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De-risking: Jargon Buster

From buy-ins and buy-outs to longevity swaps, when it comes to choosing a pensions de-risking solution there are a number of options for employers and scheme trustees. For every de-risking option, new terminology is often used.
If you come across a term or phrase and you are unsure what it means, you can use our jargon buster to quickly find a short and simple explanation to help you on your way.
Each full explanation has other key terms highlighted in bold


Balancing Premium

This is the balancing amount which is payable to the Trustee or to the insurer once the data cleanse has been completed.

Benefit specification

This document summarises all the benefits which are going to be insured by the insurer. It will also capture discretions and practices (for example, in relation to financial dependency or young spouse reductions) or may include codification of discretions.

Best estimate of liabilities/BEL

The “best estimate of liabilities” is an insurer’s best estimate of the net liabilities that it will have to pay out over the life of an insurance contract or group of insurance contracts. The termination payment (if any) in a buy-in or buy-out contract is often linked to the best estimate of the relevant liabilities being insured at the time of termination.

Bulk annuity contract

Another reference to a buy-in or buy-out policy.


For a buy-in, the insurer will make scheduled payments (usually monthly) under that policy to match the Trustee’s insured liabilities. The insurance policy is in the Trustee’s name and is an asset of the scheme. The Trustee and its administrator continue to operate the scheme as usual but funded by payments under the insurance policy. During a buy-in, both insurer and Trustee have various reporting and data verification obligations.

For a buy-out, this will be preceded by a buy-in, as the process of a buy-in is often a temporary period for trustees to cleanse the data before pushing the buy-out trigger.

Buy-in price/Premium

The initial amount which the Trustee will pay to the insurer to go on-risk. Subject to adjustment as part of the data cleanse.


A buy-out refers to the process where the insurer steps into the shoes of the Trustee and issues individual policies to scheme members. The members’ benefits are then provided directly by the insurer. The Trustee is discharged from liability in respect of those benefits it has bought out. If all benefits are bought out, the scheme usually winds up. A buy-in precedes a buy-out.


Collateral refers to a pool of assets held as security in return for an insurer’s obligations under the insurance policy. If the insurer goes insolvent, or if certain triggers occur, the Trustee can have recourse to those assets. If a transaction is collateralised, this means that there is collateral being held. The collateral is usually held by a separate custodian. There is no obligation to have collateral.


The insurer will only insure the benefits and risks the Trustee asks them to, and what they insure is the coverage. Therefore, anything outside the scope of the coverage described in the contract or the benefit specification will not be insured and the Trustee will have to pay out of its own pocket for this. Whether or not a certain risk (for example GMP equalisation) is covered will be a matter of negotiation and may be subject to the payment of an additional premium.

Data cleanse (often referred to as verification)

This is a process where the administrator, on behalf of the Trustee, will cross-check and verify the data they hold for the members of the scheme (usually referred to as the Initial Data). The administrator will hold huge amounts of information and data on its systems, used for calculating and paying benefits, but over time this data can become inaccurate or out of date. For example, this may involve checking members are still alive; whether their date of birth is correct; and whether their sex is correct. This is often referred to as verification.

This can be a complex and lengthy process, and can be carried out in advance of a de-risking project, or after the transaction has been entered into and before a buy-out. The aim is to make sure the data is as accurate and complete as possible.

Dis-intermediated structure for a longevity swap

Some longevity swaps are structured this way.

The insurer acts as a pass-through or go-between as far as possible and the Trustee contracts with the reinsurer as much as possible.

Also referred to as a pass-through structure.


The Trustee agrees to only deal with certain insurers for a transaction.

Exclusivity Letter

Confirmation that the Trustee will only exclusively deal with a particular insurer and the terms on which discussions will continue (for example, how long the exclusivity lasts).


The Financial Conduct Authority.

Finalised Data File/Verified Data

This is the member data post-data cleanse/verification (i.e the data has been checked, errors corrected) and the insurer and the Trustee have agreed that this is the final data. There is often a balancing premium to pay once the final data has been agreed.


This is the Financial Services Compensation Scheme, which is a body which compensates holders of insurance policies subject to certain conditions and limits if the insurer goes insolvent.

Fully-intermediated longevity swap

Some longevity swaps are structured this way. The Trustee enters into an insurance policy just with the insurer and has no visibility over the insurer’s own hedging arrangements.

Gap policy

This relates to the insurer’s matching adjustment requirements. If an insurer wants to place the assets held under the Trustee’s bulk annuity policy into its matching adjustment portfolio, the policy has to comply with certain terms.

If a term or payment (for example, payment on termination of the policy) does not comply with the matching adjustment requirements, the insurer may request this be covered by a separate policy so as to avoid invalidating the whole contract from qualifying for matching adjustment. This excess or additional insurance will be put into a gap policy, that is just a separate insurance policy, that is not eligible for matching adjustment.

