IFoA SP4 key terms

The amount a UK occupational pension scheme must hold to cover the benefits already accrued, calculated on a prescribed basis and certified by the scheme actuary in the scheme funding valuation.

The UK requirement that a defined benefit scheme holds sufficient and appropriate assets to cover its technical provisions, with a statement of funding principles setting out how this is to be achieved.

A document agreed by trustees and the employer recording the method and assumptions used to calculate technical provisions and the policy on funding deficits and contributions.

A formal schedule, certified by the scheme actuary, showing the contributions payable by the employer and members and the dates by which they must be paid.

The period and contribution pattern agreed to eliminate a funding shortfall in technical provisions, subject to limits on length and to trustee and employer agreement.

The actuarial assessment, normally every three years, of a defined benefit scheme's assets and liabilities, producing the technical provisions and the surplus or deficit.

The demographic and financial estimates, such as mortality, discount rates and inflation, used to place a value on future benefit payments; their choice strongly drives measured liabilities.

The rate used to convert future benefit payments into a present value; a higher rate reduces measured liabilities but must be justified by expected asset returns or scheme-specific funding basis.

A pension arrangement where benefits are set by a formula, typically related to salary and service, so the employer or scheme bears the investment and longevity risk.

An arrangement where contributions are specified and the member's retirement fund depends on investment returns and annuity or drawdown terms, so the member bears most risk.

A defined benefit design where pension is calculated as a fraction of pensionable salary at or near retirement for each year of service, rewarding late-career salary growth.

A defined benefit design where each year of service earns a pension based on that year's salary, revalued to retirement, spreading benefit accrual more evenly than final salary.

The process of increasing pension accrued in earlier years, often in line with a specified index or fixed rate, so that its purchasing power is maintained to retirement.

The practice of increasing pensions in payment in line with a price or earnings index, or a fixed rate, to protect recipients against inflation; a major driver of liability cost.

A cap and floor applied to pension increases, commonly increases in line with inflation subject to a maximum such as 2.5% or 5% per year.

The salary definition used in benefit calculations, which may exclude bonuses, overtime or amounts above a cap and therefore materially affects the value of accrued benefits.

Projecting asset and liability cash flows under many economic scenarios to test funding outcomes and choose an investment strategy that manages risk against liabilities.

Investments whose cash flows or sensitivities broadly replicate those of the liabilities, such as index-linked bonds for inflation-linked pensions or fixed bonds for nominal pensions.

An investment approach that uses derivatives and bonds to hedge specific liability risks, notably interest rate and inflation sensitivity, while seeking return from remaining assets.

The ratio of a scheme's assets to the value of its liabilities on a chosen basis; a key measure of scheme health and of the strength of the employer covenant required.

The risk that changes in interest rates alter the present value of liabilities or the value of assets, affecting a scheme's funding level and contribution requirements.

The risk that actual inflation differs from that assumed or hedged, raising pension payments that are index-linked and increasing deficits where assets do not match.

The risk that members live longer than assumed, increasing the total and duration of pension payments; it can be retained, hedged or transferred through buy-ins and buy-outs.

The actuarial estimate of death rates by age, sex and cohort used to value lifetime benefits; uncertainty in future improvement is a major source of liability error.

The financial strength and willingness of the sponsoring employer to support the scheme, assessed by trustees as the ultimate security behind promised benefits.

The UK lifeboat that pays compensation, subject to caps and reductions, to members of eligible defined benefit schemes whose employer has become insolvent.

A bulk annuity purchased by the trustees in the scheme's name, matching specified liabilities while the scheme retains responsibility for paying benefits and managing the contract.

A transaction in which liabilities and assets are transferred to an insurer, which then pays members directly, often preceding or accompanying scheme wind-up.

The process of terminating a pension scheme, establishing its assets and liabilities, applying the statutory priority order and securing or transferring members' benefits.

The debt owed by an employer to a UK defined benefit scheme on certain events, such as an employer leaving the scheme, calculated on a buy-out basis.

A contract, usually with an insurer, that converts accumulated pension savings into a series of payments, often for life, with options over escalation and survivor benefits.

Taking income directly from an invested pension fund rather than buying an annuity, leaving the fund exposed to investment and longevity risk and requiring ongoing management.

UK rules allowing most defined contribution members aged 55 and over flexible access to their funds, subject to tax rules, rather than requiring annuity purchase.

The UK requirement that employers enrol eligible workers into a qualifying pension scheme, with minimum contributions from employer and employee and a right to opt out.

The flat-rate or earnings-related pension paid by government based on contribution records, providing a foundation income in retirement separate from workplace provision.

The international accounting standard governing employer recognition of defined benefit obligations, using a corporate bond discount rate and immediate recognition of remeasurements.

On an accounting basis, the present value of defined benefit obligations less the fair value of plan assets, reported on the employer's balance sheet.

The legal and ethical obligation of trustees to act in members' best interests, avoid conflicts, invest prudently and exercise care, skill and diligence.

Situations where a trustee's or adviser's personal, commercial or other interests could improperly influence decisions; these must be identified, managed or avoided.

An attitude of questioning assumptions, checking evidence and challenging advice or valuations rather than accepting them uncritically, central to actuarial and trustee judgement.