Pension Glossary

accrual factor

see Accrual rate

accrual rate

The rate at which pension benefits builds up as member service is completed in a defined benefit plan.

accrued benefits

The amount of accumulated pension benefits of a pension plan member on the basis of years of service.

accrued rights

see Accrued benefits

accumulated assets

The total value of assets accumulated in a pension fund.

Accumulated Benefit Obligation (ABO)

The actuarial present value of benefits, vested and non-vested, attributed to the pension formula to employee service rendered to a particular date, based on current salaries. See also Projected Benefit Obligation (PBO)

accumulated contributions

see Accumulated assets

acquisition of pension rights

This is when a person joins a pension scheme. Whether that person acquires vested pensions rights at the same time is a separate issue.

active member

A pension plan member who is making contributions (and/or on behalf of whom contributions are being made) and is accumulating assets.

actuarial assumptions

The various estimates (including assumptions related to changes in longevity, wage, inflation, returns on assets, etc.) that the actuary makes in formulating the actuarial valuation.

actuarial deficiency

In a situation when the actuarial value of a pension fund’s assets is less than the actuarial liability, the measure of this value.

actuarial increase

The amount of benefit increase the pension fund member receives – calculated based on actuarial assumptions – in case of deferred retirement.

actuarial liability

The amount calculated based on actuarial assumptions that represents the present value of the pension benefits accrued in a pension plan.

actuarial reduction

The amount of benefit decrease the pension plan member receives – calculated based on actuarial assumptions – in case of early retirement.

actuarial report

The report prepared by the actuary following the actuarial valuation that describes the financial position of the pension fund.

actuarial surplus

In a situation when the actuarial liability is less than the actuarial value of a pension fund’s assets, the measure of this value.

actuarial valuation

A valuation carried out by an actuary on a regular basis, in particular to test future funding or current solvency of the value of the pension fund’s assets with its liabilities.

actuary

The person or entity whose responsibility, as a minimum, is to evaluate present and future pension liabilities in order to determine the financial solvency of the pension plan, following recognised actuarial and accounting methods.

administration 

The operation and oversight of a pension fund.

annual pensions estimate

see Benefit statement
 

annual report

A report prepared each year by the pension fund, which informs of its operation, and other information whereby the trustees of pension funds inform all interested parties.

annuitant

The person who is covered by an annuity and who will normally receive the benefits of the annuity.

annuity

A form of financial contract mostly sold by life insurance companies that guarantees a fixed or variable payment of income benefit (monthly, quarterly, half-yearly, or yearly) for the life of a person(s) (the annuitant) or for a specified period of time. It is different than a life insurance contract which provides income to the beneficiary after the death of the insured. An annuity may be bought through instalments or as a single lump sum. Benefits may start immediately or at a pre-defined time in the future or at a specific age.

annuity rate

The present value of a series of payments of unit value per period payable to an individual that is calculated based on factors such as the mortality of the annuitant and the possible investment returns.

asset allocation

The spread of fund investments among different investment forms.

asset management

The act of investing the pension fund’s assets following its investment strategy.

asset manager

The individual(s) or entity(ies) endowed with the responsibility to physically invest the pension fund assets. Asset managers may also set out the investment strategy for a pension fund.

assets

Liabilities Pension assets

auditor

A qualified individual or entity endowed with the task of conducting audit.

authorization [EU]

In EU financial services law it is generally a procedure in which a financial institution is officially acknowledged by a body of a Member State to comply with a certain set of standards in relation to a certain type or class of financial service.

Authorization by one Member State is generally valid in other Member States, allowing an authorized entity to operate by branches or by services in other Member States. In this sense authorization is a sort of 'European passport'.

In the IORP Directive, authorization contrasts with registration.

Average earnings scheme

A scheme where the pension benefits earned for a year depend on how much the member’s

basic pension

see Basic state pension

basic state pension

A non-earning related pension paid by the State to individuals with a minimum number of service years.

beneficiary 

An individual who is entitled to a benefit (including the plan member and dependants).

benefit

Payment made to a pension fund member (or dependants) after retirement.

benefit statement

A statement of the pension benefits an individual has earned (in a defined benefit plan) or a prediction of what the final pension might be (in a defined contribution plan).

book reserved pension plans

Sums entered in the balance sheet of the plan sponsor as reserves or provisions for occupational pension plan benefits. Some assets may be held in separate accounts for the purpose of financing benefits, but are not legally or contractually pension plan assets. Most OECD countries do not allow this method of financing. Those that do usually require these plans to be insured against bankruptcy of the plan sponsor through an insolvency guaranty arrangement.

Budapest Protocol [EU]

Protocol for co-operation between occupational pension supervisors. It sets out guidelines for co-operation between supervisors in regulating cross-border pension activity under the IORP Directive.

link to: Budapest Protocol

Capital Requirements Directive (CRD) [EU]

The CRD introduces an updated supervisory framework in the EU which reflects the Basel II rules on capital standards agreed at G-10 level. Member States can now focus on transposing and implementing the Directive by the end of 2008.

captive

These are usually a type of reinsurance vehicle for a company or group of companies not usually involved in the insurance business.

They mainly insure the risks of the parent company or companies and are used in two ways. To obtain the cash flow benefits of high frequency risks such as workers compensation risks or motor fleet and for high severity/low frequency risks where there may be no cover available in the traditional market.

career average scheme

see Average earnings scheme

CEECs [EU]

Central and Eastern European Countries

CEIOPS [EU]

In the EU this is a forum in which supervisors of insurance companies and occupational pension funds can cooperate, e.g. by developing common codes of practice or by agreeing protocols on cross-border supervisory arrangements. CEIOPS itself has no supervisory powers. It also gives advice to the European Commission on technical issues.

It is a so-called Level 3 body under the Lamfalussy system.

Although formally created in 2004, it is the continuation of a much older body, the Conference MMM, which dates back to 1958.

website: www.ceiops.eu

closed pension funds

Funds that support only pension plans that are limited to certain employees. (e.g. those of an employer or group of employers).

cohort

A group of people selected on the basis of a common characteristics such as year of birth (a generation is a cohort). Pensions (like education) raise issues of economic relations between generations.

common contractual fund (CCF) [EU / IE]

This is an Irish collective investment scheme structure which comes in two forms UCITS and non-UCITS.

The UCITS compliant version of the CCF is an unincorporated body established by a management company under which the participants by contractual arrangements participate and share in the property of the fund as co-owners (specifically tenants in common). It is based on the Luxembourg Fonds Commun de Placement (FCP) structure.

Although originally a UCITS form of CCF was possible, now a non-UCITS CCF can now be established via the Investment Funds, Companies and Miscellaneous Provisions Act 2005.

common indicators [EU]

The diversity of national social protection systems makes it very hard to make comparisons across systems. By developing common indicators progress e.g. combating poverty and social exclusion, can be monitored in a comparable way. As there are different models of welfare state across the EU, these must be performance indicators. Policy indicators remain at national level. Common indicators do not imply common policies.

The Laeken European Council endorsed in December 2001 a set of 18 primary and secondary common indicators of social exclusion and poverty, covering key dimensions of social exclusion: financial poverty; employment; health; education that need to be considered as a consistent whole.

The Social Protection Committee adopted a new set of overarching indicators in June 2006.

common objectives [EU]

In the context of the Open Method of Coordination applied to Social Protection and Social Inclusion, Member States have agreed on common objectives. Member States translate these common objectives into national policies through national action plans. They are free to choose how they appropriately achieve the common objectives.

company pension plan

see Employer’s pension plan

consumer protection

A consumer is a private, individual buyer in the market place. This means that an individual acting in the market place in a commercial capacity is not a consumer. Also, an individual enjoying benefits as an employee is not a consumer.

