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Glossary of Terms

ACCRUED PENSION BENEFITS
The present value of the benefits payable to the members over their lifetime to which they are entitled or will be entitled to under the Plan.

ACTIVE MANAGEMENT
An investment management style that aims to achieve returns above a chosen benchmark or market index. It is the opposite of passive management.

ACTUARIAL VALUATION
An analysis of the financial condition of a pension plan that calculates the liabilities of the plan and the costs of providing plan benefits. An actuary prepares the valuation and the plan sponsor must file the valuation with its pension regulator at least once per year.

ACTUARY
A business professional who is a fellow of the Canadian Institute of Actuaries (CIA) and is responsible for preparing and signing actuarial valuations.

ASSETS
Plan assets refer to the property of the pension fund, primarily comprised of the fair value of its investments.

ASSET MIX
The percentage of a portfolio or fund that is invested in each of the main asset types (i.e. short–term investments, fixed income, Canadian equity, international equity and alternatives).

BASIS POINT
One one-hundredth of a percentage point (0.01 percentage point). For example, if the target for the overnight interest rate is raised from 2.75 % to 3.00 %, it has been increased by 25 basis points.

BENCHMARK
A standard against which the performance or characteristics of a portfolio or investment is evaluated. The S&P/TSX equity index and the DEX Universe Bond index are widely used Canadian equity and Canadian fixed income benchmarks, respectively.

BETA
A quantitative measure of the sensitivity of an equity security or an equity portfolio to changes in its related benchmark index.

BOND FORWARD
A contract between two parties where one party agrees to buy a bond and the other agrees to sell a bond at an agreed future date, but at a price established at the start of the contract.

BOND OVERLAY PORTFOLIO
A portfolio of fixed income derivative instruments that is designed to hedge a pension plan’s interest rate and inflation risks without changing the plan’s physical asset mix. It is a key part of the plan’s Liability Driven Investment strategy.

BUYOUT INVESTMENTS
Investments in controlling interests of a company.

CAPSA
Canadian Association of Pension Supervisory Authorities (CAPSA) is a national inter-jurisdictional association of pension supervisory authorities whose mission is to facilitate an efficient and effective pension regulatory system in Canada. It discusses pension regulatory issues of common interest and develops policies to further the simplification and harmonization of pension law across Canada.

CONSUMER PRICE INDEX (CPI)
An inflation measure computed by Statistics Canada that calculates the change in prices of a fixed basket of goods and services purchased by a typical Canadian consumer each month. The CPI is used to calculate annual cost of living increases for pension benefits, a process referred to as Indexing.

CONTRIBUTORY DEFINED BENEFIT PENSION PLAN
A type of pension plan in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employeeђs earnings history and years of service under the plan, rather than depending on investment returns. With a defined benefit plan, investment risk is borne by the employer. In a contributory plan, members must make contributions, usually by payroll deduction, to accrue benefits.

CONTRIBUTION HOLIDAY
A period when contributions to a pension plan are put on hold, the most common reason for this being a situation of surplus.

CONVEXITY
A measure of the sensitivity of the duration of a bond to changes in interest rates.

CONTROL SELF-ASSESSMENT (CSA)
A methodology used to review key business objectives, risks involved in achieving the objectives, and internal controls designed to manage those risks. A CSA allows managers and work teams directly involved in business units, functions or processes to participate in assessing the organization’s risk management and control processes.

CREDIT SPREAD
The difference in the yield between two different bonds, due to different credit quality. The credit spread reflects the additional net yield an investor can earn from taking incremental credit risk. It is often quoted in relation to the yield on (federal) government bonds.

DEFICIT
A deficit exists in a pension plan when the actuarial valuation determines that the value of the plan’s assets is less than its liabilities (see also “Going Concern” and “Solvency”).

DEFINED BENEFIT PENSION PLAN
The pension received is determined by a defined formula usually, but not always, based on combination of earnings and years of Pensionable Service. The CBC Pension Plan is a Defined Benefit plan.

DERIVATIVES
Financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying on which a derivative is based can be an asset (e.g. equities, bonds), an index (e.g. exchange rates, stock market indices) or other items. The main types of derivatives are forwards (which, if traded on an exchange, are known as futures), options and swaps. Derivatives can be used to hedge the risk of economic loss arising from changes in the value of the underlying.

DURATION
The weighted average term to payment of the cash flows on a bond.

FAIR VALUE
An estimate of the amount of the consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.

FIDUCIARY
An individual or institution occupying a position of trust. An executor, administrator or trustee who is responsible for the assets belonging to another person.

