- Adjusted Funding Target Attainment Percentage (AFTAP). A defined benefit plan's AFTAP is the amount of plan assets in relation to liabilities with adjustments for credit balances and annuity purchases, where applicable. If the AFTAP is less than 80%, annuity purchases are restricted.
- Annuity Buy-In. An annuity buy-in will provide annuities, or the promise of a future annuity, but retain the annuity within the plan assets.
- Annuity Buy-Out. An annuity buy-out will completely remove liabilities associated with an annuity purchase from the plan. Assets used to purchase the annuity are also removed from the plan. The buy-out can apply in a partial risk transfer or a complete close-out of a pension plan.
- Annuity Certificates. Annuity certificates are issued by the insurance company to each participant (annuitant) listed in a group annuity. The certificate identifies the annuity benefit amount, other payment options and terms and conditions of payment.
- Annuity Placement. An annuity placement involves the removal of a portion or all of the assets and liabilities from a defined benefit plan by "settling" them (buying annuities) with an insurer (structured settlement).
- Frozen Defined Benefit Plan. A frozen defined benefit plan has been amended to restrict new participants from entering the plan (soft freeze). A plan may also cease accruals of additional benefits (hard freeze). Typically, a plan is frozen prior to its termination.
- Group Annuity. A group annuity is a contract between a pension plan sponsor and an insurance company in which the insurance company guarantees future benefits for a specific group of plan participants in exchange for a single one-time premium payment.
- Hard Freeze. A hard freeze occurs when a plan is amended to cease accrual of additional benefits.
- Liability Driven Investing (LDI). LDI occurs when plan assets are invested to match expected cash flows and changes in interest rates applied to measure the liabilities.
- Partial Carve-Out. A partial carve-out is another name for partial risk transfer.
- Partial Risk Transfer. Partial risk transfer occurs when a portion of plan assets are used to purchase a group annuity, covering a select group of participants. These assets and the corresponding benefit liabilities are completely removed from the plan. The remaining assets and participants continue as an ongoing plan.
- Pension Close-Out. A pension close-out involves the purchase of a group annuity with plan assets to completely satisfy all future liabilities remaining and terminate the pension plan. (Terminal Funding)
- Plan Sponsor. The plan sponsor is the legal entity that establishes and maintains a qualified retirement plan under which funds are accumulated and individuals become entitled to annuity benefits.
- Safest Annuity Available. Department of Labor Interpretive Bulletin 95-1 (DOL 95-1) requires plan sponsors "to obtain the safest annuity available, unless under the circumstances it would be in the interest of participants and beneficiaries to do otherwise...A fiduciary must evaluate a number of factors relating to a potential annuity provider's claims-paying ability and creditworthiness. Reliance solely on ratings provided by insurance rating agencies would not be sufficient to meet this requirement." The types of factors to be considered include:
Quality and diversification of the annuity provider's investment portfolio; the size of the insurer relative to the proposed contract; the level of the insurer's capital and surplus; the lines of business of the annuity provider and other indications of an insurer's exposure to liability; the structure of the annuity contract and guarantees supporting the annuities; and the availability and extent of additional protection through state guaranty associations.
- Soft Freeze. A soft freeze closes the plan to any new participants. Current participants will continue to accrue benefits.
- Structured Settlement. A structured settlement involves the removal of a portion or all of the assets and liabilities from a defined benefit plan by "settling" them (buying annuities) with an insurer (annuity placement).
- Terminal Funding. A group annuity is purchased with plan assets to completely satisfy all future liabilities remaining and terminate the pension plan (pension close-out).