Investment Basics - Terms

Pension Fund
The vehicle that receives contributions accrues investment income from the investment of the assets held and accumulates the assets due to these contributions and investment income, for purposes of paying the benefits specified by the pension plan.

Pension Plan
The collection of provisions, generally found in state law or nonprofit corporation bylaw which specify: (1) membership eligibility requirements; (2) the contributions required by law from employers and covered employees; and (3) the level, conditions, and nature of benefits payable at termination, retirement, death, or date of disability.

Investment Portfolio
The collection of investment securities owned by a pension fund.

A debt-related investment security, representing a loan of money in return for an enforceable promise by the debtor to repay the principal amount of the loan and interest on the unpaid principal balance at a stated percentage rate on or before a stated date.

Benchmarks serve as a standard against which investment performance can be measured. An ideal benchmark return would consist of a hypothetical portfolio of indices, invested in the same asset classes and in the same proportion as the actual holdings of the entire portfolio. Indices track different asset classes, such as domestic equity or bonds.

Debt Securities
An investment security that represents a loan from the investment fund to some other entity, frequently a corporation, in order to obtain the interest payments on the loan principal balance, rather than to obtain an ownership interest in the entity.

The equity or ownership interest in a corporation, issued by the corporation in the form of shares, and traded on an exchange.

Investment securities that represent an ownership interest in the entity issuing the security, that are expected to produce income in the form of shared profits, typically referred to as dividends, and to produce appreciation in value, typically referred to as capital appreciation or capital gain.

Balanced Portfolio
An asset allocation practice emphasizing the investment of significant portions of a fund in the two major asset classes (e.g. debt (bonds) and equity (stocks)).

Asset Allocation
The investment practice of determining what portion of an investment fund ought to be invested in various types of investment securities, such as stocks, bonds, and cash equivalents.

Investment Performance
The measurement of the net gain or loss produced by an investment portfolio. The measurement can be restricted to realized investment results only (yield) or inclusive of unrealized changes in market value (total rate of return) and can ignore the impact of cash flow (dollar weighted rate of return) or can attempt to correct for cash flow changes (time weighted rate of return.)

Investment Strategy
The plan of an investment fund for purchasing various types of investment securities, attempting to take advantage of the earnings potential of the various investment security types, to emphasize the reduction of risk through diversification, and to accommodate future liquidity and cash flow needs.

Investment Policy
An investment policy is an important tool to help relief association trustees fulfill their roles as fiduciaries. Investment policies should define and assign investment decision-making and oversight roles, provide for review of investment transactions and strategies, encourage effective communication and reporting, identify the relief association’s risk tolerance, and provide continuity to the investment program. Investment policies may be crafted to apply to all investments made by the relief association, or only to the investment of special fund assets. State law requires that each relief association have an investment policy on file with the OSA.

Funding Ratio
The relief association’s current assets expressed as a percentage of its accrued liabilities. A funding ratio of one hundred percent indicates current assets are equal to accrued liabilities. If a funding ratio is over 100 percent, the relief association had more assets than liabilities, while less than 100 percent means the association had more projected liabilities than assets.

Normal Cost
The relief association’s cost of existing for one year. The normal cost includes the cost of members receiving one additional year of service credit and becoming closer to receiving a fully vested pension.

The tendency for the fair market value of investment securities, especially equity investments, to vary positively or negatively over a short period of time and within a considerable range.

The investment income obtained or obtainable from an investment security in the form of interest on bonds, dividends on equities, and net realized gain upon the sale of the security.

Additional Resources
More information can be found in our Pension Investment Basic Series found in the Investment Basics Topic.

Additional information is provided for in a Statement of Position on Relief Association Investment Authority and in another Statement of Position on Relief Association Investment Policies.

Last Updated May 2024