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

(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.

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.