Consumer protection policy aims at rectifying a perceived imbalance between a business and consumer.

Consumer protection law regulates legal transactions between individual consumers and the businesses that sell them goods and services. Such legislation covers a wide range of topics, including but not necessarily limited to product liability, privacy rights, unfair business practices, fraud, misrepresentation, and other consumer/business interactions.

An alternative to legislation is to try to reduce the perceived imbalance by educating the consumer. AEGON UK has been active in financial services education initiatives via the Thoresen Review.

In the EU, consumer protection is still mainly a national issue. A Member State may rely on national consumer protection concerns to maintain certain barriers to trade within the internal market.

An unanswered question in EU law is the relation between consumer protection and worker protection.

Contractual Trust Arrangement (CTA) [DE]

This refers to book reserve arrangements (also known as 'internally funded' systems) under German law whereby the employer's assets are legally ring-fenced from the other assets so at meet the pension liabilities.

see Mercer article on CTAs

contribution

A payment made to a pension plan by a plan sponsor or a plan member.

contribution base

The reference salary used to calculate the contribution.

contribution holiday

A period when the contributions to a pension scheme are put on hold, the most common reason for this being a situation of overfunding.

contribution rate

The amount (typically expressed as a percentage of the contribution base) that is needed to be paid into the pension fund.

contributory pension scheme

A pension scheme where both the employer and the members have to pay into the scheme.

corporate trustee

A company that acts as a trustee.
 

Council [EU]

A consultative branch of the governing body of the European Union (EU). It is composed of the heads of government of the EU nations and their foreign ministers, in conjunction with the president and two additional members from the European Commission. It meets at least twice a year. Meetings of the European Council often emphasize political as well as economic cooperation among EU nations; for example, the impetus for the move to have the members of the European Parliament elected directly by universal suffrage came out of an agreement reached at the first meeting of the European Council in 1974. The council was given legal definition by the Single European Act (1987).

countries

These may include plans for public sector workers.

custodian

The entity responsible, as a minimum, for holding the pension fund assets and for ensuring their safekeeping.

DB system

see Defined benefit plans

DC system

see Defined contribution plans

deferred member

A pension plan member that no longer contributes to or accrues benefits from the plan but has not yet begun to receive retirement benefits from that plan.

deferred pension

A pension arrangement in which a portion of an employee’s income is paid out at a date after which that income is actually earned.

deferred pensioner

An individual who draws the pension benefits later than their normal retirement age.

deferred retirement

A situation when an individual decides to retire later and draw the pension benefits later than their normal retirement age.

deficiency

see Actuarial deficiency

defined benefit (DB) occupational pension plans

Occupational plans other than defined contributions plans. DB plans generally can be classified into one of three main types, “traditional”, “mixed” and “hybrid” plans.

defined contribution (DC) occupational pension plans

Occupational pension plans under which the plan sponsor pays fixed contributions and has no legal or constructive obligation to pay further contributions to an ongoing plan in the event of unfavourable plan experience.

dependant

An individual who is financially dependent on a (passive or active) member of a pension scheme

dependency ratio

Typically defined as the ratio of those of non-active age to those of active age in a given population.

directive

A directive is a form of EU law that binds Member States only as regards the objective to be achieved but leaves it to the national authorities to decide on how the agreed EU objective is to be incorporated into their domestic legal systems.

To ensure that the objectives set by directives become applicable to individual citizens, an act of transposition by national legislators is required, whereby national law is adapted to the objectives laid down in directives. Individual citizens are given rights and are bound by the legal act when the directive is incorporated into national law. Transposition must be within the period laid down in a directive.

see also 'regulation'

disclosure regulations

The rules the pension plan must follow when providing information on the plan operation to its members and the supervisory authority.

early retirement

A situation when an individual decides to retire earlier later and draw the pension benefits earlier than their normal retirement age.

EC Treaty

This Treaty established the European Community, and is part of the system of treaties underpinning the European Union. It is a list of policy areas in which member countries agree to share power.

See EC policy areas.

EET ('exempt, exempt taxed')

This relates to the way national taxation systems treat funded pensions based on whether a tax is levied at the moment contributions are made ('exempt'/'taxed'), or on the wealth generated on investments by the fund ('exempt'/'taxed'), or on payments out, i.e. the pension payment ('exempt'/'taxed').

EET system

A form of taxation of pension plans, whereby contributions are exempt, investment income and capital gains of the pension fund are also exempt and benefits are taxed from personal income taxation.

EIOPC [EU]

Directive 2005/01/EC amending various financial services directives in order to establish a new organisational structure for financial services committees was finally adopted on 9 March 2005. It extends the Lamfalussy committee structure to the banking, insurance and UCITS areas (undertakings for collective investment in transferable securities). The result of this new Directive in the insurance and occupational pensions sectors is the disappearance of the Insurance Committee and its replacement by the European Insurance and Occupational Pensions Committee (EIOPC). EIOPC was established by Commission Decision 2004/09/EC of 5 November 2003. It was stipulated however that that Decision would “enter into force on the same day as the entry into force of any directive amending the purely advisory functions of the Insurance Committee”.

employer’s pension plan

see Occupational pension plans

ETE system

A form of taxation whereby contributions are exempt, investment income and capital gains of the pension fund are taxed and benefits are also exempt from personal income taxation.

EU policy areas, significance of

The EU is a power-sharing arrangement in which EU countries pool their powers on a policy-by-policy basis. The EC Treaty is effectively a list of these policy areas and sets down a range of different, detailed procedures for passing laws under each policy area. Failure to use the right policy base can result in an EU law being struck down.

Some policy areas involve a higher level of pooling than others. Legislation in the area of the single market can be passed more easily – using majority voting – than legislation on the social policy or taxation where unanimity means that a 'national veto' can block an initiative.

link: EU policy areas

European Commission [EU]

The executive branch of the European Union; responsible for implementing the decisions of the Council of Ministers and proposing new measures and directions for the EU.

European Court Justice [EU]

Judicial branch of the European Union established in 1958. Ensure observance of international agreements negotiated by predecessor organizations of the EU. Based in Luxembourg, it reviews the legality of the acts of EU executive bodies and rules on cases of civil law between member states or private parties. It can invalidate the laws of EU members when they conflict with EU law.

link: European Court Justice

European Economic Area [EU]

The European Economic Area (EEA) came into being on January 1, 1994 following an agreement between three member states of European Free Trade Association (EFTA), the European Community (EC), and all member states of the European Union (EU). It allows these EFTA countries to participate in the European Single Market without joining the EU. The EEA is based on the same "four freedoms" as the European Community: the free movement of goods, persons, services, and capital among the EEA countries. Thus, the EFTA countries that are part of the EEA enjoy free trade with the European Union. As a counterpart, these countries have to adopt part of the Law of the European Union. These states have little influence on decision-making processes in Brussels. EFTA countries do not receive any funding from EU policies and development funds.

European Networks (under OMC)

One of the key objectives of the EU Social Protection Social Inclusion is to develop the capacity of key European level networks to support and further develop Community policy goals and strategies on social protection and inclusion. In this context, it provides that the Community contribute to the running costs of key European-level networks of organisations involved in the fight against poverty and social exclusion.

