By: Russ Kamp, Managing Director, Ryan ALM, Inc.
The PBGC’s Final Final Rules have not been released, but I’ve been sent a “fact sheet” highlighting three areas of “improvement”. First, and most importantly, all 18 MPRA plans that “reconfigured” benefits will be made whole enabling pension funds to restore previous levels of benefits without driving these plans back into insolvency. That is great news for all of the participants in those plans and the highlight of this announcement.
The other two areas addressed in this release are the ROA/discount rate and the permissible investments. With regard to the discount rate, the release states that there will now be two ROAs, with one for the SFA and one for the non-SFA assets. Huh? We don’t need two ROAs… we need discount rates! We need a different discount rate (currently = PPA’s 3rd segment + 200 bps) which determines the size of the SFA grant. It doesn’t matter what the SFA assets earn as they should be used to defease and secure the promised benefits.
With regard to permissible assets in the SFA bucket, I’m really disappointed to see that they are expanding the potential investments beyond bonds. If 2022 has shown us anything, it is that markets can go down and go down severely. How does one secure the promised benefits to 2051 by allowing equities (uncertain cash flows) that can’t defease liabilities? The sequencing of cash flows and returns is critically important to this process. Yes, equities will outperform bonds roughly 80% of the time over 10-year periods, but what happens if the US falls into either stagflation or recession in the near term that dramatically reduces equity valuations? There won’t be enough left in the SFA bucket to meet the 2051 promises! Permitting only 33% is better than 100%, but they should have kept the original mandate.
Why must they overcomplicate these matters? All they had to do was lower the discount rate for determining the SFA grant from the current 3rd segment plus 200 bps to using all three segments under PPA with no additional hurdle and ensure that the promised benefits are met by mandating that asset cash flows in the SFA be used to defease liability cash flows, which would allow for a more risky asset allocation in the legacy asset bucket to meet future liabilities beyond 2051. These are three easy steps to securing the benefits, while keeping these plans viable for current employees and those that will join in the years to come. UGH!!!