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(P&I) The Pension Plan Shame

September 9, 2014
The Pension Plan

The Pension Plan

Drama. As a rule – and there are exceptions – we should expect that the pension plan and endowment fund boards of directors, their portfolio managers, and the actuaries who “certify” these plans, don’t know what they’re doing. They might be competent, but we still need to assume that they don’t know what they’re doing.

Or if they do, it’s a scandal, and it could be a felony.

It’s easy enough for any plan to verify who’s who – the good, the bad, the ugly – but tolerance for the “bad”, and forgiveness for the “ugly”, is undeserved.

The “acid test” is that assuming that there are no further investment gains beyond those that are guaranteed, and that there are no further investment losses beyond a definite floor that is also guaranteed, how long can the plan run in the foreseeable future, which is this year, next year, the year after, and so forth, say N-years, and the success of the plan is measured by “N is a non-decreasing number”, year-after-year, every year.

And if there’s a problem, that is N(this year)<N(last year), then it needs to be addressed right away by taking down some of the “investment float” into the guaranteed capital, and raising the floor of the definite losses by taking some of those losses against the float, or buying the appropriate insurance.

All of this comes to mind because we have an emerging scandal in ERISA (Pensions & Investments, September 1, 2014, High court seen likely to take ERISA fidicuary-breach case) and yet another of the smaller pension plans has run into the wall (CBC News, September 8, 2014, Cash-strapped Nova Scotia towns ‘blindsided’ by police pension plan).

Despite all of the promises and projections of the portfolio managers, and all of the “calculations” of the actuaries, a pension plan or endowment fund needs to do three things every year:

Check Mark

Check, our alternatives provide a non-negative real return every year and we don’t need the capital right away even though we’re getting offers to buy our interest every other day.

Check MarkCheck, our bonds provide 100% capital safety and we could hold them to maturity regardless of inflation surprise.

Check MarkCheck, our equities provide 100% capital safety and a hopeful return above the rate of inflation, also known as a non-negative real return every year and they provide all the liquidity that we might need absent the fortuitous maturity of our bonds or alternatives.

Just say "N".

And just say “N”.

For more information, please see almost any of our Posts on “pension plans” such as “(P&I) The Pensionnaires” or “(P&I) Defined Benefit Pension Plans” or “Investo-Mania & Behavioral Pension Disorder“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, 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. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.


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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