European Parliament [EU]

The European Parliament is the directly elected parliamentary body of the European Union. Together with the Council of the European Union it forms the legislative branch of the Union.

European Passport [EU]

This is a non-technical term for the ability of businesses meeting certain legal requirements in the in which they are located to provide goods or services anywhere in the EU.

To Third generation Insurance Directives established an “EU passport system” (single license) for insurers based on the concept of minimum harmonization and mutual recognition. 

European Round Table (under OMC) [EU]

The annual European Round Table on Poverty and Social Exclusion is one of the main events on social inclusion organized is jointly by the Presidency of the Council of the European Union and the European Commission in the second semester of each year. It aims at promoting dialogue between all stakeholders in the context of the open method of coordination for social inclusion.

European Union [EU]

Group established in 1992 by the European Union Treaty (also known as the Maastricht Treaty) and amended by various treaties thereafter.

Initially, the EU consisted of six countries: Belgium, Germany, France, Italy, Luxembourg, and the Netherlands. Denmark, Ireland, and the United Kingdom joined in 1973, Greece in 1981, Spain and Portugal in 1986, Austria, Finland, and Sweden in 1995. The largest expansion occurred in 2004 with 10 new countries joining. They are: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Others are expected to join as well. At its core the EU is a group of democratic countries working together on economic, judicial, and security issues. It has taken several steps toward a more unified Europe. For example, in 1992, the EU made the decision to move toward a single European currency, known as the Euro. The EU is governed by a five-part institutional system, including the European Commission, the EU Council of Ministers, the European Parliament, and the European Court of Justice, and the Court of Auditors, which monitors EU budget spending.

fair value

The price at which an asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

final average earnings

The fund member’s earnings that are used to calculate the pension benefit in a defined benefit plan; it is typically the earnings of the last few years prior to retirement.

final earnings scheme

see Final salary scheme

final salary scheme

A type of defined benefit plan, whereby the pension benefit is typically based on the last few years’ earnings before retirement.

Financial Services Action Plan (FSAP) [EU]

The EU's Financial Services Action Plan (FSAP) was designed to open up a single market for financial services in the EU. Begun in 1999, it comprises 42 measures designed to harmonise the member states’ rules on securities, banking, insurance, mortgages, pensions and all other forms of financial transaction. By the end of 2004, almost all of these measures have been adopted.

flat rate scheme

A type of defined benefit scheme, whereby the pension benefit is only based on the length of membership in the scheme and is not affected by earnings.

flexicurity

This is about combining flexibility and security for individuals throughout their working lives. 

Unlike 'workfare', perceived as an austere regime penalizing the out-of-work, flexicurity is  a welfare state model with a pro-active labour market policy.

The model combines easier hiring and firing (flexibility for employers) and higher, more secure benefits for the unemployed (security for the employees) and facilitating voluntary job or career transition. It seeks to take into account more modern career profiles, where individuals change job, become self-employed, retrain, take time out, migrate and so on.

four freedoms [EU]

This a non-technical term referring to four basic economic freedoms enshrined in the EC Treaty:

• free movement of labour workers and of business (establishment)
• freedom to provide services
• free movement of goods
• freed movement of capital

These fundamental freedoms under the founding Treaties guarantee businessmen freedom of decision-making, workers freedom to choose their place of work and consumers freedom of choice between the greatest possible variety of products.

free movement of labour [EU]

Within the European Union, residents are guaranteed the right to freely move within the EU's internal borders by the EC Treaty and the European Parliament and Council Directive 2004/38/EC of 29 April 2004. Union residents are given the right to enter any member state for up to three months with a valid passport or identity card.

fund member

An individual who is either an active (working or contributing, and hence actively accumulating assets) or passive (retired, and hence receiving benefits), or deferred (holding deferred benefits) participant in a pension plan.

funded pension plans

Occupational or personal pension plans that accumulate dedicated assets to cover the plan's liabilities.

funding

The act of accumulating assets in order to finance the pension plan.

funding level

The relative value of a scheme’s assets and liabilities, usually expressed as a percentage figure.

funding plan

The timing of payments of contributions with the aim of meeting the cost of a given set of benefits under a defined benefit scheme. Possible objectives of a funding plan might be that, if the actuarial assumptions are borne out: a) a specified funding level should be reached by a given date; b) the level of contributions should remain constant, or should after a planned period be the standard contribution rate required by the valuation method used in the actuarial valuation.

funding rate

see Contribution rate

funding ratio

The funding level expressed as a fraction.

funding rules

Regulation that requires the maintenance of a certain level of assets in a pension fund in relation to pension plan liabilities.

fungibility

Is a property of a type of good or commodity, where its individual units are capable of mutual substitution. E.g. highly fungible commodities are crude oil, electricity, precious metals, and many currencies. Therefore fungibility:

• has nothing to do with the ability to exchange one commodity for another commodity (but only with exchanging one unit of a commodity with another unit of the same commodity).
• is different from liquidity. A good is liquid and tradable if it can be easily exchanged for money or another different good. A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place.
• does not imply liquidity, and liquidity does not imply fungibility. Jewels can be bought and sold (the trade is liquid), but individual diamonds are not interchangeable (diamonds are not fungible). Zimbabwean dollar bank notes are interchangeable in London (they are fungible there), but they are not easily traded there (they are not liquid in London).

In legal disputes, when one party is compelled to remedy another party as the result of a ruling or adjudication, the appropriate legal remedy may depend on the fungibility of the underlying right, obligation or property interest that is intended to be restored. Depending on whether the interests of the aggrieved party are fungible (a determination made by the trier of fact), the appropriate remedy may change. For example, a court may require specific performance as a remedy for breach of contract, instead of the more favored remedy of monetary damages.

general good [EU]

In EU law this is a concept which allows a Member State to impose barriers on businesses from other Member States because they do not satisfy certain national rules. They are trade barriers with a national justification.

governing body (of the pension fund)

Governing body (of the pension fund): this is the person(s) ultimately responsible for managing the pension fund with the overriding objective of providing a secure source of retirement income. In cases where operational and oversight responsibilities are split between different committees within an entity, the governing body is the executive board of the entity. Where the pension fund is not a legal entity, but managed directly by a financial institution, that institution’s board of directors is also the governing body of the pension fund.

gross rate of return

The rate of return of an asset or portfolio over a specified time period, prior to discounting any fees of commissions.

group pension funds

Multi-employer pension funds that pool the assets of pension plans established for related employers.

guarantee

see Pension guarantee

guaranteed annuity

An annuity that is paid until the death of the annuitant. If this occurs prior to a certain date, the annuity is then paid to their dependants until that date.

Helsinki Protocol [EU]

Protocol relating to the collaboration of the supervisory authorities of the Member States of the European Union with regard to the application of Directive 98/78/EC on the specialized supervision of insurance undertakings in an insurance group.

home state [EU]

In EU law, this is generally the Member State in which a company is located.

host state [EU]

In EU law, this is generally the Member State into which a company located in another Member State exports its services or sets up a branch.

hybrid DB plan

A DB plan where benefits depend on a rate of return credited to contributions, where this rate of return is either specified in the plan rules, independently of the actual return on any supporting assets (e.g. fixed, indexed to a market benchmark, tied to salary or profit growth, etc.), or is calculated with reference to the actual return of any supporting assets and a minimum return guarantee specified in the plan rules.

inactive member

see Deferred member

income replacement rate

see Replacement rate

indexation

The method with which pension benefits are adjusted to take into account changes in the cost of living (e.g. prices and/or earnings).

individual pension funds

A pension fund that comprises the assets of a single member and his/her beneficiaries, usually in the form of an individual account.

individual pension plans

see Personal pension plans

industry pension funds

Funds that pool the assets of pension plans established for unrelated employers who are involved in the same trade or businesses.

infringement proceedings [EU]

Each Member State is responsible for the implementation of Community law (adoption of implementing measures before a specified deadline, conformity and correct application) within its own legal system. Under the Treaties, the European Commission is responsible for ensuring that Community law is correctly applied. Consequently, where a Member State fails to comply with Community law, the Commission has powers of its own (action for non-compliance) to try to bring the infringement to an end and, where necessary, may refer the case to the European Court of Justice. The Commission takes whatever action it deems appropriate in response to either a complaint or indications of infringements which it detects itself.

