The holy grail of pensions advice – how to manage pension commitments

When Warren Buffett writes on pensions, it’s probably worth reading.

One of his essays – actually a letter to the Washington Post – has just crossed my desk. It makes a number of incredibly pertinent points about pensions design and investment strategy.

He notes how the law has eroded potential safety values that might have allowed companies to hold back discretionary benefits. He remarks how there’s more ‘managerial ignorance’ on pension costs than any other cost item of remotely similar magnitude.

Buffett warns that, in an economy with a risk of high inflation, the impact of advance funding ‘evaporates’ – instead pension schemes rely on the current earning power of the sponsoring company. Like it or not, you become much like the Government’s social security plan, absent the power to tax.

And he articulates, in his inimitable compelling style, why he believes professionally managed money won’t typically perform above average on a sustainable basis. It’s like a player at the poker table announcing ‘well if we all play carefully tonight, we all should be able to win a little’.

All in all, the full version is well worth a read – click on this link for the full version. I couldn’t possibly do it justice in a short blog. It’s a long essay – but stick with it to the end. Because the end is the best bit. I’m going to give away the punchline now so look away if you don’t like spoilers. At the end you discover for sure (and there are clear clues along the way) that it was written in 1975. Four decades ago, at the age of 45, Buffett was setting out the holy grail of how to manage pension commitments. Back then it was unknowingly insightful. The commentary is so spot-on that you wish the industry has stopped to notice and enjoy the benefit of his wisdom back in the 1970s, before the defined benefit pension challenges we face today started building up. It’s still a great and worthwhile read.

Raj Mody is Head of Pensions at PwC. You can contact him at [email protected] or by phone at +44 (0) 20 7804 0953

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