At PensionReforms, we are conscious of the need for the accurate use of language
to describe particular things. As we build our library of abstracts, we have decided
to adopt a formal use of definitions, in legal style, that have capital initial
letters when used in our material.
Ageing of population
Increased ratio of older to younger persons that takes place as fertility and/or mortality rates decline.
Defined Benefit (DB)
A retirement benefit plan (usually a pension) that promises benefits defined on the basis of earnings and/or membership before retirement. The earnings could be in the years just before retirement or even over a working life. They could also be based on a multiple of contributions that are themselves connected to earnings. A DB scheme can be public (such as a Tier 1 age pension) or private; benefits can be lump sum or pension and can carry ancillary death/disability benefits as well.
Defined Contribution (DC)
A retirement benefit plan that provides benefits based on individual contributions (from the member, employer and/or government) plus the investment returns.
EET, TET, TTE etc.
The taxonomy of retirement saving treatment is summarised by three letters with some combination of ‘E’ (exempt from tax or, in the case of contributions, fully deductible from other income and, therefore, from pre-tax earnings), ‘T’ (fully taxable or, in the case of contributions, paid from after-tax earnings) or ‘t’ (partially favoured under the tax regime).
The first letter describes the way contributions are treated; the second letter the investment income in the savings plan and the third letter, the way benefits are taxed.
The common international treatment of retirement saving is EET (Exempt contributions; Exempt investment income and Taxable benefits). Benefits can be described as ‘tax neutral’ under the normal income tax treatment if they are TTE. By contrast, EET can be seen as ‘neutral’ by reference to an expenditure tax regime.
Effective Marginal Tax Rate (EMTR)
The interaction of income-tested state income benefits and tax rates can reduce significantly the value of a citizen's net income after allowing for the reduced state entitlement. That can apply to someone in work as well as retirees. The ‘marginal tax rate’ refers to the rate of income tax payable for the next dollar of income (the ‘top rate’). The EMTR prescribes what is left after tax and benefit reductions apply. The EMTR can exceed 100%.
Home Equity Conversion (HEC)
Using the home to provide financial resources in retirement through some form of borrowing or annuity arrangement. This covers reverse annuities, reverse mortgages, line of credit and similar decumulation instruments.
Benefits targeted to the poor, or that exclude the wealthy, by making payment conditional on earnings, income, or assets. Separate tests of this nature are sometimes called Income-Tests or Asset-Tests.
Minimum Pension Guarantee
A guarantee provided by a government to bring pensions that have accrued under the rules to some minimum level, possibly by adding a flat top-up to the contributions-based or earnings-related pension.
Notional Defined Contribution (NDC)
A pay-as-you-go pension plan that provides benefits based on individual contributions plus credited notional interest on these contributions (sometimes referred to as non-financial defined contribution).
A method of financing in which current benefits are paid out of current revenues, often revenues from earmarked taxes (sometimes called ‘contributions’), and most often from payroll taxes.
Pillars (Tiers) of pensions
Of many definitions, PensionReforms prefers the three defined by the World Bank in its 1994 study Averting the Old Age Crisis (see here [http://www.pensionreforms.com/Preview.aspx?7]):
(1) basic pension (DB).
(2) earnings-related pension (DB or DC or NDC, public or private, pre-funded or PAYG) with mandatory contributions – this can also be a lump sum benefit.
(3) voluntary retirement savings either workplace-related or individually arranged (and not just traditional pension schemes).
PensionReforms prefers ‘tiers’ to ‘pillars’ as the former describe more naturally the way that entitlements arise.
An accumulation of enough reserves of financial instruments to pay all promised benefits (sometimes referred to as a ‘funded’ or fully funded’ pension).
State Pension Age
The age from which the ‘normal’ state pension becomes payable and without adjustment for early or late retirement.
Universal Minimum Pension
Government-provided pensions paid solely on the basis of age, citizenship (or residence) and a pensions-test, with a full pension for those with no other pension income, and reduced amounts – or zero benefit - for those with other pension income.
Government-provided pensions paid solely on the basis of age and citizenship (or residence), without regard to prior work history, earnings or contributions (known also as a citizens pension or demogrant). By definition, any form of income test means a pension is not a Universal Pension.