As the 1970s wore on, high inflation (which led to higher wages, and therefore higher pension obligations) and lousy stock markets (which reduced the pension funds’ returns), caused many defined-benefit pension schemes to become seriously under-funded, creating a major risk to employee benefits.

The Generally Lousy Moves of General Motors and General Electric

The aging work force didn’t help: By 1980, GM had stopped expanding and was moving towards its current position, in which retirees outnumber active workers.

The industry’s new solution was the so-called defined-contribution plans, such as today’s ubiquitous 401(K) accounts, in which employers and employees combine to fund employee pensions. These had one modest benefit for the employee: They were much more “portable” than defined-benefit plans.

Under the old pension system, if you had completed 20 years at General Motors, you were basically stuck there until retirement. And employers really liked 401(K) plans, as well, for this new format meant that they were freed from being responsible for employees’ welfare in retirement (a huge cost savings in the retirement area, thanks to the massive escalation in health-care costs, as it turned out). Employers also could generally substantially reduce the percentage of employee wages they devoted to pension contributions.

Defined-benefit plans had something of a comeback in the 1990s, when inflation declined and the stock market rocketed ahead so fast that the under-funded pensions of the 1970s disappeared, and were replaced with over-funded pension plans, so that employers no longer needed to make contributions. The result was that many companies took holidays from making pension contributions, boosting their earnings, their stock prices and the value of their top management’s stock options by doing so.

General Electric Co. (GE) even went further; it figured out a way in which it could make negative pension contributions, essentially withdrawing money from the pension fund, and boosting its earnings still further by doing so. GE Chief Executive Officer John F. “Neutron Jack” Welch (whose tenure at GE was from 1982-2001) never missed a trick - as that company’s unfortunate shareholders, employees, and customers are only now discovering.

Possible Pension Profit Plays

Since 2000, stock market returns have been lousy. What’s more, bond yields have declined. That’s had the effect of raising the nominal value of pension liabilities, which are calculated 30-40 years ahead and then discounted back to the present day by some appropriate bond rate.

When you factor in the recent downturn, it’s easy to see why defined-benefit pension contributions will be zooming up.

So, how do you deal with the pension-fund crisis?

Avoid the very well established companies with heavy defined-benefit pension obligations. Listen General Motors, I’m a faithful Buick driver.