By: Russ Kamp, Managing Director, Ryan ALM, Inc.
Inflation isn’t as tamed as believed (or hoped) by the investment community and as a result, the US Federal Reserve won’t be “forced” to ease rates anytime soon. Let’s feign shock! Regular readers of this blog know that we’ve been proclaiming higher rates for the foreseeable future. We believe that decades of falling inflation and US interest rates combined to create an extremely unprepared and complacent investment community. Well, today’s market action should shake the cobwebs from at least some folks.
It isn’t often that US equity indexes post >-4% declines in a day, but that is exactly what transpired today, as heavy bets appeared to have been made on the August CPI posting a bigger drop than forecast. When that expectation failed to materialize those bets were unwound faster than a Usain Bolt 100-meter sprint. As of today’s close, the S&P 500 had fallen by -4.3% and the Nasdaq had tumbled by -5.2%. The impact of falling equity markets and rising interest rates are painful for DB pension plan assets, but they are crippling for those multiemployer plans that receive Special Financial Assistance (SFA) grants through the ARPA legislation and PBGC oversight.
I’ve produced more than 1,100 posts on this blog since its inception. Of those 1,100+ posts, 66 mention SFA and many of those posts highlight the Ryan ALM view on how those assets should be invested. As the ARPA legislation states, SFA assets should be used to SECURE benefits chronologically. Despite the recent update (Final Final Rules) by the PBGC granting approval for a portion (33%) to be invested in return-seeking assets (RSA), we believe that investing in RSA violates the intent of the legislation. Days like today in the US equity markets certainly validate our concerns. Because the SFA is a sinking fund (pays the bills), and because the sequencing of results is so critically important, investing in RSA within the SFA bucket is an imprudent approach.
On September 1st, I produced a post titled, “A Precious Resource – Protect It!” which once again discussed the SFA and how this once-in-a-generation “gift” to Pension America shouldn’t be squandered. I am truly concerned that most of the plans that have received the SFA in 2022 have proceeded to invest the assets in either bonds that were RSA because they weren’t used to defease pension liabilities or bonds and equities given the loosening of constraints in the PBGC’s FFR. In either case, significant losses have likely occurred which significantly impacts a plan’s ability to secure as many benefits within the SFA as possible.
The Ryan ALM crystal ball is no better than anyone else’s. We’ve just been around for a long time and have seen many market cycles. Believe it or not, even a BEAR market in bonds (the last one in 1977 that ended in 1982). We understand that investing RSA in an inflationary environment coupled with rising rates is fraught with danger. Why play that game? Pension plans receiving the SFA have the opportunity to dramatically alter the economics of their plan. They have an obligation to the plan’s participants to ensure that the promised benefits can be paid on a monthly basis. Momma is always right! There have been days like this before and there will be more days to come. An SFA portfolio shouldn’t be subjected to them.