Morgan Stanley Report Supports Private DB Reform

January 20, 2005 ( - A Morgan Stanley Equity Research paper has given support to the Bush Administration's proposed changes to the nation's corporate defined benefit pension system and its insurer, the Pension Benefit Guaranty Corporation (PBGC).

Morgan Stanley said that the reforms, if put through effectively, would “significantly improve the systems’ chances for survival and would have important implications for financial markets.” The report said that the understanding of liabilities, funding rules, and moral hazards would all be increased by such changes as well.

“Left alone, the funding positions of DB plans and the pension safety net (the PBGC) will continue to deteriorate,” the report warned.

Researchers said that while “the time is certainly ripe for reform,” only a few DB plans face an immediate cash flow crunch and the PBGC is far from a liquidity crisis, which, the researchers said, “blunts the political impetus for reform.”

But the road ahead isn’t easy. “The hard political reality is that there is substantial opposition to reform,” the Morgan Stanley report said. “The current plan is similar to what the Treasury (Department) proposed 18 months ago. Plan sponsors, beneficiaries, and thus many in Congress were then and will likely remain opposed to change until a crisis forces action.”

The major market implication of the reform package, according to Morgan Stanley, would be the unmasking of plan asset allocation, which is overweight on equities and underweight on bonds. This move would cause a shift back towards duration to the possible tune of $650 billion, the firm predicted.

Potential reforms released by Department of Labor Secretary Elaine Chao last week included (See Chao Releases Administration DB Reform Proposal ):

  • “a single, accurate way” to gauge a fund’s liabilities that would include a requirement for financially strapped companies to also actuarially assume that workers will retire as soon as they possibly can and will take benefits in a lump sum
  • funding targets that reflect a plan’s risk of termination with a “reasonable time” for companies to meet the target of having enough funding to pay for its liabilities. Officials said they had studied the notion of giving plans seven years to reach their targets.
  • flexibility for solvent companies to make more generous contributions to pension plans during good economic times
  • restrictions on the ability of weaker firms to promise more benefits for which they can pay.
  • the reform of the PBGC premium system to better reflect the risk involved with individual plans. The proposal calls for the flat fee to be raised from $19 to $30, with troubled plans having to pay a risk-based premium determined by funding status.
  • increased transparency about such plans for workers, investors and regulators, including mandatory exposure of funding status earlier in the year.

Morgan Stanley’s view is opposed by many, including the United Auto Workers. “The UAW strongly opposes these proposals because they would have a devastating impact on the retirement income security of millions of workers and retirees and would undermine the entire defined benefit pension system,” said the union’s legislative director, Alan Reuther in a January 12 letter, which the union provided to Reuters (See UAW Says Bush Pension Plan Would Wreck System ).

A DoL fact sheet about the Bush Administration proposal is at .