ARPA Update as of April 22, 2022

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Another week, and a little more progress. Happy to report that the PBGC approved three additional Priority Group 1 applications last week. The pensions systems receiving approval included, the Retirement Benefit Plan of GCIU Detroit Newspaper Union 13N with Detroit Area Newspaper Publishers (that’s a mouthful), Graphic Communications Union Local 2-C Retirement Benefit Plan, and the Teamsters Local 617 Pension Plan. These plans represent just under 2,000 participants bringing the total number of participants seeing their benefits protected for some period to 17,917. Of the 13 applications that have been approved by the PBGC, seven have received the Special Financial Assistance. One plan, America’s Family Benefit Retirement Plan, withdrew its application. To date, all pension plans that have withdrawn an application have refiled.

As we nearly complete April marking the 9th month of ARPA activity, we still don’t have the Final, Final Rules that are to be provided by the PBGC. Again, I’m told that any changes to the legislation will not result in a clawback of previously paid SFA proceeds. Let us hope! While we wait, significantly rising US interest rates are impacting investment-grade bonds. As I wrote last week, plans that have already received their SFA must hold those assets in IG bonds. If the SFA proceeds had been used to defease plan liabilities, those assets are moving in lockstep with promised benefits, and that relationship is locked in as soon as the portfolio is constructed. Furthermore, the more rates rise, the lower the cost to defease future liabilities.

Plans that used bonds as total return assets, instead of liquidity assets, have suffered significant negative price returns this year. As we’ve witnessed so far in 2022, markets can suffer negative returns. If the list of permissible investments is expanded, the only guarantee is that the segregated SFA assets will have greater volatility, but no greater guarantee of success in securing benefits. I am hoping that the PBGC upholds the intent of the legislation which was to protect and preserve the promised benefits for as long as possible. They should allow for the plan’s legacy assets to be managed as aggressively as the plan would want as the SFA assets will take care of the liquidity for nearly a decade or more.

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