The ARPA legislation states the following: DETERMINATIONS ON APPLICATIONS.—A plan’s application for special financial assistance under this section that is timely filed in accordance with the regulations or guidance issued under subsection (c) shall be deemed approved unless the corporation notifies the plan within 120 days of the filing of the application that the application is incomplete, any proposed change or assumption is unreasonable, or the plan is not eligible under this section. Such notice shall specify the reasons the plan is ineligible for special financial assistance, any proposed change or assumption is unreasonable, or information is needed to complete the application. If a plan is denied assistance under this subsection, the plan may submit a revised application under this section. Any revised application for special financial assistance submitted by a plan shall be deemed approved unless the corporation notifies the plan within 120 days of the filing of the revised application that the application is incomplete, any proposed change or assumption is unreasonable, or the plan is not eligible under this section.

Given the above wording, we are now within days of having the first applications either approved or rejected. Local 138 Pension Trust Fund filed their application on August 23rd, which means that their 120 days are up on December 20th. Furthermore, “Special financial assistance issued by the corporation shall be effective on a date determined by the corporation, but no later than 1 year after a plan’s special financial assistance application is approved by the corporation or deemed approved.” There are several other plans that filed their initial application in September meaning that January is going to be a fairly busy time for the PBGC, which also has the second priority tier eligible plans filing their initial applications, too.

Unfortunately, these plans may be receiving their Special Financial Assistance (SFA) without knowledge of the PBGC’s “Final Final Rules”. As you may recall, the PBGC published its “Initial Final Rules” in July. Many plans and their asset consultants/actuaries are waiting to see if any changes will be made that would impact the size of the government grant or how the SFA assets may be invested. As of now, the SFA assets must be segregated from the plan’s legacy assets and be invested only in investment-grade bonds. There is a provision allowing for a 5% bucket of high yield bonds, but only if they are “Fallen Angels”.

For plan participants in Critical and Declining plans that were granted “relief” under MPRA, the waiting is particularly burdensome. Many of these participants have been struggling with financial hardship due to the draconian cuts to their earned benefits. The expectation was that benefits would be restored to previous levels once the legislation passed. But the waiting continues. Will the PBGC take the full 1-year to provide the grant? I sure hope not! Stay tuned.

March 2021 was an exciting time for many multiemployer pension plans and their participants with news that the American Rescue Plan Act (ARPA) had been signed into law and a “rescue” of some roughly 130 struggling multiemployer pension systems was right around the corner. But was it? Following the March passage, we all waited for the PBGC to produce their interim “final” rules, which they did in early July. Those guidelines laid out a schedule – a priority pecking order – for funds that qualify for the Special Financial Assistance (grant).

According to the PBGC’s website, there have been 20 applications for the Special Financial Assistance (SFA) filed to date, with one plan, Road Carriers Local 707 Pension Plan, submitting their first application on August 13th and a revised application on November 12th. To date, no applications have either been approved or rejected. The PBGC has 120 days from receipt of the application to either approve the SFA request or send it back to the plan for an amended application. Furthermore, we continue to wait for the PBGC’s “Final, Final Rules”.

As a reminder, roughly 100 letters were received by the PBGC following the publication of the Interim Final Rules in July. These comments covered various aspects of the legislation and represented feedback from individual participants, pension systems, actuaries, asset consultants, money managers, and more. It is anyone’s guess at this point whether the PBGC will, in fact, listen to the industry participants and amend any of their initial guidance. The key request by industry participants is to change the discount rate used to calculate the SFA grant from a PPA 3^rd segment rate + 200 basis points to the PPA three segment rates currently used. The higher discount rate required by the legislation significantly reduces the SFA grant.  I am not confident that they will further amend their guidelines, despite the fact that several leading voices in Congress are not pleased with how the legislation was interpreted.

It remains to be seen whether the goal to secure the next 30-years of benefits and expenses will be achieved, but initial analysis suggests that few if any, plans will, in fact, be able to secure the promised benefits, reinstitute cuts that had previously been made to benefits (18 plans under MPRA), and maintain sufficient assets to meet future benefits. Despite the possible shortfall, what we should be focused on is the fact that these struggling plans are getting a grant, and in some cases, a substantial one, to help improve funding, at least in the near term. Importantly, the SFA assets received should be used to secure the promised benefits as far out into the future as possible. This action will buy time for the current assets to grow unencumbered, and if necessary, allow for future amendments to this legislation to be enacted. Actions that don’t secure the promised benefits only act to increase the likelihood that assets received through ARPA will not be sufficient to meet the promises that are supposed to be secured until 2051. More to come.

