PBGC Joins Suit Against Morgan Stanley Over Risky Investments That Hurt Pension

The Pension Benefit Guaranty Corporation has joined a lawsuit against Morgan Stanley, seeking $25 million in damages over risky pension investments the bank made for New York's Saint Vincent Catholic Medical Centres' pension plan and its participants.

(June 9, 2011) — The Pension Benefit Guaranty Corporation (PBGC) is seeking $25 million in damages from Morgan Stanley Investment Management over the firm’s handling of risky pension investments for a New York hospital system, showcasing the agency’s efforts to go after Wall Street banking giants in the wake of the financial crisis.

While the case was originally brought in 2009 by Saint Vincent against Morgan Stanley in a US District Court, the medical center’s lawsuit was dismissed, according to PBGC, which assumed control over the plan in 2010 after the hospital system had begun liquidation. The agency wants the Second Circuit to overturn the ruling and require the district court to hear the case on its merits.

Morgan Stanley invested the assets of New York’s Saint Vincent Catholic Medical Centres’ pension plan in mortgage-backed securities in 2007 and 2008. The pensions agency claims that Morgan Stanley was aware that the financial instruments were overly risky, violating Saint Vincent’s instructions and breaching its fiduciary duty.

“MSIM irresponsibly concentrated approximately 50% of the Plan’s fixed-income assets in the single asset class of mortgage-backed securities, even as MSIM became aware in 2007 and 2008 of the rapid and dramatic deterioration of the mortgage-backed securities market,” the lawsuit said.

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PBGC — which has had to take over about 362 plans since the end of 2008 — is now reviewing other plans where similar worries may be present over the way pension investments were handled, the agency said.

PBGC’s heightened responsibilities following the economic downturn, which has caused more corporate bankruptcies and pension failures, have contributed to its widening deficit.

In response to the agency’s growing deficit, PBGC Director Josh Gotbaum said in its 2010 Annual Report: “This financial position is the result of inadequate plan funding and misfortunes that have befallen plan sponsors. In part, it is a result of the fact that the premiums PBGC charges are insufficient to pay for all the benefits that PBGC insures, and other factors.” The PBGC said its total obligations increased by $11.5 billion to $102.5 billion during fiscal 2010. Yet, the agency has $79.5 billion in assets to pay those obligations. “The deficit — the difference between our assets and liabilities — is not an immediate cash crunch, since we have the assets to pay for the foreseeable future.”

Read the PBGC lawsuit against Morgan Stanley here.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

NJ's Christie, Sweeney Approach Deal to Slash Pensions and Benefits

New Jersey Governor Chris Christie and Senate President Stephen Sweeney have reached a deal to overhaul state pensions and benefits for current public employees.

(June 8, 2011) — New Jersey Governor Chris Christie and Senate President Stephen Sweeney have reached an agreement to cut pensions and benefits for current public employees, the Wall Street Journal has reported.

Under the deal, workers would need to pay more of their salaries into the pension system. They would also need to give up annual cost-of-living increases while also paying a percentage of their health care premiums in a tiered system based on their salary, according to the WSJ. The proposed deal also comes nine months after Christie announced his proposals for cuts to help balance the state’s pension system. The scheme is underfunded by $53.9 billion, up $8 billion from one year ago, according to the Department of Treasury.

One major change included in the proposal would mandate that the state make its payments to the pension fund — a requirement that would end New Jersey’s decade-long practice of skipping payments into the scheme. In March, in an effort to boost funding levels,, the New Jersey State Investment Council approved new investment guidelines, which would allow a higher alternatives allocation totaling 35% of assets from the current cap of 25%.

In contrast, some state funds have been able to achieve superior funding levels due to mandatory contributions. “There are several reasons why funds in the United States have such low funding levels — one reason is that a lot of funds were in trouble because they didn’t keep up with contributions, so states have promised benefits, but are not funding them,” State of Wisconsin Investment Board spokesperson Vicki Hearing told aiCIO in late April, following a report by the Pew Center on the States that ranked SWIB high on its list of scheme funding levels. “The Wisconsin Retirement System funding level is strong and historically has been strong. We’ve met 100% of our contributions because it’s mandatory in the state. There’s never been a holiday here, while other states have had holidays for contributions,” she said, noting that the lack of mandatory contributions among pensions has created major attention in recent years.

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Another factor that has driven Wisconsin’s superior funding level, Hearing noted, is the fact that the state’s contribution rate and the amount paid to participants are based on the fund’s investment returns. “Our participants sharing in investment performance is a unique part of our retirement system,” Hearing said. “We had a really difficult year in 2008, with low investment returns, so the amount paid out to retirees decreased over a five-year period,” she noted, adding that this year, retirees have a decrease of 1.2% in payments. “Systems are looking to address this issue and public pensions are making changes — that’s at the top of their radar.”

Whether the New Jersey pension system can make up for years of allegedly bloated benefits and state government malfeasance in not funding the pension system has yet to be seen.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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