Oh, those pesky pension liabilities.
While pension plan sponsors are desperately lobbying lawmakers to let them put less money into their plans, Morgan Stanley & Co. is taking a contrarian position, urging companies to put more money into their pension funds.
In a recent full-page advertisement in The Wall Street Journal, the New York-based investment powerhouse criticized the Bush administration's proposal to switch to using the interest rate on long-term corporate bonds as a benchmark for valuing pension liabilities, from using the 30-year Treasury bond. Employers support legislation that would permanently let them switch to using corporate bonds as the benchmark.
"For most … companies, the issue is manageable so long as they do not let accounting or actuarial fictions delude them into a world of hope and inaction," the advertisement reminds employers. It also advises employers not to count on rising interest rates and equity markets to erase their shortfalls. "Our work shows that the combined levels of returns and interest rates required are just too high. Bottom line: if companies believe interest rates are rising and equity market are headed up, now is a good time to fund their pension deficits."
Michael Peskin, principal in Morgan Stanley's global pension group, said that even if lawmakers do pass legislation making the switch, "Companies are still going to be left with big unfunded pension liabilities." Its important for companies to treat their pension plans as a debt obligation, and make plans on how to finance them, he said.