The passage of the American Rescue Plan Act (ARPA) earlier this year was wonderful news for struggling multiemployer pension systems. For those Tier one plans eligible to file for Special Financial Assistance (SFA) immediately (July 2021) it was the life preserver needed to keep these plans afloat. For Tier 2 filers (beginning December 27, 2021) it is an opportunity to reinstate previously cut benefits under MPRA making whole participants who have struggled under the unfair economic burden brought on by sometimes massive reductions. Given these developments, I hesitate to once again raise concerns about the legislation and possible PBGC rule changes.

The PBGC was tasked with providing ARPA implementation rules. They presented their “Interim Final Rules” this past July. Those rules were met with a lot of industry blowback, especially as it related to the discount rate used to value plan liabilities, potential investments in the segregated SFA bucket, and the calculations used to determine the possible SFA allocation in the first place. Both Ron Ryan and I submitted comments to the PBGC during the feedback period. I won’t rehash those now. That said, I am very concerned about one possible revision that I am hearing may be included in the PBGC’s “Final Final Rules” that might be released as soon as January 2022.

The original intent of this legislation was to provide funding that would “ensure” benefits and expenses were paid for 30-years or until the end of the plan year 2051. Based on how the SFA is to be determined that “goal” is nothing more than a pipe dream. Based on our analysis and those of other industry experts, we believe that most plans won’t receive enough SFA funding to be able to protect benefits beyond 8-10 years. The disconnect is startling!

Currently, the SFA assets are only permitted to be invested in investment-grade (IG) bonds, with a maximum of 5% held in high yield securities, but only if they were originally purchased as IG bonds. There is also a provision within the legislation that allows for the PBGC to determine potentially other investments as being acceptable, too. In their Interim Rules, they did not expand the list of permitted investments, but we are hearing rumors that the January Final Rules may include an expanded list. This is where I am most concerned.

If the original intent of the legislation was to “SECURE” the promised benefits, how does expanding the list of acceptable investments to include equities (my guess) do anything to secure those promises? The PBGC was right in limiting the original list of permissible investments to only IG bonds. Bonds are the only asset with a known terminal value and cash flows that have been used for decades to defease liabilities (lottery systems, insurance companies, and yes, pension plans). The SFA assets should be used to defease the plan’s liabilities as far out as possible. This is a “sleep well at night” strategy that ensures those promises will be met for as long as the SFA assets exist. While the segregated SFA portfolio is paying benefits (and expenses), the legacy assets and future contributions can grow unencumbered. It is in this portfolio (alpha/growth) where the list of acceptable investments should be as broad as possible.

One can debate all they want about the current valuations for US equities, but the fact remains that equities are much more volatile than bonds. Given that the SFA assets are likely much smaller than needed to ensure 30-years of benefit payments, why does a plan, their consultant/actuary, or the PBGC want to inject more risk into the process potentially reducing further the timeframe to meet benefits? One doesn’t have to go back too far in history to know that we’ve experienced two shocking market corrections in the last two decades. Do we really want 8-10 years of “guaranteed” benefits to become 4-5 years or worse?

If the PBGC does anything to “improve” the Interim Rules they should address the discount rate embedded in the legislation. It is the use of the 3rd segment (PPA) plus 200 basis points that is having the greatest negative impact on the amount of the SFA to be received by these troubled plans. The use of an appropriate discount rate of all three segments under PPA with no added kicker would dramatically increase the size of the SFA and guarantee many more years of benefit coverage. But we know that the cost of this legislation (roughly $95 billion) is a source of “great concern” despite the government spending trillions of $s on other projects. Expanding the list of permissible investments does very little to secure more benefits, but it would dramatically increase the uncertainty regarding how many years of benefits are actually protected. More to come!