Non-compliance means failure by a Member State to fulfil its obligations under Community law. It may consist either of action or omission. The term "State" is taken to mean the Member State which infringes Community law, irrespective of the authority – central, regional or local – to which the compliance is attributable.

Insurance Mediation Directive (IMD) [EU]

The Insurance Mediation Directive is intended to create a single market in insurance via a "passport" for EU retail insurance intermediaries.

In return for the passport Member States are required to set certain minimum standards for taking up and continuation of the business of insurance mediation.

Insurance Mediation Directive (IMD) [EC]

"Insurance mediation" means "introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim."

The IMD is intended to create a single market in insurance via a "passport" for EU retail insurance intermediaries. In return for the passport Member States are required to set certain minimum standards for taking up and continuation of the business of insurance mediation. It sets minimum authorisation requirements for these entities and introduces a passporting system for those authorised insurance intermediaries which will allow the intermediaries to operate cross-border under freedom of services or freedom of establishment arrangements.

Persons involved in insurance or reinsurance mediation will be required to demonstrate the knowledge and ability necessary for the performance of their duties. The Directive also allows the good repute of insurance intermediaries to be checked to ensure that staff have a clean police record and have not been declared bankrupt.

The Directive specifies a mandatory level of professional indemnity insurance cover of at least €1m applying to each claim and in aggregate €1.5m per year for all claims (unless a comparable guarantee is already provided by an insurance undertaking for which the intermediary is empowered to act). Member States must choose one or more of the measures provided in the Directive for protecting customers against failure by the intermediary to transfer a premium to the insurance undertaking. These include a requirement for the intermediary to have a financial capacity amounting to 4% of the sum of annual premiums received subject to a minimum of €15 000, strict segregation of client accounts so that they cannot be used to reimburse creditors in the event of bankruptcy and the establishment of a guarantee fund. It remains to be seen which option is chosen for implementation in Ireland. There will be a requirement to set up a register of complaints about insurance intermediaries and redress procedures. 

Finally, there are detailed requirements in respect of information to be provided to the customer by the insurance intermediary prior to the conclusion of an insurance contract. Insurance intermediaries will be required to give advice on the basis of a fair analysis of the market place. Prior to concluding a contract the intermediary will be required to provide a letter setting out the reasons for any advice given on the basis of information provided by the customer.

International Accounting Standards Board (IASB)

What is the  and why are the International Financial Reporting Standards (IFRS) issued by it so important? 

The International Accounting Standards Board (IASB) issues IFRS (International Financial Reporting Standards). Nearly 100 countries use or coordinate with IFRS. These countries or groups of countries include the EU, Australia, and South Africa. While some countries require all companies to adhere to IFRS, others merely allow it or try to coordinate their own country’s standards to be similar. The IASB is working toward this goal in a partnership with some of the most influential accounting standard-setters across the globe. 

The IASB is a committee with 14 members, from nine different countries, which work to develop global accounting standards. The goal of this committee is to create global standards that are transparent, enforceable, understandable, and of high-quality. These members create the IFRS that are used by so many countries around the world. Each committee member has one vote for each of the standards that is voted upon and this privately funded group of accounting standards setters are based in London. 

Acceptance of IFRS While there are many countries that abide by IFRS, many do not. Notably, the United States Financial Accounting Standards Board and the Accounting Standards Board (AcSB) of Canada do not adhere directly to IFRS. However, there is a currently a partnership between these and other countries with the IASB to try to coordinate standards that come together. This is an ongoing process. 

IASB and IFRS are important for the future of accounting. With businesses turning global, investors must be able to compare companies under similar standards. Likewise, it is important for businesses operating in multiple countries to be able to create financial statements that are understandable in all the countries they operate in.

Eventually, International Accounting Standards Board (IASB) and other accounting organizations hope to see a convergence of all accounting standards throughout the world. This type of convergence, would allow for the best of circumstances for investors and other interested parties to be able to examine and compare companies in a transparent and equal way. With the coordination of the International Financial Reporting Standards (IFRS) with other accounting standards from around the globe, this goal of convergence may not be as far-fetched as it may sound.

IORP (institution for occupational retirement provision) [EU]

In EU law an IORP is a pension fund falling within the scope of the IORP Directive.

Joint Report (under OMC) [EU]

The Joint Reports assess progress made in the implementation of the OMC, set key priorities and identify good practice and innovative approaches of common interest to the Member States on the basis of the National action plans submitted by the Member States. It is adopted by the Council on a Commission proposal. The Joint Reports also set key priorities and identify good practice and innovative approaches of common interest to the Member States.

Lamfalussy system [EU]

This approach was devised by a Committee of Wise Men (chaired by Baron Alexander Lamfalussy, former Head of the European Monetary Institute) which was set up at the request of the European Council. "Lamfalussy" Directives are split into two levels – the "level 1" Directive which establishes the guiding principles of the legislation agreed in co-decision by EP/Council and the "level 2" implementing measures (see question 3). The advantage of this "split-level" approach is that it allows the Council and Parliament to focus on the key political decisions, while technical implementing details are worked through afterwards. This flexibility allows for more rapid and frequent adaptation of the legislation so that it can keep pace with market and technological developments.

late retirement

see Deferred retirement

Level 1 measures [EU]

They are an element of the Lamfalussy system and are 'framework laws' that take the form of traditional types of EU law, directives or regulations, but they are not very detailed and set out instead framework principles.  

Level 1 measures also contain special provisions for adopting additional more detailed rules under 'fast track' committee procedures. These additional measures, 'Level 2 measures' flesh out the principles set out at Level 1.

Level 2 measures [EU]

They are an element of the Lamfalussy system and are technical implementing measures to render the level 1 principles operational, can be adopted, adapted and updated by the Commission after having been submitted to the European Securities Committee (ESC) – a committee composed mainly of members of Ministries of Finance – and the European Parliament for their opinion. The Committee of European Securities Regulators (CESR), an independent advisory body made up of securities regulators, can advise the Commission on the technical implementing details to be included in level 2 legislation. This advice is provided in response to specific "mandates" from the Commission asking for help in particular areas. Level 2 implementing measures do not in any way alter the principles agreed at Level 1; they simply provide the technical details which are necessary to make these principles operational.

level of funding

see Funding level

liabilities (value of)

Value of liabilities. Assets.

Life Insurance Directive

This Directive regulates the setting up, organization, supervision and operational activities of life insurance companies. It aims to

• create a harmonized framework for life insurance companies across the EU
• provide life insurance companies with a 'European passport' enabling them to operate anywhere in the EU.

It is relevant to pension provision because it regulates activities relating to the

• provision of life insurance and annuities on a contractual basis
• management of group workplace pension funds (effectively outsourcing arrangements)
• certain social insurance arrangements.

