Investment Basics - Terms

Pension Fund
The vehicle that receives contributions, and accumulates the assets due to these contributions and the investment income from investing the assets, 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 covered employees and employing units; and (3) the level, conditions, and nature of benefits payable at termination, retirement, death, or date of disability.

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.

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 or otherwise.

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 (e.g. stocks, bonds, cash equivalents, etc.)

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 types of investment securities, to emphasize safety from risk through diversification, and to accommodate future liquidity and cash flow needs.

Funding Ratio
Current assets expressed as a percentage of the actuarial accrued liability. A funding ratio of one hundred percent indicates current assets are equal to actuarial accrued liabilities. A funding ratio of less than one hundred percent indicates that the plan has unfunded actuarial accrued liabilities.

Normal Cost
The cost, or additional liability, incurred by covering employees for the current year's operations.

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 any net realized gain upon security sale.

Published last in the July 2008 Pension Newsletter