On July 6, the Pension Benefit Guaranty Corporation, the federally chartered public corporation tasked with insuring Americans’ pension benefits, issued the final rule implementing the American Rescue Plan Act of 2021’s Special Financial Assistance program.

The moment came as a great relief for many retirement industry practitioners who had long been lobbying for the program, which is designed to provide financial relief to the most severely underfunded union pension programs across the country. But Wednesday’s developments were arguably even more gladly received by the hundreds of thousands of union pensioners and their families, who stood to lose as much as 40% of their promised pension payments.

While the program had been operating on an interim basis, sources agree that the finalization of the rule is a critical step for the program and its beneficiaries. Additionally, the final rule includes significant changes compared with the interim program, and while some of the updates are viewed favorably by the vast majority of stakeholders, others have raised questions that warrant consideration.

The Key SFA Program Changes

According to the PBGC, there are multiple important policy differences between the interim final rule and the final rule. For example, one change addresses the amount of Special Financial Assistance needed to better achieve the goal of allowing plans to remain solvent until 2051.

Initially, the interim final rule applied a single rate of return included in the statute that is higher than could be expected for SFA funds given that they were required to be invested exclusively in safe, but low-return, investment-grade fixed-income products. The final rule uses two different rates of return for SFA and non-SFA assets, so that the interest rate for SFA assets is more realistic given the investment limitations on these funds.

Another change in the final rule allows up to 33% of SFA to be invested in return-seeking assets that are projected to allow plans to receive a higher rate of return on their investments than under the interim final rule, subject to certain protections. Namely, this portion of plans’ SFA funds generally must be invested in publicly traded assets on liquid markets to ensure responsible stewardship of federal funds. These return-seeking investments include equities, equity funds and bonds. The other 67% of SFA funds must be invested in investment-grade fixed-income products.

The third major change is meant to ensure plans can confidently restore both past and future benefits and enter 2051 with rising assets. PBGC designed the final rule to ensure that no “MPRA plan”—a group of fewer than 20 multiemployer plans that remained solvent by cutting benefits pursuant to the Multiemployer Pension Reform Act of 2014—was forced to choose between restoring its benefit payments to previous levels and remaining indefinitely solvent. Instead, the final rule ensures that all MPRA plans avoid this dilemma, supporting them with enough assistance so that these plans can both restore benefits and be projected to remain indefinitely solvent going into 2051.

An Attorney’s Analysis

One experienced pension attorney to have already analyzed the regulation, at least on a preliminary basis, is Rob Projansky, who is co-chair of the employee benefits and executive compensation group at Proskauer. Projansky has experience advising both multiemployer union plans and single employer clients on all issues related to the legal compliance and tax-qualification.

In Projansky’s view, the updates made to the SFA program are, generally speaking, well considered and useful from the perspective of allowing the program to more expressly achieve the goals set out by Congress in the ARPA legislation. He told PLANSPONSOR that the program has already been functioning relatively well as a procedural matter.

Specifically, 27 applications for relief have been approved under the interim program, with $6.7 billion requested for the benefit of more than 127,500 participants. There are 13 additional pending applications already under review, seeking relief to the tune of $36.9 billion on behalf of some 404,800 participants. 

“I think these changes are being viewed positively, for the most part,” Projansky says. “Before Wednesday, there was real concern about the interim final rule potentially producing some outcomes that weren’t consistent with the intent of the ARPA. At an absolute minimum, the express goal of the statute was to provide enough money to these stressed pensions so that they could last at least through 2051. Because of some technicalities in the interim program that have now been cleared up, there were a number of plans that were, potentially, going to receive relief that was not sufficient to make it to 2051. That would not have been a good or intended outcome.”

The issue is technical, but in basic terms, one problem with the interim relief rules was that the amount of assistance for a given plan was to be calculated based on certain rates of return that investment practitioners viewed as being excessive. These rates of return were seen to be in excess of what was actually possible for a plan receiving relief, given that the regulations also significantly limited the ability of stressed pensions to invest the relief funds in return-seeking assets. This is why the final rules include different (i.e., more favorable for the plans) assumed rates of returns to be used in the calculation of relief payments.

