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Buffett’s Pension

Greg Spears

AS MY OLD NEWSPAPER company slid toward bankruptcy, it signed over the deeds to its newspaper buildings to the pension plan in an effort to meet its obligations. It was like burning the furniture to keep the house warm—and it worked about as well as you might expect.

When the company finally filed for bankruptcy in 2020, it laid the blame on its unfunded pension obligations. The pension fund was short by $1 billion, according to a subsequent audit by the Pension Benefit Guaranty Corporation, which took over the plan and now pays me a monthly benefit.

This is not an uncommon problem. Collectively, U.S. pension funds are short-funded by more than $1 trillion, having only 75 cents on hand for every dollar in benefits promised to employees, according to Boston College’s Center for Retirement Research. Given this backdrop, it’s surprising to hear of another newspaper company’s pension plan that’s overflowing with money.

Graham Holdings—which for most of its existence owned The Washington Post—has a $2.1 billion pension surplus, according to the company’s recent filings. It’s so stuffed with money that the company expects to never contribute another cent to the plan.

Credit for this is owed primarily to Warren Buffett, who steered the pension fund’s investments in an unorthodox direction while he was a company director in the mid-1970s. In a 19-page memo written to then-CEO Katharine Graham in 1975, he said hiring the usual institutional money management firms would be “doomed to disappointment.”

He predicted that rising inflation rates would eat up the returns of the bond portfolios then favored by pension managers. Buffett instead recommended that the fund selectively buy stocks to meet the plan’s obligations. The Post’s directors agreed and hired two small, specialized investment firms that Buffett recommended in 1978.

The majority of the company’s pension pot is still overseen by Ruane, Cunniff & Goldfarb and First Manhattan Co. Both firms have long ties to Buffett. First Manhattan founder David “Sandy” Gottesman is a billionaire many times over thanks to an early investment in Berkshire Hathaway. Gottesman, age 96, currently sits on Berkshire’s board, where Buffett, 91, presides as CEO.

Ruane, Cunniff & Goldfarb is perhaps best known as the investment manager of the Sequoia Fund, which outpaced the S&P 500 over a 45-year period, despite notably rotten returns in 2015 and 2016. Firm founder Bill Ruane met Buffett at a value investment seminar at Columbia University taught by legendary investor Benjamin Graham.

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The two investment firms have made enormous gains over the past 45 years. Graham Holdings had $3.2 billion in pension assets and roughly $1.1 billion in pension obligations as of last September, according to a company report. The largest holding is—no surprise—Berkshire Hathaway.

All of this has created an unusual problem for Graham Holdings, whose stock price doesn’t reflect its pension riches. The firm would like to redeploy some of the money, but pension laws are far stricter now than they were when corporate raiders gutted pension funds in takeover plays in the 1980s. If the company used the money for anything other than retirement checks, it would owe a 50% federal excise tax on top of any state and local tax levies.

The Graham family, which still controls Graham Holdings, sold The Washington Post newspaper to Jeff Bezos in 2013 for $250 million. They transferred enough money to meet all the Post’s pension obligations, plus an extra $50 million.

Graham Holdings, which retained the rest of the pension pot, is a conglomerate with seven TV stations, car dealerships, the Kaplan test prep business, restaurant chains and a few publications like Slate and Foreign Policy. The standout performer of the whole lot has been its pension fund.

“Current management deserves no credit for this,” Graham Holdings’ Chief Financial Officer Wallace R. Cooney said at a December 2021 meeting of shareholders. “All the credit goes to Katharine Graham and the wisdom she had to ask Warren Buffett for his advice, and take it, back in 1978. Mr. Buffett recommended that we invest our pension assets in equities and hire smart advisors to manage those funds—and that is exactly what Mrs. Graham did.”

I wonder if other pension managers might take a page from Warren Buffett’s plan and invest a greater share of their assets in stocks. I know I wish that my old newspaper company had done that a long time ago.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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Bob Wilmes
Bob Wilmes
4 months ago

There is a great book on how Warren Buffett worked with a man named Joe Rosenfield, a lawyer and businessman from Des Moines, Iowa helped to build the endowment of tiny Grinnell College in Iowa to a $3 billion dollar trust. I highly recommend the book.
https://www.amazon.com/gp/aw/d/0998652857/

Last edited 4 months ago by Bob Wilmes
booch221
booch221
4 months ago

Ruane, Cunniff & Goldfarb is perhaps best known as the investment manager of the Sequoia Fund, which outpaced the S&P 500 over a 45-year period, despite notably rotten returns in 2015 and 2016.

Yet we’re always told that no one can outperform the market consistently.

parkslope
parkslope
4 months ago
Reply to  booch221

What we are “told” is that the number of investors/funds who outperform the market over a given time period is no greater than what one would expect by chance.

Last edited 4 months ago by parkslope
Jonathan Clements
Admin
Jonathan Clements
4 months ago
Reply to  booch221

There will always be managers who outperform the averages — but can you identify them ahead of time and, once their record is “discovered,” does the outperformance persist? In the case of the Sequoia Fund, it’s underperformed its category’s index in nine of the last 10 calendar years, according to Morningstar.

Edmund Marsh
Edmund Marsh
4 months ago

This article hits home for me. I had never expected a pension, and had planned accordingly. But, in 2016, our company group was sold. With the new company came a pension that for me, with short tenure, might add about ten percent to my retirement income if I worked eleven years to age 65. Three years ago, the pension benefit accrual was frozen. Not harmful to me, but I feel for my co-workers with the legacy company that got caught short on their pension benefit, and short on time to make up the difference with the investment plan. Company donations to the 403b won’t make up the difference. I, too, wish for smarter pension managers,

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