By: Russ Kamp, Managing Director, Ryan ALM, Inc.
Last week was an incredibly busy week for the PBGC as they published the Final Final Rules (FFR) on how to implement the ARPA Pension legislation. I provided my initial feedback in this blog regarding the updated guidelines on July 6th. Ron Ryan and I are preparing a response to the PBGC regarding some of the elements that remain from the initial Interim Final Rules (IFR) and a few of the changes reflected in the FFR.
I remain concerned about the expansion of permissible investments up to 33% of the SFA assets. First and foremost, BONDS are return-seeking assets if they are not used to defease benefits and expenses. As such, 100% of the SFA assets should be considered RSA, which does not support the mission of this pension grant to SECURE the promised benefits through 2051. Why risk these grant proceeds? Defease the plan’s benefit payments. Assume risk within the legacy portfolio as the SFA assets buy time for the non-SFA assets to grow unencumbered.
As a reminder, most fixed-income assets are managed against the Bloomberg Barclays Aggregate Index. This index declined by -10.4% through June 30, 2022, as a result of rising rates in this inflationary environment. Inflation has not dissipated! Rates are likely to rise further as the Fed aggressively combats inflation. A bond’s principal will fall in a rising rate environment. A bond with a 10-year duration will lose 10% with only a 1% increase in rates. Where is the securing of pension benefits in such an environment? Again, most participants in our capital markets have not witnessed high inflation and rising rates. The last four decades have been an incredible environment for investors as rates fell to historically low levels. Those incredible bond returns from 1982 – 2021 are likely behind us.
With regard to the mundane activities of ARPA’s implementation, there were no new applications filed last week. Furthermore, there were no applications approved or rejected. Lastly, there were no payouts for the already approved SFA applications. Obviously, all of the focus was on the FFR. It is disappointing that it took one year for the FFR to be produced, especially since they have really muddied the waters with the changes in the SFA investment framework. I’ll address the 67%/33% allocation that must be maintained at least one day per year (12 months) in another post. Talk about over-complicating a process!