PBGC Issues FAQ on Acceptable SFA Investments

The Pension Benefit Guaranty Corporation last week clarified in an FAQ what investments qualify as “return seeking assets” and “investment grade fixed income” for pension funds investing money received from the Special Financial Assistance fund.

Multiemployer plans receiving Special Financial Assistance under the American Rescue Plan must invest all of the money they receive from the PBGC into IGFI investments if they applied under the interim rule issued in July 2021. If they applied under the final rule, issued in July 2022, they can invest up to 33% in RSAs, and the remaining 67% must be in IGFI.

Though the PBGC wrote in the FAQ that it believes “the meaning of these terms is well understood by sophisticated investors,” they acknowledged some confusion among pension managers.

“Investment grade” is defined in Section 4262.14 of the SFA regulations as “securities for which the issuer (or obligor) has at least adequate capacity to meet the financial commitments under the security for the projected life of the asset or exposure,” according to the FAQ. Credit ratings from credit agencies cannot be used in this determination under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Some examples of IGFI investments include securities issued by the U.S. government, investment-grade municipal bonds, money market funds and cash or cash equivalents. Debt which pays a fixed amount or rate, is denominated in U.S. dollars, originates from an SEC-registered issuer and meets all investment grade criteria, also qualifies.

Mutual funds, exchange-traded funds and collective funds can be vehicles for IGFI, depending on their composition.

The PBGC wrote that if an ETF or mutual fund abides “by an investment policy that restricts investment predominantly to permissible IGFI securities,” it would qualify as IGFI and “generally, the types of investment grade securities included in a typical aggregate U.S. bond index fund are permissible IGFI securities, except fixed-to-float securities or those resold in reliance on the SEC’s Rule 144A,” which defines certain qualified investors for private placements.

As for permissible RSAs, the PBGC explained that these investments typically include common stock registered with the SEC and offered on a U.S. exchange. This can include foreign stock and real estate investment trusts.

The PBGC also offered several examples of investments that are not permissible as return-seeking assets, including stocks traded over the counter, stocks traded on foreign exchanges, funds invested in foreign markets, high-yield bonds and alternative investments—including private credit and “direct real estate or hedge funds and investments with or that create leverage.”

The PBGC also said it does not provide “upfront advice” or pre-approval of an investment strategy or asset class. Certain investments may be found non-compliant in an audit, though the PBGC did not elaborate.