions to trades unions and their members. For more information contact John Cullen on 01603 451750. http://www.tssa.org.uk/work/pens01.rtf 8