Under the (non-technical) three pillar classification of pension systems, the Life Insurance Directive may be viewed as covering third pillar pensions.

The Life Insurance Directive may be regarded as consisting of five broad elements

• organizational rules on setting up, structure and winding up of the life insurance entity
• operational rules on a life insurer's  entity's financial activities (solvency / investment)
• rules on relations with actual and potential clients (includes rules on advertising and marketing – interaction also with other financial services legislation)
• cross-border rules - also deals with third country providers
• supervision

The Life Insurance Directive is currently in the process of being integrated into the comprehensive Recast Insurance Solvency Framework Directive along with some 12 other directives. This will not only consolidate existing many insurance directives but also introduce to new solvency regime and also a group support / supervisory regime.

The 'European passport' in the Life Insurance Directive enables authorized life insurance companies to export occupational pension services into other Member States either by direct provision of services or by the creation of a branch.

The Life Insurance Directive refers to the concept of 'general good' in the context of cross-border activity. These are rules of the host State (the country into which it wishes to export its services) that are imposed in addition to any host State rules mentioned by the Life Insurance Directive. In broad terms the general good concept is the life insurance equivalent to the concept of social and labour law in the IORP Directive. 

Dates

1979 

1990 

1992 

1997 

2000 

2000

2002

2004

2007

2008

2010

2012

mandatory contribution

The level of contribution the member (or an entity on behalf of the member) is required to pay according to scheme rules.

mandatory occupational plans

Participation in these plans is mandatory for employers. Employers are obliged by law to participate in a pension plan. Employers must set up (and make contributions to) occupational pension plans which employees will normally be required to join. Where employers are obliged to offer an occupational pension plan, but the employees' membership is on a voluntary basis, these plans are also considered mandatory.

mandatory personal pension plans

These are personal plans that individuals must join or which are eligible to receive mandatory pension contributions. Individuals may be required to make pension contributions to a pension plan of their choice normally within a certain range of choices or to a specific pension plan.

market value

The price at which an asset would change hands if it sold on the open market.

Markets in Financial Instruments Directive (MiFID)

The MiFID (Directive 2004/39/EC.) replaces the Investment Services Directive (ISD) of 1993.  

Directive has two overall regulatory aims:

• protect investors and safeguard market integrity by establishing harmonised requirements governing the activities of authorised intermediaries;
• promote fair, transparent, efficient and integrated financial markets.  

"Single passport"

Authorization functions as a "single passport" system enabling investment firms to operate throughout the EU. The Directive requires the Member States to harmonise their rules on investment services and investment activities. Since each EU country applies the harmonised rules, any authorized investment firm, bank or stock exchange should be able to offer their services across borders as it will be granted on the basis of the same conditions in all the Member States. 

Investor protection

The Directive sets minimum standards for the mandate and powers that national competent authorities must have at their disposal and establishing effective mechanisms for real-time cooperation in investigating and prosecuting breaches of the rules.

Transparency and market integrity

The Directive creates an obligation to safeguard market integrity, to report transactions and to keep records.

It establishes a pre-trade transparency obligation. This requires "internalisers" (i.e. firms dealing on own account by executing client orders outside regulated markets or multilateral trading facilities) to disclose the prices at which they will be willing to buy from and/or sell to their clients. However, it limits this disclosure obligation to transactions not above "standard market size", defined as the "average size" of orders executed in the market.

This ensures that European wholesale markets will not be subject to the pre-trade transparency rule and that wholesale broker-dealers will not be exposed to significant risks in their role as market makers.

Operator protection

The Directive includes a set of protective measures for "internalisers" when they are obliged to quote, so that they can provide this essential service to their clients without running undesirable risks. These measures include the possibility of updating and withdrawing quotes. 

The Directive also establishes a fair market place for retail investors. It prevents financial institutions from discriminating between such investors, e.g. by offering some of them improvements to publicly quoted prices. 

Final provisions 

The Directive is designed to improve the Community rules on securities markets. It therefore confines itself to setting out the general obligations which Member State authorities must enforce.  

Implementing measures, reports and reviews will be adopted by the Commission following consultations with market participants from the Member States and taking into account the opinion of the Committee of European Securities Regulators.

Markets in Financial Instruments Directive (MiFID) [EU]

This replaces the Investment Services Directive (ISD). It is a central element of the Commission's Financial Services Action Plan (FSAP). It sets rules on investment services and financial markets in Europe. It contains measures which will change and improve the pecialized and functioning of investment firms, facilitate cross border trading. At the same time, it will ensure strong investor protection, inter alia with a comprehensive set of rules governing the relationship which investment firms have with their clients.

master fund

An investment vehicle that enables individual investors or small superannuation funds to channel money into one or more underlying investments most commonly wholesale or retail pooled funds operated by professional investment managers.  

Generally three types:

• discretionary funds: individual investor selects the underlying investment product(s) from a list drawn up by the master fund manager
• fund of funds: investor selects a general risk profile (e.g. growth, capital stable) but the master fund manager selects the underlying investments from among a range of products managed by external managers
• feeder funds: operate similarly to fund of funds arrangements, but with the master fund manager also being responsible for managing the underlying investments.  

Master funds which are structured as prescribed interests are commonly referred to as Master Trusts. However, the term master fund encompasses the broader scope of the industry including products offered by life insurance companies.

master trust

A master trust is a trust that holds client’s funds from separate pension plans or pools that the client wants combined together for asset management efficiency. It allows for commingled investments among two or more plans maintained by a (single employer or group of employers under common control.)

Reporting is provided at the individual manager account level as well as consolidated across all managers. Likewise, reports at the plan / pool level are generated along with consolidations as needed by the client.

member

see Active member Fund member

minimum benefit

see Minimum pension

minimum pension

The minimum level of pension benefits the plan pays out in all circumstances.

mixed DB plans

DB plans that has two separate DB and DC components but which are treated as part of the same plan.

mixed indexation

The method with which pension benefits are adjusted taking into account changes in both wages and prices.

money purchase plan

A pension plan providing benefits on a money purchase basis (ie the determination of an individual member’s benefits by reference to contributions paid into the scheme in respect of that member, usually increased by an amount based on the investment return on those contributions).

mortality table

A chart showing rate of death at each age. Unisex mortality table.

multi-employer pension funds

Funds that pool the assets of pension plans established by various plan sponsors. There are three types of multi-employer pension funds: a) for related employers i.e. companies that are financially connected or owned by a single holding group (group pension funds); b) for unrelated employers who are involved in the same trade or business (industry pension funds); c) for unrelated employers that may be in different trades or businesses (collective pension funds).

Mutual Information System on Social Protection (MISSOC) [EU]

This was established in 1990 to promote a continuous exchange of information on social protection among the EU Member States. MISSOC has become the central information source on social protection legislation in all Member States of the European Union and countries of the European Economic Area. MISSOC produces regularly updated comparatives tables covering all areas of social protection and MISSOC Info Bulletins on specific topics and on the main changes in the social protection systems.

