To date, the PBGC has approved the Special Financial Assistance (SFA) for 4 plans totaling just over $1 billion in grant money. The largest of these allocations was to Local 707 (1/19/22) which will receive $812.3 million. It remains the case that only Local 138 has received their payment. I guess that isn’t too problematic since we still haven’t been informed by the PBGC regarding their Final, Final Rules pertaining to the legislation’s implementation. As you may recall, we got the Interim Final Rules last July just before plans in Group 1 were permitted to file an application for the SFA.

Presently, any SFA grant money received must remain segregated from the plan’s legacy assets and they must be invested in investment-grade (IG) bonds. The intent of the legislation was to provide funds to SECURE the promised benefits (and expenses). Many industry practitioners have been prodding the PBGC to expand the investible universe to include other assets (and asset classes). We have cautioned that any movement away from a defeased portfolio using bond cash flows to match and fund pension liabilities opens the plan to greater volatility and potentially less security. Based on the current rules, most plans aren’t going to be able to secure more than 8-10 years of benefits. Why risk shortening this timeframe even more.

One need only look at the beginning of 2022 to be reminded that risk assets don’t only rise in value. The S&P 500 is off -9.2% YTD, while the R2000 is down -14%, while NASDAQ has fallen nearly -15%. The sequencing of returns is a critical element in a plan’s ability to meet its future obligations. It would have been a travesty had any one of these plans received their SFA only to have it decline by >-10% out of the gate after investing in assets other than IG bonds. Furthermore, who is to say that equity markets can’t correct more from these levels. We’ve certainly witnessed far greater declines in the past.

Oh, and by the way, I may be discussing the implementation of the SFA proceeds, but the same can be said about POB proceeds. This recent market action following the issuance of more POB $ since 2003 is why there are critics of POBs. We believe that both SFA and POB assets should be used to defease a plan’s liabilities chronologically as far out as the allocation will permit. No games! Secure the promises that have been made to your plan participants. Allow yourself and them to sleep well at night.