A pension fund is a pool of funds that have been contributed by employers and their employees, and which is being invested to provide employees with retirement benefits. Since pension funds typically have enormous amounts available to invest, they are classified as institutional investors, and are managed by professional investment managers. The earnings of a pension fund are usually tax-deferred, and are only recognized as income by plan recipients after they have reached retirement age.
Those individuals responsible for making management decisions for a pension fund have a fiduciary responsibility to make prudent investments. Consequently, investments are typically well diversified and avoid high-risk situations.
Pension funds are usually underfunded, since the sponsoring organizations are not able to contribute the full amount indicated by an actuarial analysis of the funds that will be needed to ensure that adequate payouts are made in accordance with the schedule of plan benefits. This underfunding is recognized as a liability on the balance sheets of the sponsoring organizations.