National Action Plans/ National Reports on Strategies (under OMC) [EU]

The National Action Plans or National Reports on Strategies (since 2005) reflect the Member States’ existing strategy against poverty and exclusion and present how governments intend to reach the common objectives previously set. National Action Plans/ National Reports on Strategies are submitted to the Commission every other year.

net rate of return

The rate of return of an asset or portfolio over a specified time period, after discounting any fees of commissions.

non-contributory pension scheme

A pension scheme where the members do not have to pay into the scheme.

normal pension age

see Normal retirement age

normal retirement age

Age from which the individual is eligible for pension benefits.

occupational pension plans

Access to such plans is linked to an employment or professional relationship between the plan member and the entity that establishes the plan (the plan sponsor). Occupational plans may be established by employers or groups thereof (e.g. industry associations) and labour or professional associations, jointly or separately. The plan may be administered directly by the plan sponsor or by an independent entity (a pension fund or a financial institution acting as pension provider). In the latter case, the plan sponsor may still have oversight responsibilities over the operation of the plan.

Open Method of Coordination (OMC) [EU]

Because of the 'national veto' in the EC Treaty, the EU has few powers in the area of social policy. In order to persuade Member States to work together more without changing the Treaty the idea of the "open method of coordination" (OMC) was developed. This provides an innovative instrument to support the Member States in moving towards agreed EU objectives and to exchange best practice in the areas of employment, social protection and social inclusion. The OMC is a framework of political coordination without legal constraints. The definition of the appropriate means and ways to achieve the agreed objectives is left to the Member States, respecting thus their competences in these fields.

open pension funds

Funds that support at least one plan with no restriction on membership.

overfunding

The situation when the value of a plan’s assets are more than its liabilities, thereby having an actuarial surplus.

oversight committee

see Supervisory body

participant

see Fund member

pay-as-you-go (PAYG) plan

see Funded pension plans, Unfunded pension plans

Peer Review (under OMC) [EU]

The Peer Review is a mutual learning process involving the scrutiny of specific policies on the basis of proposals volunteered by Member States. A "host country" presents a policy or institutional arrangement (good practice) or a policy reform to a selected group of decision-makers and experts from other countries ("peer countries") and to stakeholders' representatives and European Commission officials. Peer Reviews are a key instrument of the OMC.

pension

see Benefit

pension annuity

see Annuity

pension assets

All forms of investment with a value associated to a pension plan.

pension benefit

see Benefit Retirement benefit

pension contribution

see Contribution

pension fund administrator

The individual(s) ultimately responsible for the operation and oversight of the pension fund.

pension fund governance

The operation and oversight of a pension fund. The governing body is responsible for administration, but may employ other specialists, such as actuaries, custodians, consultants, asset managers and advisers to carry out specific operational tasks or to advise the plan administration or governing body.

pension fund managing company

A type of administrator in the form of a company whose exclusive activity is the administration of pension funds.

pension fund member

see Member

pension funds

The pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits. The plan/fund members have a legal or beneficial right or some other contractual claim against the assets of the pension fund. Pension funds take the form of either a special purpose entity with legal personality (such as a trust, foundation, or corporate entity) or a legally separated fund without legal personality managed by a dedicated provider (pension fund management company) or other financial institution on behalf of the plan/fund members.

pension insurance contracts

Insurance contracts that specify pension plans contributions to an insurance undertaking in exchange for which the pension plan benefits will be paid when the members reach a specified retirement age or on earlier exit of members from the plan. Most countries limit the integration of pension plans only into pension funds, as the financial vehicle of the pension plan. Other countries also consider the pension insurance contract as the financial vehicle for pension plans.

pension plan

A legally binding contract having an explicit retirement objective (or – in order to satisfy tax-related conditions or contract provisions – the benefits can not be paid at all or without a significant penalty unless the beneficiary is older than a legally defined retirement age). This contract may be part of a broader employment contract, it may be set forth in the plan rules or documents, or it may be required by law. In addition to having an explicit retirement objective, pension plans may offer additional benefits, such as disability, sickness, and survivors’ benefits.

pension plan administrator

The individual(s) ultimately responsible for the operation and oversight of the pension plan.

pension plan administrator

see Administrator

pension plan beneficiary

see Beneficiary

pension plan member

see Fund member

pension plan sponsor

An institution (e.g. company, industry/employment association) that designs, negotiates, and normally helps to administer an occupational pension plan for its employees or members.

pension regulator

A governmental authority with competence over the regulation of pension systems.

pension scheme

see Pension funds Pension plan

pension supervisor

A governmental authority with competence over the supervision of pension systems.

pensionable age

see Normal retirement age

pensionable service

see Service period

personal pension plans

Access to these plans does not have to be linked to an employment relationship. The plans are established and administered directly by a pension fund or a financial institution acting as pension provider without any intervention of employers. Individuals independently purchase and select material aspects of the arrangements. The employer may nonetheless make contributions to personal pension plans. Some personal plans may have restricted membership.

phased retirement

A situation when an individual is allowed to retire and receive retirement benefits while continuing to work (usually part-time) and contributing towards the retirement scheme.

plan member

see Member

plan sponsor

see Pension plan sponsor

portability

This is non-technical term refers to the ability of employees to take their rights to benefits, for example pensions, with them when they change employer.

With a mobile workforce in which employees move from one company to another, portability of employee benefits, especially insurance and retirement plans, is important. Concerns about pre-existing conditions or insurability, as well as vesting schedules of qualified pension plans, are critical factors to an employee who entertains a more lucrative employment opportunity elsewhere. Some insurance and brokerage firms stress the portability of their programs.

postponed retirement

see Deferred retirement

price indexation

The method with which pension benefits are adjusted taking into account changes in prices.

private pension funds

A pension fund that is regulated under private sector law.

private pension plans

A pension plan administered by an institution other than general government. Private pension plans may be administered directly by a private sector employer acting as the plan sponsor, a private pension fund or a private sector provider. Private pension plans may complement or substitute for public pension plans. In some

projected Benefit Obligation (PBO)

The actuarial present value of vested and non-vested benefits attributed to the plan through the pension benefit formula for service rendered to that date based on employees’ future salary levels.

protected pension plan

A plan (personal pension plan or occupational defined contribution pension plan) other than an unprotected pension plan. The guarantees or promises may be offered by the pension plan/fund itself or the plan provider (e.g. deferred annuity, guaranteed rate of return).

public pension funds

Pension funds that are regulated under public sector law.

public pension plans

Social security and similar statutory programmes administered by the general government (that is central, state, and local governments, as well as other public sector bodies such as social security institutions). Public pension plans have been traditionally PAYG financed, but some OECD countries have partial funding of public pension liabilities or have replaced these plans by private pension plans.

QIS ('quantitative impact study')

QIS ('quantitative impact study') are simulations, performed by insurers on a voluntary basis, of the impact of the proposed new requirements on their financial resources. These have been run by CEIOPS, on the request of the Commission. QIS 3 has recently been concluded and the results will be made public in November. A further QIS 4 will be conducted in 2008. The QIS are the primary means for testing the design of the future European Standard Formula, as well as the main route for finding the correct calibration. The QIS are also instrumental in collecting data on the potential impact of the new Formula.

qualifying period

see Waiting period

rate of return

The income earned by holding an asset over a specified period.

regulation [EU]

A regulation is a form of EU law that is binding in its entirety and is directly applicable in all Member States, i.e. it requires no act of transposition by a Member State.

see also 'directive'

regulatory authority

see Supervisory authority Pension regulator

reinsurance [EU]

The practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim.

Also known as "insurance for insurers" or "stop-loss insurance".

reinsurance Directive [EU]

The Directive requires that all reinsurance undertakings be pecialize in their home Member State. 

To obtain that pecializedn, they will need to meet strict requirements. Once they have done so, they will be free to carry out their activity anywhere in the EU through the single passport. 

