Responses have started to come in to the Pension Benefit Guaranty Corporation (PBGC)’s interim final rule on special financial assistance (SFA) payments for multiemployer plans under the American Rescue Plan Act (ARPA).
ARPA allows multiemployer plans that are in critical and declining status to apply for a lump sum of money for benefit payments and plan expenses through the next 30 years, or until 2051.
The PBGC issued its interim final rule last month, which lays out requirements for SFA applications, as well as restrictions and conditions on the amounts received.
In the regulation, the agency sets forth what information a plan is required to file to demonstrate eligibility for SFA and the amount of SFA needed by the plan. It identifies which plans will be given priority to file applications before March 11, 2023, and provides for a processing system, which will accommodate the filing and review of many applications in a limited amount of time. It also establishes permissible investments for SFA funds and restrictions and conditions on plans that receive SFA.
Soon after the interim final rule was released, retirement industry sources expressed concern about the potential for inequity in SFA payments to different plans, and about the ability for multiemployer plans to make the funds last with the investments permitted by the PBGC.
The ERISA [Employee Retirement Income Security Act] Industry Committee (ERIC) issued its recommendations to the PBGC, also expressing some concern and highlighting three main areas to address in its suggestion. ERIC asked PBGC to consider removing investment restrictions on SFA, provide a more flexible test for requiring documentation and information regarding contributions, and adopt a reasonableness standard for documentation.
“The primary area of concern is the restriction on the investment of the special financial assistance,” Aliya Robinson, senior vice president of retirement and compensation policy at ERIC, tells PLANSPONSOR.
Under the investment provision in the interim rule, PBGC restricts a plan’s investment of SFA to investment-grade corporate bonds, which are currently returning 3% less than the 5.5% discount rate the PBGC intends to use. ERIC said this could incentivize plans to take on additional risk in investments to remain solvent until 2051.
“The PBGC is using a rate [for calculating plans’ needs] that is higher at about 200 basis points [bps] than what these assets will earn. They are over projecting because plans are only allowed to invest in assets that are 200 basis points lower, and so they would need more money to make up the difference,” Robinson adds.
ERIC recommended PBGC amend the interim rule to permit plans to invest SFA with the objective of earning the discount rate used to calculate the amount of financial assistance provided. In its comments, ERIC said this will not only increase the benefit of the financial assistance, but also reduce the incentive for plans to take on additional risk in investing their other assets.
The American Academy of Actuaries expressed the same concern in its comments on the final rule, arguing that the interest rate provision in the interim final rule introduces a “negative arbitrage” for many plans eligible to receive SFA. Because PBGC would require SFA assets to be invested in investment-grade bonds with annual yields at about 2.0% to 2.5%, most plans that cannot reach their benchmark would become insolvent by 2051, the academy wrote in its letter.
“Due to current, low yields on investment-grade bonds, many plans may not be able to attain a total return on plan assets of at least 5.5%,” the institution continued. “If investment returns on plan assets fall short of the interest rate used to determine the amount of SFA, the plan would fall short of its intended funding target. … In fact, many plans that receive SFA—especially those that are already insolvent or close to insolvency—are likely to exhaust their assets six to 12 years before 2051.”
The Academy of Actuaries discussed possible remedies, including the possibility of a “bifurcated” interest rate assumption for determining the amount of SFA. Under this approach, it says, a deterministic projection would be used to calculate the amount of SFA required to enable the plan to remain solvent and pay benefits, without reduction, through 2051.
The academy says the projection would be based on two interest rate assumptions: for SFA assets, an interest rate based on current yields on investment grade bonds; and for non-SFA assets and future contributions, the interest rate assumption as described under Section 4262(e)(2) of ARPA—currently, the 5.5% mentioned in responses to the PBGC rule.
Similar concerns were expressed in comments from the National Coordinating Committee for Multiemployer Plans (NCCMP) and Albertsons Cos., one of many food retailers that withdrew from the troubled UFCW International Union-Industry Pension Fund.
« Parents in Great Need of Education and Help for Student Loans