Pension risk transfer (PRT) can be a complicated topic. This blog post is designed to help you become familiar with industry terminology, to help you research PRT and come to the best decision for your business and your pension plan participants.
Accrue: The word “accrue” is similar to “earn” and “accumulated”. Accrued benefits increase over time. They increase depending on length of service and salary, and continue to accumulate until they are ready to start being received, after the pension plan participant has retired.
Actuary: A professional that helps to understand pension risk, using statistics, valuations, and calculations.
Additional Voluntary Contributions (AVCs): Additional contributions to a pension fund, that a pension plan member chooses to make.
Ancillary Benefits: Benefits that are additional to the main benefit of regular pension income, for example death benefits or disability benefits.
Annuities: Annuities provide guaranteed income for a set period or for life, similar to pension plan benefits.
Beneficiary: The recipient of pension benefits.
Death Benefit: Benefits received by a beneficiary after a pension plan member has died.
Defined Benefit (DB) Plan: A pension plan primarily contributed to and managed by an employer, offering guaranteed income to pension plan participants after they retire. This type of plan is also determined by factors unrelated to the amounts contributed by the employer, such as employee years of service.
Defined Contribution (DC) Plan: Primarily funded and managed by the employee, a 401(k) is an example of a defined contribution plan.
Financial Strength: A company’s financial strength can be assessed by looking at profitability, liquidity, solvency and operating efficiency. Financial strength is important when choosing an insurer to provide a safe PRT solution for pension plan participants.
Frozen Pension: A frozen pension is one which is no longer accepting new plan members and no longer allowing current members to accrue further benefits owed.
Lift-out: A ‘lift-out’ is where a subset of plan participants is lifted out and transferred to an insurance company.
Lump Sum: A lump sum pension buyout is when a pension plan participant is offered a single, one-off lump sum payment instead of regular pension income.
Pension Benefit: Pension benefit refers to the income received by pension plan participants.
Pension Risk Transfer (PRT): Pension risk transfer (also known as pension de-risking) is when a pension plan chooses to transfer some or all of its obligations to pay out guaranteed retirement income to an insurer.
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