The Directive fills the gap in current European insurance legislation which does not provide for regulation of specialized reinsurers whilst activities of reinsurance carried out by direct insurers are subjected to regulation. This is a priority measure under the EU's Financial Services Action Plan, which ultimately aims to establish a truly integrated European market for financial services in which customers can have confidence. The Directive also updates EU's life, non-life and insurance Groups directives in line with the supervision rules for reinsurance undertakings.

related member funds

Pension funds that comprise the assets of a limited number of related members who are all in the governing body of the pension fund.

replacement rate

The ratio of an individual’s (or a given population’s) (average) pension in a given time period and the (average) income in a given time period.

retirement age

see Normal retirement age

retirement benefit

see Benefit

retirement plan

see Pension plan

right of establishment [EU]

Freedom of establishment is the right for businesses and individuals from one EU country to set up and manage businesses in any other EU country. Individuals and businesses coming into another country may not be disadvantaged in comparison to locals from that country.

ring-fencing

This refers to situations where a business must separate one set of assets from another. distinctions made between any kind of separation of placing restrictions on a funding stream such that it can only be used for defined purposes.

risk-based solvency requirements

technical provisions to cover expected future claims from policyholders.

The technical provisions should be equivalent to the amount another insurer would be expected to pay in order to take over and meet the insurer's obligations to policyholders.

In addition, insurers must have available resources sufficient to cover both a Minimum Capital Requirement (MCR) and a Solvency Capital Requirement (SCR). 

SCR 

• is based on a Value-at-Risk measure calibrated to a 99.5% confidence level over a 1-year time horizon.
• covers all risks that an insurer faces (e.g. insurance, market, credit and operational risk) and will take full account of any risk mitigation techniques applied by the insurer (e.g. reinsurance and securitisation).
• may be calculated using either a new European Standard Formula or an internal model validated by the supervisory authorities.

separate accounts

A pension fund that is legally segregated from both the plan sponsor and a financial institution that acts as the manager of the fund on behalf of the plan member.

service period

The length of time an individual has earned rights to a pension benefits.

Siena Protocol [EU]

The Siena Protocol, concluded in 1997, relates to the collaboration of the supervisory authorities in the application of the Directives on life and non-life insurance.

single employer pension funds

Funds that pool the assets of pension plans established by a single sponsor.

Social Protection Committee (SPC) [EU]

This was established in 2000 in order the serve as a vehicle for cooperative exchange between the European Commission and the Member States of the EU about modernizing and improving social protection systems. Under the mandate given to it by the Council, the Committee should work on the policy challenges related to the following objectives: "to make work pay and provide secure income, to make pensions safe and pension systems sustainable, to promote social inclusion and to ensure high quality and sustainable health care". The Committee consists of two representatives appointed by each Member State and two representatives of the Commission.

Social Situation Report [EU]

The Social Situation Report — published annually since 2000 — aims at informing the public debate on social policy by providing key data and prospective analysis. It is divided in two parts, a first part devoted to a special topic which is explored in depth and a second part consisting of statistical portraits covering the full range of social policy issues and a data appendix.

Solvency II [EU]

The aim of a solvency regime is to ensure the financial soundness of insurance undertakings. This protect policyholders (consumers, businesses) and the stability of the financial system as a whole.

Solvency rules stipulate the minimum amounts of financial resources that insurers and reinsurers must have to cover the risks to which they are exposed. The rules also include principles that should guide insurers' overall risk management so that they can better anticipate any adverse events and better handle such situations.

The rationale for EU insurance legislation is to facilitate the development of a Single Market in insurance services, whilst at the same time securing an adequate level of consumer protection. The third-generation Insurance Directives established an "EU passport" (single licence) for insurers based on the concept of minimum harmonisation and mutual recognition. Many Member States have concluded that the current EU minimum requirements are not sufficient and have implemented their own reforms, thus leading to a situation where there is a patchwork of regulatory requirements across the EU. This hampers the functioning of the Single Market.

The new 'Solvency 2' rules will replace current 'Solvency 1' requirements set out in the Life Insurance Directive.

What is new about the Solvency II? Unlike 'Solvency I', 'Solvency 2' is an economic risk-based solvency approach. It is more risk-sensitive, more sophisticated than Solvency 1 enabling a better coverage of the real risks run by any particular insurer. It moves away from a "one-model-fits-all" way of estimating capital requirements to more entity-specific requirements.

Solvency requirements will also be more comprehensive than in the past. Whereas at the moment the EU solvency requirements concentrate mainly on the liabilities side (i.e. insurance risks), Solvency 2 will also take account of the asset-side risks. The new regime will be a 'total balance sheet' type regime where all the risks and their interactions are considered.

Insurers will be required to hold capital against market risk (i.e. fall in the value of insurers' investments), credit risk (e.g. when third parties cannot repay their debts) and operational risk (e.g. risk of systems breaking down or malpractice). These risks are not currently covered by EU Solvency 1.

Although one of the big steps forward under the new regime will be the introduction of more risk-sensitive solvency requirements and adopting the 'total balance sheet' approach to measuring solvency, the new regime also emphasises that capital is not the only (or the best) way to mitigate against failures. Under 'Solvency 2', new rules will for the first time compel insurers specifically to focus on and devote significant resources to the identification, measurement and proactive management of risks.

Together with a greater focus on risks and their management, the new solvency system will also adopt a more prospective focus. Whereas at the moment solvency requirements are based on largely historical data, the new rules will require insurers also to think about any future developments, such as new business plans or the possibility of catastrophic events which might affect their financial standing. A new development in this area will be the introduction of the "Own Risk and Solvency Assessment" (ORSA)" (see also question 27).

Another new requirement is the "Supervisory Review Process" (SRP). The purpose of the SRP is to enable supervisors to better and earlier identify insurers which might be heading for difficulties. Under the SRP, supervisors evaluate insurers' overall risk profile to ascertain that they hold adequate solvency capital and that their risk management and governance systems are adequate to the nature, scale and complexity of the insurer in question. The ORSA, together with a robust SRP, will introduce a new discipline to the industry that will help in ensuring the stability and long-term sustainability of the European insurance industry.

The new rules require insurers to disclose certain information publicly to a far greater extent than currently is the case. This will bring in 'market discipline', which will help to ensure the soundness and stability of insurers, as market players will be able to exercise greater supervision over and offer greater competition to other insurers. Insurers applying 'best practice' are more likely to be rewarded by lower financing costs, for example.

The new framework will strengthen the role of the 'group supervisor' who will have specific responsibilities to be exercised in close cooperation with the solo supervisors. This means that the same economic risk-based approach will be applied to insurance groups as a single economic entity. The new solvency provisions will foster and force greater cooperation between insurance supervisors and will further supervisory convergence.

Solvency II and pension funds [EU]

This refers to a controversy about application of Solvency II rules to IORPs pension funds. This is seen as fundamentally undesirable by some on the basis that IORPs are 'different' from insurance companies. Others say that the debate on Solvency II and IORPs should be dealt with separately from the Solvency II project for life insurance companies. 

In any event, although IORPs currently fall under Solvency I, a technical legal mechanism in the current IORP Directive and draft Solvency II Directive means that Solvency II rules in some sense will apply to IORPs as from 2012 via a 'legal pipeline'. There are initiatives to remove this 'pipeline' from the draft Solvency II Directive.

solvency rules

New solvency requirements will be more risk-sensitive and more sophisticated than in the past, thus enabling a better coverage of the real risks run by any particular insurer. The new requirements move away from a crude "one-model-fits-all" way of estimating capital requirements to more entity-specific requirements.

