ARPA Update as of August 29, 2022

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

We are pleased to provide our weekly update of plan activity related to the ARPA legislation. There were four developments last week, with three plans providing supplemental information to their applications following the PBGC’s release of the Final Final Rules. Those three plans were each a Priority Group 1 member including Local 365 UAW Pension Trust Fund, Management-Labor Pension Fund Local 1730 ILA Local, and 408 International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America Pension Plan. These three small funds were seeking to supplement their original SFA grants that totaled <$30 million for the roughly 5,200 plan participants.

Filing an initial application was Priority Group 2 member, International Association of Machinists Motor City Pension Plan, which seeks $64.8 million in SFA for their 953 plan participants. The PBGC has until 12/24/22 to render a decision on the application. Acceptance by the PBGC would provide a nice Christmas present under a lot of folks’ trees this year.

To date, 28 plans have received the SFA, with only one accepted application to be paid which is the Pension Plan of the Printers League – Graphic Communications International Union Local 119B, New York Pension Fund. That plan is expected to receive $90.6 million for its 1213 participants. It would be interesting to see how the 28 plans have invested the SFA proceeds to date. I imagine that several plans were keeping the assets in short-term securities while awaiting the PBGC’s final rules, but now that they’ve been released, investing activity should pick up. Given the Fed’s pronouncements last week, it continues to be an incredibly difficult environment for all asset classes.

We highly recommend that plans use fixed income cash flows (principal and income) to fund and cash flow match liability cash flows. Such a strategy will eliminate interest rate risk, as future values are not interest rate sensitive. Interest rate risk is by far the most prominent risk in today’s markets, and likely will be for quite some time as the Fed tries to tackle inflation. As a reminder, a fixed income strategy that isn’t used to defease pension liabilities is a total return-seeking strategy, which should be reserved for the 33% RSA bucket and not the 67% in investment-grade bonds.

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