Absolute volatility – the amount of risk or uncertainty in the size of changes in an investment’s value. Generally, the higher the volatility, the higher the risk as the price of a security can change more dramatically in either direction. Volatility is usually measured by the standard deviation of asset price movements.

Asset mix – the categorization of assets within the pension plan portfolio (e.g., cash, Canadian equities, real estate, etc.). Each category is measured as a percentage of the total pension plan portfolio’s fair value.

Assumptions – estimates of what certain variables – such as interest rates, investment returns, and mortality rates – will be in the future. Assumptions are used to estimate the future cost of pensions and the future value of pension assets.

Capital preservation – prevents capital losses during down market conditions. A capital preservation investment approach generally implies a lower-level risk profile for the investment portfolio; this may result in relative underperformance during periods of rising markets. However, it is expected to result in outpacing benchmarks during periods of steep market decline.

Credit spreads – the difference in yield between a high-quality bond (e.g., Government of Canada bond) and a riskier bond (e.g., corporate bond) that have the same payment date. Typically, an issuer of bonds with greater credit spreads implies a higher probability of potential default on debt repayment, and investors have to earn a higher yield to protect against the risk exposure.

Derivative overlays – derivative securities (e.g., equity futures) used to cost-effectively modify the overall total Plan economic exposures without disrupting the underlying direct investing activities of investment managers.

Emerging markets – countries (such as Brazil, China and India) experiencing higher economic and industrialized growth than developed countries (such as the U.S., Canada, and the U.K.). Emerging markets often present higher investment risks due to geopolitical instabilities, currency fluctuations, and financial regulations still in infancy; on the other hand, emerging markets offer investors expected higher returns because of greater growth prospects.

Frontier markets – have lower market capitalization and liquidity than emerging markets, which are more developed. Frontier markets offer higher long-term returns to compensate for incremental risks and volatility.

Funded status – a measure of the amount of assets the pension plan currently holds to pay out its future pension benefits (present value of projected future pension benefits). The funded status is regarded as the “health check” of a pension plan, and is determined by undertaking a funding valuation of the pension plan.

Inflection point – the point in an investment cycle after which a dramatic change – either positive or negative – is expected.

Investment risk – the uncertainty of asset returns associated with investing activities (i.e., asset returns are lower than what is expected).

J-curve – the historical tendency of certain investments to produce negative returns in their early years.

Long bond – the generic term for bonds that mature relatively far in the future – typically 10 years or more, but extending up to 50 years in some cases. Long bonds are attractive investment options for defined benefit pension plans, because the extended maturity dates tend to align well with the long-term nature of pension liabilities.

Private equity – equity capital of non-public companies. Private equity is less liquid and is considered more of a long-term investment.

Private markets – the market for assets that are not sold or listed on a public exchange, such as a stock exchange. Assets bought and sold in the private market include things like real estate, private equity, infrastructure, and mortgages.

Public equity – an ownership interest in a company that sells shares on a public stock exchange.

Public markets – the market for assets that are bought and sold on public exchanges, such as stock exchanges.

Special Debentures – fixed income securities (i.e., bonds) that were issued to the Plan by the Province of Ontario as an initial funding mechanism when the PSPP was established as a separately funded plan in 1990.

Specialty mandates – created when a portion of the money in a particular asset class is invested in a specific segment of the market. Examples of mandates created by OPB include: a small cap Canadian equity mandate, a high-yield U.S. equity mandate, a gold mandate, and a distressed debt mandate.

Strategic Asset Allocation (SAA) – a long-term discipline of asset mix with the purpose of achieving highest returns on investment to meet current and projected future pension benefits given the Plan’s risk tolerance and investment horizon.

Tactical Asset Allocation (TAA) – an asset mix strategy that uses both fundamental and quantitative factors in a systematic approach to increase or decrease OPB’s risk exposure at various points in the market cycles to take advantage of investment opportunities.

Universe bond – a portfolio of bonds with general characteristics that reflect the overall Canadian bond market. With thousands of corporate, government and other bond issues circulating at any one time, the investment industry has accepted this "Universe" as a representation of the broader bond market. The portfolio also forms the basis for the commonly used FTSE/TMX Universe Bond Index.

Unrewarded risk – an investment risk that is not associated with any benefit for the party accepting the risk. It does not generate sufficient returns to make it a rational risk for investors to take.

Vintage year – refers to the year in which an investor makes its first investment in a portfolio company or, for a fund investment, the year in which the fund makes its first of several investments.

Year’s Maximum Pensionable Earnings (YMPE) – the salary rate at which members stop paying Canada Pension Plan contributions. Canada Revenue Agency sets this rate each year. For 2015, the YMPE is $53,600.