The market action over the last week or so has been so crazy that many participants are likely suffering from seasickness. It has given me the feeling that I’ve been on a monstrous roller coaster of just ups and downs with no extended straightaways. How about you? There are so many inputs that need to be factored into the decision to buy or sell the US equity market, but have things really changed that significantly since Thanksgiving let alone every day? Sure, we have the new Covid-19 strain called Omicron, but as of today we really don’t know how much we will be impacted by it. Yet, with each piece of “information”, the markets rapidly adjust (overreact). Is it rational behavior? Given underlying valuations for US stocks… are holders of equities just looking for a reason to sell or are we seeing long-term investors using every opportunity to buy dips? I guess that only time will tell.

However, if your head is spinning and you aren’t sure about the near-term direction of your equity exposure I would encourage you to look to your Investment Policy Statement (IPS) for guidance. Take advantage of the tremendous gains created during the last 18 months to rebalance your pension asset allocation back to policy normal targets. It is never a bad time to take profits! Furthermore, if you believe, as we do, that US interest rates need to eventually reflect the current economic environment, you may also want to change the composition of your fixed-income allocation.

A rising US interest rate environment will create significant headwinds for your total return-oriented manager. It doesn’t take much of an interest rate move upward to create a negative annual return for your manager. In fact, at these low-interest rates, only a 30 basis point move up in rates would have a 7-year duration portfolio producing a negative annual return for your bond manager. That can happen in a week or less! Consider adopting a cash flow matching fixed income (CDI) implementation that matches asset cash flows from bonds (interest and principal) with liability cash flows. A CDI strategy will ensure that your plan’s liquidity is enhanced, interest rate risk on that portion of the portfolio is mitigated, and importantly, the investing horizon for your growth assets is extended allowing for those assets to grow unencumbered.

Adopting this approach will likely reduce the seasickness that you may be experiencing at this time. Securing the plan’s liabilities (the promise to participants) should be the primary objective, which can be accomplished at a reasonable cost and with prudent risk. Save the ups and downs for your next visit to Six Flags.

Remember… trends don’t wait for the end of the year to happen!

According to the U.S. Census Bureau, 59% of Americans have access to a 401(k) plan through their employer, but only 32% actually invest in one. Some people would find that shocking, but I don’t. We have a significant percentage of Americans living within 200% of the poverty line in an era of escalating costs for housing, insurance, education, food, etc. Funding a retirement account, although important, isn’t the first order of business for the average American when it comes to allocating their very finite disposable income.

What is worse to me is the fact that only 16% of the private sector workforce (26% if you include public employees) has exposure to a defined benefit pension plan. For many of these participants, their plans have unfortunately become frozen meaning that they are no longer accruing benefits. There is a reason why the US labor force is witnessing tremendous growth in the number of workers 65-years-old or older continuing to work and it’s not because they all aspire to want to be greeters at Walmart. For a majority of this cohort they just can’t afford not to work. Where other age segments of the U.S. labor force have remained stable or declined, this cohort is witnessing annual growth rates in excess of 5%.

The loss of a true retirement vehicle (DB Pensions) in favor of defined contribution (DC) plans is further exacerbating this trend. The uncertainty for individuals in DC plans related to when to retire, what asset allocation to use, and how much to disburse annually from one’s retirement account are incredibly difficult problems to “solve”. DC plans would be great if they were truly supplemental to a DB plan, which was their original intended use. The “great resignation” which we are experiencing today might not have been as robust had DB plans been maintained. The fact that DC participants can jump around from one job to another (provided that they offer a DC plan) is likely one very big unintended consequence brought about by the demise of DB plans. Let’s hope that as DC participants jump around that they don’t actually take premature withdrawals from their previous employer’s offering.

