Berkshire Hathaway Letters to Shareholders: 1965-2024

by Warren Buffett

1975 - Pensions Referred to in the 2013 letter to shareholders. PENSIONS There are two aspects of the pension cost problem upon which management can have a significant impact: (1) maintaining rational control over pension plan promises to employees and (2) increasing investment returns on pension plan assets. The Irreversible Nature of Pension Promises To control promises rationally, it is necessary to understand the basic arithmetic and practical rules governing pension plans. The first thing to recognize, with every pension benefit decision, is that you almost certainly are playing for keeps and won’t be able to reverse your decision subsequently if it produces subnormal profitability. As a practical matter, it is next to impossible to decrease pension benefits in a large profitable company—or even a large marginal one. The plan may embody language unequivocally declaring the company’s right to terminate at any time and providing that contributions shall be solely at the option of the company. But the law has eroded much of the significance such “out” clauses were presumed to have, and operating practicalities render any residual rights to terminate moot. So, rule number one regarding pension costs has to be to know what you are getting into before signing up. Look before you leap. There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, the...