Initial Data File/Initial Data

This is the spreadsheet, or other file, containing the key data for payment of members’ benefits (i.e. names, NI numbers, dates of birth, pension in payment). This is normally provided right at the start of the transaction, and then once the documents are signed the verification/data cleanse period begins. The initial premium (i.e. the price the Trustee pays at the start of the transaction) is based on the Initial Data.

Initial Period

The period under the contract before the Finalised Data File is confirmed.


Invitation to quote or request for proposal: This is essentially a tender which goes out at the start of the process to insurers who will return their price on the basis of that document. It is usually accompanied by the benefit specification.


How long members live.

Longevity swap

An insurance policy similar to a buy-in but the only risk the insurance policy covers is longevity. It covers members living longer than expected.

Matching Adjustment/MA/Matching Adjustment Portfolio

How much capital an insurer has to hold is determined in part by the value of its liabilities. Insurers value the present value of their liabilities using a discount rate.

A matching adjustment (MA) is an upward adjustment to the discount rate, which has the effect of reducing the amount of liabilities and has the effect of reducing the insurer’s Solvency II capital requirements.

An insurer can only use matching adjustment where it meets certain conditions and has a matching adjustment portfolio. When an insurer has a matching adjustment portfolio, this means that it sets aside a portfolio of assets to support a known/predictable portion of its liabilities. The return on the assets in the matching adjustment portfolio match the liabilities attributable to that portfolio – i.e. the assets match that proportion of its liabilities, and so the overall risk is reduced and the insurer is able to use matching adjustment to reduce its Solvency II capital requirements.

An insurer may put a bulk annuity contract into a matching adjustment portfolio, which means that the contract needs to comply with the matching adjustment requirements. If a term is non-compliant, it may be put into a gap policy.

Minimum capital requirement

This is the absolute minimum level of capital insurers can hold without losing their licence. As described below, Solvency II requires a level of capital high above that minimum.

Mortality Risk

This is the risk of a member dying (in which case death benefits will immediately become payable). Often the insurer takes on mortality risk on a different date to the date they start making pension payments.

Non-disclosure Agreement

This is put in place when the Trustee wants to pass scheme (including member) data to the insurer so the insurer can provide a price. This governs the insurer’s use of that data and includes protections for the Trustee.

Part VII Transfer

This is a court-approved regulatory process for an insurer to transfer some or all of its business to another insurer. The process is overseen by the court and the PRA and FCA, and an independent expert is appointed who considers the impact of the transfer on policyholders, including any trustees who hold an insurance policy.


The Prudential Regulation Authority.

Price Lock/Gilt Lock

At the outset of the transaction, the insurer’s pricing terms may be agreed relative to market conditions. Therefore, over time, the exact amount of the premium moves in line with market conditions or the insurer’s investment strategy. This leads to a risk that the premium moves so much that the Trustee cannot afford it when it is required to pay it up front.

In order to pay the premium, the Trustee will usually set aside cash and assets (i.e. shares, bonds, gilts) to fund the premium. A price lock agrees with the insurer that its premium will be tracked in line with the Trustee’s chosen assets. This means that the Trustee can make sure the movement in their assets matches the movement in the premium.

The price lock is usually agreed at the outset of exclusivity.


The insurer with whom the Trustee transacts may itself insure its liabilities with another insurer, called a reinsurer. The reinsurer will not be involved with the Trustee in the buy-in or buy-out transaction as they do not have the right regulatory permissions to deal with the Trustee directly, but the insurer may have restrictions on its ability to insure certain benefits if it cannot obtain reinsurance in the market.

The Trustee may have more interaction with the reinsurer under a longevity swap depending on the structure.

Risk margin

Risk margin is an amount in addition to the best estimate of liabilities that is designed to represent the additional cost of getting a willing insurer to take over the liabilities. It is calculated in accordance with Solvency II.

Solvency II

Solvency II is an EU directive which regulates how insurers can carry out their business. It imposes Solvency II capital requirements on insurers, so that they can withstand economic and other shocks. The requirements of Solvency II are linked to the amount of an insurer’s liabilities.

Solvency II capital requirements/SCR/Regulatory Capital/Reserves

Under Solvency II, insurers have to hold sufficient capital to withstand a "1 in 200" shock event – i.e. enough capital so that there is at least a 99.5% chance that they will be able to meet their liabilities over the next 12 months.

Termination Payment

Also referred to as the cancellation payment, this is the amount which the Trustee will be paid if the policy terminates (if there are termination rights). The amount often depends on whether the termination was the fault of the Trustee or the insurer, and often has a relationship to BEL.


This forms part of the balancing premium and represents the difference in the benefits which were paid during the data cleanse from what should have been paid in light of the Finalised Data File.

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