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P&I Defined Benefit Pension Plans

October 25, 2013

Essay. Corporations are fleeing the “traditional” Defined Benefit Pension plans because the management of said plans has simply not been able to deliver on their promises of an adequate portfolio performance that would assist companies to meet the objectives of the plan without a usurious and unanticipated extra expense. The simple math is that:

Investment Earnings + Contributions – Expenses = Benefits

and if the investment earnings are negative, then the benefits must drop or the contributions must increase, and the equation is just as valid on a current cash basis as it is on an inflation-adjusted one in which the earnings, contributions and benefits are expressed in current dollars (and we can’t save the plan by diddling with the expenses because there just aren’t enough of them).

Retirement Guy

The Retirement Guy

It’s much better to say to management that “we will obtain a non-negative real return this year” and to show them that we have done that for every year and for every year ending in every month up until today.

Moreover, if we can do that – that is, guarantee a non-negative real rate of return for every year – then we can also expect that the contributions may drop to zero, or even be negative signifying a benefit to the current plan contributors.

But the actuaries and portfolio managers will say that can’t be done. We can’t guarantee a non-negative real return every year, and every year ending in now. And we will say, you’re fired.

Although the actuaries have a reason to believe in statistics based on mortality tables neither the actuaries nor the portfolio managers have a reason to believe in statistics based on “market performance”.

S&P 500 1-, 3-, 5- and 7-Year Returns Since 1897

S&P 500 1-, 3-, 5- and 7-Year Returns Since 1897
Data Courtesy Of: Robert J. Shiller, Yale University, 2013

We could waffle a bit on the term “real” because we can’t predict nor do we control the rate of inflation. But we do have a pretty good idea of what it is now, and that’s what we’re talking about.

We’re talking about now and if the rate of inflation is high (as it has been from time to time, and even in the double digits as it was in the 80s), we can also expect that the markets will respond in kind (and produce double-digit returns if that’s required).

None of this is “rocket science” but it becomes rocket science when we don’t have a clear and enforceable idea of what it is that we want from our investments. What we want is 100% capital safety and a hopeful but not necessarily guaranteed return above the rate of inflation, and we want it now.

Efficient Frontier and Volatility Problem "Rocket Science"

Efficient Frontier and Volatility Problem
“Rocket Science”

Efficient Frontier (B)(N) Boundary Open

Efficient Frontier (B)(N) Boundary Open
“The Perpetual Bond”

The fact is that this (on the left) is “rocket science” but what we want is this, on the right.

Nevertheless, there remain among us many “space travellers” and if they can’t get good returns at home this year then they will never get them other than by “accident”.

Working in America

Working in America

For more information on the theory and references, please see our recent Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100.


We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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