Pink water is a game mechanic designed to knock out Jimmy if he enters an area not meant to be accessed via glitches. This happens due to certain objects being merely textures and not solidified objects, or when Jimmy falls through "seams" in the geography. This usually happens when Jimmy re-spawns somewhere, after being knocked out, busted, or passing out. It is the rough analogue of the 'blue hell' game mechanic in the Grand Theft Auto series of games, also developed by Rockstar.
Pink water is found below the entire game world. Whenever something happens to cause Jimmy to fall through the geography, he will land in the pink water. After a minute or two in real life time he will pass out and wake up at the nearest Medical Center.
Although frequently thought to be a glitch, the pink water is actually a counter-measure against glitches.
In the Wii version of Scholarship Edition, the water is the standard blue color, but still functions the same way.
The pink water can be viewed underneath the ocean inlet in Old Bullworth Vale if the camera dips below the surface of the ocean water.