Private pension plans operate under different accounting standards than those in the public sector (FASB versus GASB). As a consequence, private plans are “forced” to use market discount rates (ASC 715 = AA corporate yield curve), as opposed to a static discount rate (the ROA) permitted under GASB. Why is this important? Well, for one, using a static (non-market rate) masks the plan’s true liability. Unfortunately, in this environment of near-historically low-interest rates, that means that the plan’s liabilities are likely severely understated and the funded ratio overstated. as opposed to a static discount rate (the ROA) permitted under GASB. Why is this important? Well, for one, using a static (non-market rate) masks the plan’s true liability. Unfortunately, in this environment of near-historically low-interest rates, that means that the plan’s liabilities are likely severely understated and the funded ratio overstated.

I entered the pension industry in 1981, and interest rates have basically been falling ever since. This has created a huge headwind for defined benefit pension plans, as lower rates not only make it difficult for plans to achieve their return objectives, but it makes it much more expensive to try and defease pension liabilities. As the following chart depicts, it would have cost a plan sponsor only $14.37 to defease a $1,000 30-year liability in September 1981. Today, that same liability costs a plan more than $622! Oh, my!

Oh, how we wish for the days of double-digit interest rates (at least if you are a retiree or a pension plan sponsor) where winning the retirement game would consist of nothing more than understanding your liability and managing to it (i.e. defeasance or dedication)! So simple. But, again, when forced to operate under accounting rules that provide for static measurement of a plan’s liabilities (GASB), changes in interest rates are not understood to have any impact on pension liabilities. Yet, they do, and it can be significant. Despite the decades of falling rates, there is some good news to share. U.S. interest rates have moved steadily higher since touching all-time lows last year. This provides some relief for pension funds that have been crushed by falling rates. Given the current inflationary environment (transitory or not?) one should expect that US interest rates will move higher. As a reminder, the US bond market has provided a “real return” from bonds that is >2% longer-term but currently provides investors a negative return when adjusting for inflation. This situation is not sustainable.

Unfortunately, investing in a traditional return-oriented bond program will likely generate negative returns for the foreseeable future, as the 39-year bull market in bonds likely comes to a close. How high US rates go is anyone’s guess, but it would only take about a 30 basis point move upward in rates to create a negative annual return for a portfolio with a 7-year duration. A move of that magnitude could happen in a blink of an eye. Instead of using a core fixed income manager as a performance generator, use bonds for the certainty of their cash flows to match assets versus liability cash flows. You’ll be happy that you did!

Lastly, get a more frequent view of your plan’s liabilities. We, at Ryan ALM, produce a Custom Liability Index (CLI) that uses your plan’s unique actuarially projected benefits, expenses, and contributions that are produced by your actuary to monitor monthly your plan’s liabilities using multiple discount rates. Managing pension assets to pension liabilities ensures that asset allocation decisions are being done with all of the information necessary to be successful. Not only is it okay to peek at the promises (liabilities) that have been made to your participants… it is absolutely imperative!

We recently produced a post on the investment into Bitcoin and Ethereum by a large public pension system. One of the points stressed by this plan’s CIO was the fact that “this is another tool to manage my risk,” that “has a positive expected return… and a low correlation to every other asset class.” Having observed the pattern of performance during the last couple of years, it doesn’t appear to me that Bitcoin has a low correlation to equities. In fact, the Bloomberg chart below that was published by the Daily Shot appears to highlight a meaningful correlation to US equities.

Given current valuations for the US equity market… is Bitcoin or any other cryptocurrency truly a hedge against a significant market decline? As we discussed in the previous post published on October 29th, Bitcoin has only been around for about 11 years. It is much too short of a timeframe to make any real determination as to whether or not it will be a good hedge against inflation and/or a risk diversifying “investment” during periods of market dislocation when everything seems to correlate towards 1 with the exception of long-term US Treasuries, which have exhibited true diversifying tendencies.

If you want an appropriate investment that will protect your plan during significant down markets, convert your fixed-income core portfolio to a defeased bond portfolio that matches bond cashflows versus plan benefits and expenses (i.e. liability cash flows). Whether interest rates rise or fall, the value of your bonds will move in lockstep with the plan’s liabilities. This will provide the plan with the necessary liquidity to meet all of your short-term needs while extending the investing horizon for your growth (alpha) assets to rebound from the negative impact of any market correction. This is a tried and true investment approach used for many, many decades. Who needs another new-fangled product that might not produce the desired outcome?

