There are many definitions of risk, but the one that we think is appropriate for pensions is that risk is the UNCERTAINTY of achieving the objective. In the case of a defined benefit pension plan, risk is not the volatility of returns, but the uncertainty of paying the promised benefits! There is nothing more important than building a corpus that can accomplish this objective with great certainty. The promise, as you know, is the plan’s scheduled benefit payments (liabilities) and they must be measured, monitored, and managed on a regular basis.

The American Rescue Plan Act (ARPA), signed into law by President Biden in March 2021, provides a lifeline to struggling multiemployer pension plans that are designated as in Critical and Declining status. The legislation calls for the US Treasury to provide the necessary funds to the PBGC which will then send payments to these plans through grants. The grant money, aka Special Financial Assistance (SFA), “shall be such amount required for the plan to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment under this section and ending on the last day of the plan year ending in 2051, with no reduction in a participant’s or beneficiary’s accrued benefit as of such date of enactment”. In other words, secure the promised benefits for a 30-year period – no games!

How do you secure these benefits? The PBGC and the legislation have stated that the SFA should be invested in investment grade bonds as the means to “secure” these promised benefits. Why bonds? They are the only financial instrument that has a known cash flow that can be used to meet the pension plan’s obligations. Any other asset class or financial instrument will create uncertainty as to their cash flows and/or terminal value.

The PBGC presented their Interim Final Rules (IFR) on July 9th, which included a 30 day comment period. Not surprisingly, the PBGC received 101 submissions from individuals (mostly union members), unions, Congress, and investment advisory organizations. The comments covered a variety of topics identified in the legislation including how the SFA is to be calculated, the discount rate used (3rd segment (PPA) + 200 bps), eligibility, and the most common which dealt with the approved list of investments for the SFA. One firm, a leading fixed income shop providing ALM solutions articulated perfectly the goal of the legislation by stating “we need to uphold the spirit of the Butch Lewis Act (BLA). Moreover, the SFA needs to be based on “pillars of certainty”.” AMEN!

Plan participants in these struggling plans, and especially those that have already seen benefit reductions through MPRA (18 funds), want the promise that was made to them to be returned and secured for the next 30-years. They no longer want their benefits subjected to the whims of the market. I certainly don’t blame them. Everyone should take the time to read some of the horror stories on the Teamsters’ Facebook page that speak to the pain inflicted on individuals through these benefit cuts. Plan participants, through no fault of their own, have lost homes and much more, as benefits have been slashed by as much as 50% or more – horrible.

We hope that the PBGC continues to support the idea that the SFA should only be invested in investment grade bonds (IG) (with <5% in high yield as a result of downgrades after the IG bond was owned) and that those bonds be used to cash flow match SFA assets to the promised benefits and expenses (liabilities) securing the promise that has been made, while fulfilling the intent of the legislation. These plan participants have already lived through years of uncertainty. Creating an investment program that doesn’t secure the benefits would be unfair and harsh. Any investments where the cash flows are uncertain are risky assets. To repeat the intent of the ARPA legislation: the SFA needs to be based on “pillars of certainty”. Risky assets in the SFA bucket should not be allowed under ARPA.