Richard Berner on Implications of Pension Reform

by: Richard Berner

Excerpt from Morgan Stanley's Chief US Economist Richard Berner's weekly essay:

After nearly two years of debate, Congress has just passed pension reform legislation, and the President likely will sign it. The Pension Protection Act of 2006 improves on current law in several important respects, but together with pending changes in pension accounting, it would expose more fully the economic cost of defined-benefit [DB] plans. As a result, I continue to think that plan sponsors are likely to accelerate the ongoing shift from DB to defined-contribution [DC] plans, and potentially re-allocate portfolios away from equities and towards longer-duration bonds. Indeed, that shift will probably continue even if the reform process bogs down again. But I also think that the resulting market effects could be smaller than I judged two years ago...

There’s no mistaking the major compromises and gaps in the Act. While the framers tightened funding rules, opponents of change forced them to accept extended transition periods, especially for some troubled airlines. The delayed start (in 2008) and long phase-in of tougher rules (to 2011 for well-funded plans, to 2013 for those at risk, and to 2023 for airlines that opt for a “hard freeze” of their plans — closing them to new entrants and eliminating further benefit accruals) reduce the proposals’ effectiveness...

That Congress has passed pension reform and will send it to the President for signing is good news, but it isn’t the end of the story. While HR 4 is a tome of 907 pages, the devil is always in the details of complex legislation.

See Berner's full analysis.