Now How Long Will It Take?

As we recently reported, Local 138’s ARPA application reaches its 120th day under review at the PBGC today (December 21st). No news is good news with regard to this Special Financial Assistance (SFA) application, as the PBGC is required to notify a plan only if the application has been rejected for one of a plethora of reasons. The fact that 138 has not been notified suggests to me that their application has been accepted despite the fact that the PBGC’s website still says that the application is under review. Perhaps will see an update later today.

Now the waiting to receive the SFA funds begins. Unfortunately, I sometimes feel as if the multiemployer pension system is playing a massive game of red light, green light that you and I played as kids, except that there is too much at stake for the participants in these plans. According to the ARPA legislation, the “Special financial assistance issued by the corporation shall be effective on a date determined by the corporation, but no later than 1-year after a plan’s special financial assistance application is approved by the corporation or deemed approved.” Why one year? It doesn’t seem possible that it would take one year from the time that the SFA application has been approved to the point that a single lump-sum payment can be wired to the plan’s custodian.

Here’s my greatest concern: markets (equity) are near or at historic levels. A traditional asset allocation will have significant exposure to equities and equity-like asset classes. Negative cash flow from these Critical and Declining pension systems on a monthly basis is difficult to manage. Not getting the SFA proceeds for a year opens these plans to unnecessary liquidity risk. Why? If SFA assets were received promptly the proceeds would be invested in investment-grade bonds per the legislation’s mandate and the SFA assets would be used to meet the monthly benefit payments. We would prefer that the SFA assets be used to defease (cash flow match or CDI) the current Retired Lives Liability as far out as possible (likely around 8-10 years depending on the plan). This action ensures that the plan has the liquidity necessary to meet those monthly flows without having to force liquidity from the equity managers that might be under stress as the markets turn. Furthermore, should the US equity markets experience another major decline, the availability of SFA assets to meet benefit payments means that the investment horizon has been extended for equities allowing for them to grow unencumbered while allowing for recovery of those potential losses.

There are enough documented issues with regard to this ARPA rescue plan. Imposing unnecessary delays on pension plans that have gotten approval for their SFA applications is just further salt in the wounds inflicted by previous failed attempts at improving the soundness of these struggling multiemployer systems. Get the SFA money to these plans ASAP. They can then secure the promised benefits for at least some period of time despite the fact that the 30-year “guarantee” is nowhere close to being a reality.