FUNDED RATIO
The ratio of pension plan assets to pension plan liabilities as determined by the latest actuarial valuation. The funded ratio equals 100% when the value of the pension plan’s assets and liabilities are equal. Can be measured on either a “solvency” or “going concern” basis.

GOING CONCERN VALUATION
A pension plan valuation that looks at the plan’s funded status on the basis that the plan will continue to operate indefinitely.

GOVERNANCE
Pension plan governance refers to the structure, processes and safeguards for overseeing, managing and administering the plan to ensure the fiduciary and other obligations of the plan are met.

HEDGING
Using one kind of security to protect against unfavorable movements in the price of another kind of security. Usually edging is accomplished by the use of derivatives such as options, forwards,  swaps or futures.

INDEXING (of Pension Benefits)
The periodic cost of living adjustment of pension benefits usually based on a percentage or capped value of the Consumer Price Index.

LIABILITIES
The amount required by the plan to cover the cost of paying current and future pension benefits.

LIABILITY DRIVEN INVESTMENT (LDI)
LDI, which is also known as asset/liability matching, is an investment strategy that manages a pension plan’s assets relative to its liabilities with the intent of minimizing pension surplus volatility. This is done primarily through the hedging of interest rate and inflation risk. Under LDI, pension plan assets are grouped into matched and unmatched assets. Matched assets (fixed income) have interest rate and inflation sensitivities similar to the pension plan’s liabilities. Unmatched assets (equities and alternative investments) do not have the same interest rate and inflation sensitivities as the pension plan’s liabilities.

MANAGEMENT FEE
A charge levied by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their costs and expertise.

MATURE PENSION PLAN
A pension plan in which the number of pensioners and employees near retirement is significantly greater than the number of younger plan members. Mature plans usually pay out more to pensioners than they receive from members who are still working, as is the case with the CBC Pension Plan.

MEZZANINE INVESTMENTS
Investments in the subordinated debt of a company that contain an option to convert the debt to equity.

OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS (OSFI)
A federal agency established in 1987 under the Office of the Superintendent of Financial Institutions Act whose mandate is to supervise all federally regulated financial institutions and pension
plans.

PASSIVE MANAGEMENT
An investment management style that seeks to achieve returns equal to the market or index returns, also known as “indexing.” It is the opposite of active management. The objective of passive management is to minimize the possibility of earning less than the index return, which can occur with active management.

PENSION BENEFITS STANDARDS ACT (1985)
Managed by the Office of the Superintendent of Financial Institutions Canada, this Act establishes minimum standards regarding the registration, the funding and the administration of federally regulated pension plans.

PENSION FUND
A pool of assets forming an independent legal entity that is bought with the contributions (by the plan sponsor and members) to a pension plan for the exclusive purpose of financing pension plan benefits.

PERFORMANCE ATTRIBUTION
The identification of the sources of portfolio return relative to the portfolio’s benchmark. It helps explain why a portfolio over or underperformed its benchmark.

PLAN SPONSOR
The organization or individual who establishes a pension plan.

PRIVATE EQUITY
The sale of equity or fixed income securities directly to institutional investors such as banks, insurance companies, hedge funds and pension funds. As the sale is to institutional investors only, the securities registration and information disclosure requirements are reduced relative to publicly traded securities. Typically these securities are not traded on a public exchange.

REPO RATE
The Repo rate is the discount rate at which a central bank repurchases government securities from the commercial banks.

RISK METRICS
Statistical measures that quantify the degree of uncertainty as to the realization of expected returns. They assist organizations in understanding the amount of risk they are currently taking or are planning to take.

SIP&P
Statement of Investment Policy and Procedures. The SIP&P defines the investment policies, principles and eligible investments which are appropriate to the needs and objectives of the Plan and the Fund, in a manner conforming to the requirements of the Pension Benefits Standards Act and the Regulations thereof.

SOLVENCY BASIS VALUATION
A pension plan valuation that assumes that the plan suddenly stops operating as of the valuation date. It is intended to test whether the plan has sufficient assets to provide an immediate payout of all benefits that have been earned to that date.

SURPLUS
A surplus exists in a pension plan when the actuarial valuation determines that the assets available exceed the accrued benefit payments (liabilities) to be paid out. (Also reckoned on a solvency and on a going concern basis.)

TOTAL RETURN SWAPS
Contract between two parties where one agrees to pay the total return (interest payments and any capital gains or losses) from a specified reference asset and the other counterparty agrees to pay a specified fixed or floating cash flow.

U.S. FED
Created in 1913, The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States.

VENTURE CAPITAL INVESTMENTS
Investments in start-up companies.

YIELD CURVE
The relation between the interest rate (rate of borrowing) and the time to maturity of the debt for a given borrower in a given currency.