A Precious Resource – Protect it!

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

It isn’t often that pension plans receive a gift, but that is exactly what happened with the passage of the ARPA legislation in March 2021. The Special Financial Assistance (SFA) that is granted to eligible multiemployer plans is an incredible lifeline for many plans that were already or soon to become insolvent. That SFA “gift” should be treated as the precious resource that it is.

It is days like today, weeks like this last one, and years, like we are currently going through, that should remind everyone that markets don’t experience volatility only in one direction. Squandering any of the SFA grant in an attempt to potentially enhance the return and size of the pool is fiduciarily imprudent. I don’t mean to be on my soapbox, but I keep thinking of the 28 multiemployer plans that have already received the SFA in 2022, and I wonder just how bad the returns must be so far this year given what is transpiring in both the equity and fixed income markets.

Plan sponsors and their advisors should be looking to take risks within the legacy portfolio as those assets will benefit from the passage of time. The SFA portfolio is a sinking fund intended to be used to secure benefits (and expenses) chronologically for as long as that pool of assets lasts. The sequencing of returns is critically important. There is no mandate from the PBGC to defease the plan’s liabilities to secure those promised benefits, but there should be! The original Butch Lewis Act (BLA) had such a mandate. Local 138 Pension Trust Fund and Idaho Signatory Employers-Laborers Pension Plan were the first two recipients of the SFA grants in January 2022. I’d be very interested to know how those assets were invested. If they were only invested in investment grade bonds, as was required by the PBGC under the Interim Final Rules, those assets could be down >10% so far. That loss of principal will reduce the payment of future benefit payments, as US rates will likely continue to rise for the foreseeable future and are not likely to reverse course anytime soon.

For those plans that have only received the SFA payouts since the PBGC issued its Final Final Rules in July, a portion of the grant money (<33%) has likely been invested in equities. Both bonds and equities faced challenging markets in August. Again, the available assets to meet those promised benefits have unfortunately been reduced. As payouts are made from the SFA, losses will be more difficult to overcome as both a smaller pool of resources and less time to overcome the deficit will impact the performance of the SFA and its future growth. Don’t play games with this incredible gift. SECURE those promised benefits through cash flow matching (defeasance).

In an analysis that we just completed for an SFA recipient, we reported that we can defease and secure more than 10 years of pension liabilities through a cash flow matching strategy at a current yield in excess of 4.7%. That 10-year horizon buys plenty of time for the plan’s legacy assets to grow unencumbered. The risk of not achieving one’s objectives is dramatically reduced given a 10-year investing horizon. So, I once again ask, why take a risk with a precious resource such as the SFA grant and potentially reduce the benefit of this amazing financial gift?

4 thoughts on “A Precious Resource – Protect it!

  1. I agree with what you’re saying and I completely appreciate your constant reminders of this. Hopefully the right people running the funds will see your posts or one of these days it will sink it.

    I do wonder about this:

    “If they were only invested in investment grade bonds, as was required by the PBGC under the Interim Final Rules, those assets could be down >10% so far. That loss of principal will reduce the payment of future benefit payments, as US rates will likely continue to rise for the foreseeable future and are not likely to reverse course anytime soon.”

    My question is: Wouldn’t the bonds pay 100% at maturity?

    • If the bonds were cash flow matched to pension liabilities, they would be held to maturity and would pay out at par. IG bonds managed against the BB Aggregate Index are return-seeking and may not be held to maturity, as those strategies are active and may trade in and out of positions to adjust duration, sector exposure, quality, yield, etc.

  2. Pingback: Momma Said That There’d Be Days Like This! – Ryan ALM Blog

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