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Pension Plans

Coyote Blog has some sound discussion on the transition between fixed benefit pension plans, and fixed contribution plans.

I think, however, that he's a little hard on the company in terms of their obligations to their workers. The unions, as he points out, were also perfectly aware of what the books were saying, and yet continued to insist on defined benefit plans. This sort of "generosity" is exactly the thing that helped sink Bethlehem Steel, giving them less and less room to maneuever even as their equipment aged and their market share shrank.

While he also overstates the risk from inflation in a properly managed plan, the cost of insuring against inflation would have been greater deductions from the cash flow. Using bond immunization, it's possible to manage a large plan in such a way that it's virtually free from risk due to interest rate changes. Barring the body-snatching of Alan Greenspan by Arthur Burns, inflation without higher interest rates is almost unthinkable. Such a mechanism would have required greater cash outlays, but it also would have sent out warning signals much earlier.