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

We are pleased to see an acceleration in the approval process for ARPA/SFA applications. As of Friday, May 6, 2022, 23 applications have now been approved by the PBGC. These 23 funds are expected to receive $6.5 billion in Special Financial Assistance (SFA) grants which will be used to partially secure the promised benefits for 123,486 plan participants, while importantly restoring benefits that had been reduced through MPRA. This is a monumental accomplishment that is still only in the second inning of the legislation’s implementation.

To date, 10 funds have received the SFA payments. My question: What have the plan sponsors done with the proceeds? According to the PBGC’s interim rules, only investment-grade fixed-income securities can be used in the segregated SFA bucket. We know that a rising interest rate environment is hurting total return-seeking fixed income portfolios and the US Federal Reserve has indicated that they are not yet done addressing inflation which likely means further interest rate increases. Those plans receiving recent payments from the PBGC will not have been hurt as much as those plans that were “fortunate” to be paid earlier in the year. Have any of these plans done as we suggested and defeased their liability cash flows with bond cash flows? As a reminder, this is the only way to SECURE the promised benefits for as long as the SFA allocation lasts. Are they sitting in cash hoping that the PBGC produces less constrained investment guidelines?

At Ryan ALM, we believe that the intent of the legislation was to secure the promised benefits chronologically as far out as the allocation could go. It won’t come close to the 30-years (2051) that the legislation had hoped to achieve, but it is still found money that should be used to “guarantee” that monthly benefits will be paid as promised as far into the future as possible. Both equity and fixed income markets have declined significantly to begin 2022. Some in the industry are suggesting that it might make sense to expand the list of permissible investments to take advantage of lower valuations. But is their crystal ball any better than my very foggy one? Do they truly know how low these markets can go? We’ve seen nearly 50% equity declines twice in the last two decades. Is a decline of that magnitude possible? I hope not, but I have no way of knowing where equity (and bond) valuations will eventually settle.

As a result, don’t play the total return game. Don’t try to time these markets. Implement a strategy that truly secures those promised benefits as far out as possible. Buying time for the legacy assets to recoup current losses is critical. Using the SFA bucket for all of the plan’s liquidity needs is the intent of the ARPA legislation. We urge SFA recipients to use these grants in a way that maximizes the value of investment grade bonds. By establishing a defeased bond portfolio assets and liabilities become matched. A cash flow matching strategy mitigates interest rate risk as the defeased portfolio is matching future values (benefits) that are not interest-rate sensitive. Given the higher interest rates there is a very good chance that the SFA allocation can secure 10 or more years!

Here are the ten funds that have received the SFA payout.

I’m interested to learn what they’ve done with the SFA assets. Please share the details with me if you know. Thanks!