PBGC Clarifies Investment-Grade Bond Criteria for SFA Funds in FAQ

The Pension Benefit Guaranty Corporation made two updates to its Special Financial Assistance Program FAQ page regarding investment of SFA grants. The update gives examples of securities found in aggregate U.S. bond funds that qualify as investment-grade fixed-income assets and clarifies how pooled investment vehicles should be classified.

The SFA program provides grants to struggling multiemployer pension funds so they can stay solvent through 2051. PBGC regulations require that at least two-thirds of the grant money awarded be invested in “high-quality fixed-income investments.” The remaining third can be invested in “return seeking” investments, such as stocks and stock funds.

The PBGC has granted about $61.9 billion total through the SFA program.

The FAQ update stated that “funds, including mutual funds, exchange-traded funds, and collective trusts, are permissible IGFI funds if they abide by an investment policy that restricts investment predominantly to permissible IGFI securities.”

It adds that “funds that include immaterial amounts of below-investment grade bonds are permissible whether the bonds were investment grade at the time the fund purchased them or not.” These can include funds that “deviate from a broad-based index by overweighting certain portions of the index (and are therefore underweight in other portions) if the overweighting is to securities that are permissible IGFI.”

A fund fails to predominately invest in IGFI securities “if it has the potential to invest more than 20 percent of its market value in impermissible securities,” the PBGC stated in a separate, earlier FAQ, that was not part of the recent update.

In the updated FAQ, the PBGC listed categories of investments that are normally considered IGFI and would contribute to a pooled vehicle being considered IGFI: U.S. government-issued securities; investment-grade municipal bonds; cash and cash equivalents; money market funds; and other bonds that pay a fixed amount of interest, are denominated in dollars, are registered with the SEC and are rated investment grade.

The FAQ added that most “types of investment grade securities included in a typical large, aggregate U.S. bond index fund, such as the Bloomberg U.S. Aggregate Bond Index and the ICE BofA U.S. Broad Market Index, are permissible IGFI securities.”