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FT: "Pension Deficit Disorder"
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Posted by: Jack Ciesielski 2/24/2005 8:51 AM
The Financial Times ran a story today headlined "A case of pension deficit disorder." Hmmm.... sounds vaguely familiar. Could they have gotten that phrase maybe from - here?

An excerpt:
"Attention is also being paid to the Financial Accounting Standards Board and the International Accounting Standards Board, amid a debate over the need for changes to pension accounting rules to force companies to better fund their plans.

Any proposal that required a closer marking to market value of pension assets would be likely to increase investment in longer-dated bonds.

Joseph Shatz, senior government bond strategist at Merrill Lynch, said many pension funds had “over-invested” in equities because current rules accounted for the investments in terms of long-term expected returns, not realised gains.

A move to mark-to-market could produce huge balance sheet swings unless neutralised by a shift into longer-dated bonds to better match assets and liabilities. (Emphasis added.)

“If the pension reform proposals are passed by Congress, the accounting reforms are more likely to be enacted by FASB and IASB,” added Mr Shatz.

Pension fund managers are already in a vicious circle as yields on longer-dated bonds, and coupons on new paper, have fallen even as the desire to more closely match assets with liabilities has boosted funds' appetite for longer maturity debt."

There's no denying that the pension accounting is in need of reform, both at the funding level which can be commanded only by Congress, and at the reporting level, which can be remedied by FASB and IASB.

At this time, the FASB has not yet added pension accounting to its agenda. In my view, it would be a good choice for them: the issues have been with us for years, and structurally, they're not getting better. Sure, assumptions are getting saner, and investors are wise to pension games played. But the same goofy mix of ingredients works its way into pension cost.

What's ironic about the article: before the Board has even added the project to its agenda, it's being damned for causing a rise in long bond rates. I'll bet the Board didn't know it was that powerful.

Doesn't anyone think that if demand rises for bonds at the long end, the Treasury might find a way to start issuing 30 year bonds again?
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