Compliance May 4, 2023

PBGC Grants More Than $600 Million to 3 Struggling Pension Funds

The pensions are in the service, transportation and manufacturing industries.

Reported by

The Pension Benefit Guaranty Corp. on Monday provided Special Financial Assistance totaling more than $600 million to three multiemployer plans. The plans are the Western States Office and Professional Employees Pension Plan, the United Furniture Workers Pension Fund A and the Building Material Drivers Local 436 Pension Plan.

The Western States plan, based in Portland, Oregon, has 7,230 participants in the service industry. In October 2018, it cut benefits by 25% to approximately 6,000 participants under the Multiemployer Pension Reform Act of 2014. The PBGC provided $294.7 million in assistance to cover lost benefits and to keep the plan funded through 2051.

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As is often the case with plans in need of PBGC assistance, the Western States plan had a very high ratio of retirees to active participants. According to its Form 5500 filing for 2021, the plan had 472 active participants and 3,925 retirees collecting benefits.

The United Furniture Workers plan is based in Nashville, Tennessee, and has 8,434 employees in the manufacturing industry. In September 2017, the plan cut benefits to about 2,800 participants by 13%. The PBGC granted $214.6 million in assistance.

Lastly, the Drivers Local 436 plan, a Teamsters affiliate, received $95.2 million in assistance. The plan is based in Cleveland, Ohio, and has 1,461 participants. It was projected to become insolvent in 2026, when a 35% benefit cut would have been necessary.

According to its Form 5500 filing, as of January 1, 2021, the Drivers Local 436 plan had about $106 million in liabilities and $37 million in total assets.

The SFA provision of the American Rescue Plan Act allows for PBGC funding for severely underfunded multiemployer pension plans. Funds that receive assistance must monitor the interest resulting from the grant money as separate from other sources of funding. The PBGC requires that at least two-thirds of the money it provides be invested in “high-quality fixed income investments.” The Final Rule on Special Financial Assistance, issued in July 2022, states that the other third can be invested in “return-seeking investments,” such as stocks and stock funds.

Investing May 3, 2023

Siegel Says Stock Options Can Help Participants Hedge Against Inflation

Economist and investor Jeremy Siegel favors stocks, REITs and certain high-yield bonds for long-term investing.

Reported by

Jeremy Siegel, professor emeritus of finance at the Wharton School of the University of Pennsylvania, who spoke Wednesday at a conference hosted by the CFA Institute about one hour before the Federal Reserve Open Market Committee announced its decision to again raise interest rates, expressed sharp disapproval of Chairman Jerome Powell’s leadership.

The Fed raised the federal funds rate by another 25 basis points and reiterated its commitment to reducing inflation to 2%. The decision was unanimous and is the 10th such raise since March 2022.

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Siegel said the Fed has already raised rates too high and that he thinks the latest hike is also regrettable: “The Fed is tightening way too much, given that inflation has come down.”

Although he said he expects Wednesday’s to be the last rate increase, the series of rate hikes is not justified by admittedly high inflation and will likely lead to a mild recession. When Siegel said, “I am not thrilled with Chairman Powell,” he drew applause from the CFA audience.

Siegel then pivoted to what investors can do while dealing with high inflation and the Fed’s monetary policy. Above all else, Siegel emphasized the superiority of stocks as a long-term investment.

“Stocks are the perfect hedge against inflation,” Siegel explained. Stocks have consistently outperformed bonds, gold and other assets over a long time horizon, he said.

Despite Siegel’s confidence, the major stock indexes were largely down between 0.50% and 0.80% following the Fed’s announcement.

Siegel later acknowledged that equity real estate investment trusts and some high-yield bonds can come close to stocks in terms of long-term returns and said the only bonds he has ever invested in for the long term came in a high-yield junk bond fund managed by Vanguard, though he did not specify the precise fund.

As a final thought, Siegel shared his views on the ongoing standoff over the federal debt ceiling. He said “there will not be a default on the debt” and compared it to a “game of chicken.” Though when playing chicken, it is not unheard of for the cars to smash together if neither swerves out of the way.

Perhaps a bit nihilistically, Siegel also said that if the federal government comes close to a default, it will be “a good time to buy” stocks and treasuries especially, since other investors will be selling in anticipation of a crisis that ultimately does not take place.

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