I want to wish you and yours a Happy Thanksgiving holiday from my family and me (sorry, Calvin Russell Kamp, our youngest grandchild who didn’t make it into this picture). May the beginning of this holiday season be truly memorable! I wish that I could thank each person individually who has played such an important and meaningful role in who I am today, but there are just so many. THANK YOU! Your support and encouragement have been amazing.

As a nation, we are blessed in so many ways, but there are many among us who are in need of assistance at this time. During this holiday season, let us ALL strive to do just a little more to help our family members, friends, neighbors, and perfect strangers overcome their unique challenges.

In 1863, President Abraham Lincoln proclaimed that a day should be set aside to reflect on all our blessings. Lincoln saw the reason for thanks despite trying times (the country was in the grip of the Civil War). Given the challenging times that many in our country have faced this year (pandemic, fires, floods, hurricanes, poverty, etc.), a day such as Thanksgiving is critically important for all of us. Let us collectively make tomorrow better for all and as good as possible!

There have been many investment strategies over the years that have incorporated some aspect of leverage, but it is rare to see a public pension system decide to use leverage as an overlay on its plan’s asset allocation. The CalPERS Board of Directors recently adopted a new policy in a 7-4 vote permitting the use of leverage at 5% of the plan’s total assets. This strategy certainly comes with risk and it is the risk that needs to be evaluated relative to the potential gains.

I find it interesting that CalPERS has only recently reduced the long-term (20-years) expected return on assets (ROA) to 6.8% from 7% earlier in the year. In a WSJ article written by Heather Gillers, the writer refers to a CalPERS presentation that highlighted the fact that the current asset mix would only provide a 6.2% return going forward, which is clearly short of the new return objective. She also states that the use of leverage “reflects the dimming prospects for safe publicly traded investments by households and institutions alike and sets a tone for increased risk-taking by pension funds around the country”. But does it? Are more plans going to use leverage to create greater exposure to certain asset classes given the “dimming prospects”? We would certainly hope not, especially given the current investing landscape in terms of valuations and fundamentals.

As a reminder, the S&P 500 declined by nearly 50% during two major market drawdowns to start this century. As a result, the funded status for pension America collapsed, while contribution expenses skyrocketed! Using leverage at 5% of CalPERS’ current asset level means that potentially $25 billion in greater exposure will be created synthetically. Can you imagine what will happen to contribution expenses should this implementation results in greater losses WHEN the market corrects? In addition to approving the use of leverage, the Board also increased exposure to both private equity and private debt, but there are no guarantees that these strategies will achieve their forecasted returns.

The primary objective in managing a defined benefit plan is to SECURE the benefits at low cost and with prudent risk. Do the additions of leverage and greater exposure to both private equity and debt accomplish this objective? I think not!

PlanSponsor magazine is reporting on the improved funded status of DB plans following strong asset growth that offset a more modest rise in plan liabilities during October. Several organizations, including Ryan ALM, have “pension monitors” that are all reflecting similar improvements. In fact, each of the studies is estimating a funded status for corporate America in the neighborhood of 94% to 95% funded. In most cases, the reduction in the funded ratio during September’s market sell-off in equities was mostly reversed during the last month.

Now what? We believe that asset allocation strategies need to be dynamic or responsive and that decisions should be based on the plan’s funded status, with better-funded plans taking risk off the table, while those less-well funded maintain more risky implementations. Importantly, being responsive does not mean tactical. Trying to “time” market moves has proven incredibly difficult for nearly all market participants. Plan sponsors and their advisors should take full advantage of the improved funding to lock in the gains. We espouse using a cash flow matching (CDI) implementation to SECURE the promised benefits and plan expenses chronologically for as far out as the allocation will allow. This enables the plan to maintain exposure to more risky assets, as they now can grow unencumbered, but they are no longer a source of liquidity.

As the plan’s funded status/ratio improves port additional “profits” (portable alpha) from the alpha or risk assets to the CDI portfolio extending the period of Retired Lives liabilities that are being defeased. This process secures more of the promised benefits and reduces the volatility in the funded status that we’ve witnessed on multiple occasions during the last couple of decades.