“This was an issue that was the topic of many of the comment letters that were sent to the PBGC, and to their credit, they have taken the market’s feedback and, in our view, improved the system and brought it closer into alignment with what Congress had envisioned,” Projansky says. “This is the purpose of the notice, comment and final proposal system of regulation. The government should, and it did, consider these comments.”

Commenting on the rule change that allows pensions to invest up to a third of the relief assets in return-seeking publicly traded equities, Projansky called it a “reasonable compromise.”

“I think the PBGC recognized the need to balance the security and protection of these assets with the real need for these plans to be generating a reasonable rate of return that supports their long-term stability,” he says. “Under the final rules, plans can modestly increase their return expectations with little to no additional risk, which is what a number of commentators wanted. The PBGC had said previously that it recognized that it had taken a very conservative position regarding the investment of SFA funds, and that the statute indeed gave more room than that.”

Projansky says another technical but important change impacts those plans that had already enacted a MPRA benefits reduction. In basic terms, under the interim rules, certain plans that had already enacted MPRA-authorized reductions might actually be in a better position if it maintained the benefit cuts rather than restored them via the interim relief program. This is because the interim program rules only gave plans enough to keep them solvent through 2051 whereas MPRA would have kept them insolvent indefinitely.

“So, certain plans with suspensions already in place were put in the unenviable position of potentially having to reject the new source of support in order to keep their plan solvent for longer,” Projansky says. “This conflict was the subject of a lot of comments, as well, and the PBGC has made some important changes to solve this issue.”

Points of Concern

Russell Kamp, managing director at Ryan ALM, has more questions and concerns about the finalized framework.

For context, Ryan ALM’s stated mission is to solve liability-driven problems faced by pensions and other institutional investors through the provision of “low-cost, low-risk solutions.” Kamp himself was on the team of government and industry professionals that drafted the Butch Lewis Act, which was used as the legislative framework for the relief program.

Kamp says the most important development is that all 18 MPRA plans that “reconfigured” benefits will be made whole, enabling pension funds to restore previous levels of benefits without driving these plans back into insolvency.

“That is great news for all of the participants in those plans and the highlight of this announcement,” Kamp says. “The other two areas addressed in this release are the return on assets/discount rates and the permissible investments. With regard to the discount rate, the release states that there will now be two ROAs, with one for the SFA and one for the non-SFA assets.”

Kamp says this framework, from his point of view, is a head-scratcher.

“We don’t need two ROAs,” he says. “We need [more generous] discount rates! We need a different discount rate which determines the size of the Special Financial Assistance grant. It doesn’t matter what the SFA assets earn, as they should be used to defease and secure the promised benefits.”

Kamp says he is “really disappointed” to see that the PBGC is expanding the potential investments for SFA funds beyond bonds.

“If 2022 has shown us anything, it is that markets can go down and go down severely,” he warns. “How does one secure the promised benefits to 2051 by allowing equities that can’t defease liabilities? The sequencing of cash flows and returns is critically important to this process. Yes, equities will outperform bonds roughly 80% of the time over 10-year periods, but what happens if the U.S. falls into either stagflation or recession in the near term that dramatically reduces equity valuations? There won’t be enough left in the SFA bucket to meet the 2051 promises. Permitting only 33% is better than 100%, but they should have kept the original mandate.”

Kamp says he fears that the PGGC has overcomplicated these matters.

“All they had to do was lower the discount rate for determining the SFA grant from the current ‘third segment plus 200 bps’ rule to using all three segments under the Pension Protection Act, with no additional hurdle,” Kamp says. “And, they must ensure that the promised benefits are met by mandating that asset cash flows in the SFA be used to defease liability cash flows, which would allow for a more risky asset allocation in the legacy asset bucket to meet future liabilities beyond 2051. These are three easy steps to securing the benefits, while keeping these plans viable for current employees and those that will join in the years to come.”