Solvency requirements will also be more comprehensive than in the past. Whereas at the moment the EU solvency requirements concentrate mainly on the liabilities side (i.e. insurance risks), Solvency 2 will also take account of the asset-side risks. The new regime will be a 'total balance sheet' type regime where all the risks and their interactions are considered.

In particular, insurers will now be required to hold capital against market risk (i.e. fall in the value of insurers' investments), credit risk (e.g. when third parties cannot repay their debts) and operational risk (e.g. risk of systems breaking down or malpractice).

subsidiarity [EU]

Subsidiarity is a principle determining when and how the EU should act on a matter. The EU should not act (except on matters for which it alone is responsible) unless EU action is more effective than action taken at national, regional or local level.

superannuation

see Pension

supervisory authority

see Regulatory authority Pension supervisor

supervisory board

The individual(s) responsible for monitoring the governing body of a pension entity.

surplus

see Actuarial surplus

Swiss indexation

see Mixed indexation

Switzerland

Switzerland is neither in the EEU nor EEA but is in EFTA. So EU law does not automatically apply. But there are bilateral agreements between the EU and Switzerland which should be taken into account. 

system dependency ratio

Typically defined as the ratio of those receiving pension benefits to those accruing pension rights.

technical provisions

Amount set aside on the balance sheet to meet liabilities arising out of insurance contracts. Including claims provision, provisions for unearned premiums, provision for unexpired risks. life assurance provision and other liabilities related to life insurance contracts.

TEE

tax-exempt-exempt, TEE, treatment.

TEE system

A form of taxation of pension plans whereby contributions are taxed, investment income and capital gains of the pension fund are exempt and benefits are also exempt from personal income taxation.

termination

see Winding up

Third Country

non-EU country (and, presumably, non-EEA)

TPA (Third Party Administrator)

An entity other than a plan sponsor, that is responsible for administering an occupational pension plan.

traditional DB plan

A DB plan where benefits are linked through a formula to the members' wages or salaries, length of employment, or other factors.

transferability (pensions)

This non-technical terms refers to the 'transfer' of pension 'rights' that may accompany a job-move so that an individual may 'take' his or her existing pension rights into the new job. 

On closer analysis there is no 'transfer' of a 'right' but a transfer of accumulated capital that underpins the a pension right.

Transferability was one of key elements of the European Commission's draft portability directive under article 9 to exclude this requirement in the case of unfunded schemes – this exemption will be reviewed after 10 years.

Transnational Exchange Programme [EU]

The objective of the Transnational Exchange Programme is to promote and financially support the organization of exchanges and promote mutual learning between member states, EFTA and EEA countries. The purpose of promoting transnational exchanges as part of the Social Protection Social Inclusion Process is to support the implementation of the Open Method of Coordination on Poverty and Social Exclusion and in particular the development and implementation of the National Action Plans.

trust

This is a structure under English and Irish law under which assets are held and managed one or more individuals (trustees) for the benefit of other individuals (beneficiaries).

A trust is not a legal person.

Trusts are used in the context of pension provision.

trust

A legal scheme, whereby named people (termed trustees) hold property on behalf of other people (termed beneficiaries).

Trustee

A person or a company appointed to carry out the tasks of the trust.

UCITS (undertakings for the collective investment in transferable securities) [EC]

A public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union.

underfunding

The situation when the value of a plan’s assets are less than its liabilities, thereby having an actuarial deficiency.

unfunded pension plans

Plans that are financed directly from contributions from the plan sponsor or provider and/or the plan participant. Unfunded pension plans are said to be paid on a current disbursement method (also known as the pay as you go, PAYG, method). Unfunded plans may still have associated reserves to cover immediate expenses or smooth contributions within given time periods. Most OECD countries do not allow unfunded private pension plans.

unisex annuity rate

Annuity rates that are the same for men and women.

unisex mortality table

Mortality table where the rate of death is equal for males and females.

unistatus annuity rate

Annuity rates which are the same for both men and women and for all family status. See Annuity rate

unprotected pension plan

A plan (personal pension plan or occupational defined contribution pension plan) where the pension plan/fund itself or the pension provider does not offer any investment return or benefit guarantees or promises covering the whole plan/fund.

valuation

see Actuarial valuation

Value-at-Risk (VaR)

Value-at-Risk (VaR) is a commonly used measure in financial services to assess the risk associated with a portfolio of assets and liabilities. VaR answers the question how much money would be lost, if events develop in an adverse and unexpected way. More precisely, Value-at-Risk (VaR) measures the worst expected loss under normal conditions over a specific time interval at a given confidence level. For example, if VaR is measured over a one-year period at a confidence level of 99.5% then this corresponds to the worst loss one would expect to occur in a single year over the next two hundred years.

A reason for two capital requirements is to establish a better early warning mechanism (allows more time for supervisory intervention).

If an insurer's available resources fall below the SCR, then supervisors must act to restore the insurer’s finances back into the level of the SCR as soon as possible. But if the financial situation of the insurer continues to deteriorate, then the level of supervisory intervention will be progressively intensified. The aim of this 'supervisory ladder' of intervention is to capture any ailing insurers before a serious threat to policyholders' interests.

If, despite supervisory intervention, the available resources of the insurer fall below the MCR, then 'ultimate supervisory action' will be triggered i.e. the insurer's liabilities will be transferred to another insurer and the license of the insurer will be withdrawn or the insurer will be closed to new business and its in-force business will be liquidated.

European Standard Formula is the new basic calculation method that insurers can use to determine their solvency capital requirement (SCR). The final calibration will be included in an implementing measure that will contain the technical detail needed for insurers to run the formula in practice. This implementing measure will be agreed after the Framework Directive has been finalised, following a careful analysis of the results of QIS 3 and QIS 4, and after consultation with the co-legislators and stakeholders. It is expected that the final formula will be known in the second half of 2009.

vested benefit obligation (VBO)

The actuarial present value, using current salary levels, of vested benefits only.

vested benefits

see Vested rights

vested rights

Deferred pensions for deferred pensioners, benefits accrued to active members and benefits of passive members.

vesting

This is when a person acquires non-forfeitable pension rights in a workplace pension scheme.

Generally, acquired rights are based on the employee's number of years of service.

Vesting of rights is distinct from acquisition of rights.

voluntary contribution

An extra contribution paid in addition to the mandatory contribution a member can pay to the pension fund in order to increase the future pension benefits.

voluntary occupational pension plans

The establishment of these plans is voluntary for employers (including those in which there is automatic enrolment as part of an employment contract or where the law requires employees to join plans set up on a voluntary basis by their employers). In some countries, employers can on a voluntary basis establish occupational plans that provide benefits that replace at least partly those of the social security system. These plans are classified as voluntary, even though employers must continue sponsoring these plans in order to be exempted (at least partly) from social security contributions.

voluntary personal pension plans

Participation in these plans is voluntary for individuals. By law individuals are not obliged to participate in a pension plan. They are not required to make pension contributions to a pension plan. Voluntary personal plans include those plans that individuals must join if they choose to replace part of their social security benefits with those from personal pension plans.

wage indexation

The method with which pension benefits are adjusted taking into account changes in wages.

waiting period

The length of time an individual must be employed by a particular employer before joining the employer’s pension scheme.

winding-up

The termination of a pension scheme by either providing (deferred) annuities for all members or by moving all its assets and liabilities into another scheme.