PBGC Issues Final Rule for Shutdown Benefits

May 12, 2014 (PLANSPONSOR.com) – The Pension Benefit Guaranty Corporation (PBGC) has issued a final rule about the phase-in of guaranteed “unpredictable contingent event benefits” (UCEBs).

The final rule keeps in place provisions of the proposed rule issued by the PBGC in March 2011 (see “PBGC Proposes Guidance on Limitations on Guaranteed Benefits”). The agency explains that UCEBs are benefits or benefit increases that become payable solely by reason of the occurrence of a UCE such as a plant shutdown. UCEBs typically provide a full pension, without any reduction for age, starting well before an unreduced pension would otherwise be payable.

The events most commonly giving rise to UCEBs are events relating to full or partial plant shutdowns or other reductions in force. UCEBs, which are frequently provided in pension plans in various industries such as the steel and automobile industries, are payable with respect to full or partial plant shutdowns as well as shutdowns of different kinds of facilities, such as administrative offices, warehouses, retail operations, etc. UCEBs are also payable, in some cases, with respect to layoffs and other work force reductions.

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The final regulation incorporates the definition of UCEB under Section 206(g)(1)(C) of the Employee Retirement Income Security Act (ERISA) and Treas. Reg. § 1.436–1(j)(9). It also provides that the guarantee of a UCEB is phased in from the latest of the date the benefit provision is adopted, the date the benefit is effective, or the date the UCE that makes the benefit payable occurs.

The final rule includes eight examples that show how the UCEB phase-in rules apply in the following situations:

  • Shutdown that occurs later than the announced shutdown date,
  • Sequential permanent layoffs,
  • Skeleton shutdown crews,
  • Permanent layoff benefit for which the participant qualifies shortly before the sponsor enters bankruptcy,
  • Employer declaration during a layoff that return to work is unlikely,
  • Shutdown benefit with age requirement that can be met after the shutdown,
  • Retroactive UCEB, and
  • Removal of IRC Section 436 restriction.

Because shutdowns and similar situations are fact-specific, PBGC says it continues to believe a facts-and-circumstances approach is the best way to implement the statute. However, PBGC agrees with the one commenter to its proposed regulation that determinations made by a plan, arbitrator, or court regarding the date when participants became entitled to the UCEB may be relevant. Accordingly, in response to the comment, § 4022.27(d) of the final regulation specifically includes determinations and statements by such parties as factors that will be considered, to the extent relevant, in establishing the UCE date.

PBGC said it will not, however, treat any such determinations or statements as controlling. This change does not alter the principle that PBGC is ultimately responsible for determining participants’ guaranteed benefits.

Text of the final rule is here.

Institutional Investors Increasing ETF Use

May 12, 2014 (PLANSPONSOR.com) – The use of exchange-traded funds (ETFs) by institutional investors is increasing, a study finds.

According to Greenwich Associates’ report, “ETFs: An Evolving Toolset for U.S. Institutions,” as recently as 2011, fewer than 15% of U.S. institutions were using ETFs in their portfolios. That share climbed to 18% in 2012 and reached 21% in 2013.

But, the overall averages understate the extent to which ETFs are used by certain types of investors, Greenwich Associates says. For example, 40% of U.S. endowments employ ETFs in their portfolios, as do one-third of the largest public defined benefit pension funds (those with at least $5 billion in assets under management) and roughly 25% of the largest corporate defined benefit funds.

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Although ETFs represent a small percentage of total U.S. institutional assets, some institutions have begun building sizable ETF allocations. Forty-six percent of institutional ETF users participating in the Greenwich Associates “2014 U.S. Exchange-Traded Funds Study” allocate 10% or more of their total assets to ETFs, with almost three in 10 reporting ETF allocations from 10% to 25%, and nearly one in five institutions making even greater allocations.

The current study shows institutional investors adopt ETFs for routine portfolio functions, as well as a means of obtaining long-term strategic investment exposures. In 2014, approximately 80% of participating institutions using ETFs are employing them as a means of obtaining core portfolio exposures, making it the most common ETF application among study participants. That share is up from 74% using ETFs for this task in 2013.

ETFs are gaining traction in asset classes outside equities, especially in fixed income, where changes in market structure could boost ETF use. The share of institutional users employing ETFs in domestic fixed income increased to two-thirds in 2014 from just 55% in 2013. Another 35% of institutions overall are utilizing ETFs for international fixed-income access, up from 29% last year. Forty percent of the institutional ETF users employ the vehicles in commodities, and 45% are using ETFs in real estate investment trusts or REITS.

In addition, ETF holding periods are lengthening. The share of institutions reporting average holding periods of two years or longer jumped to 49% in 2014 from 36% in 2013.

The results of the study suggest ETFs will continue to gain momentum in the coming year. Among institutions currently employing ETFs in their portfolios, nearly half say they expect to expand use in the next year. One-third of the institutions in the 2014 study expect to grow allocations by 1% to 10%, while nearly 15% plan to increase by 10% or more.

For the study, Greenwich Associates interviewed a total of 201 U.S. based institutional exchange-traded fund users in an effort to track and uncover usage trends. The respondent base of ETF users included 49 institutional funds (corporate pensions, public pensions, foundations and endowments), 32 asset managers (firms managing assets to specific investment strategies/guidelines), 31 insurance companies, 70 RIAs, and 19 investment consultants. The study was sponsored by BlackRock.

The study report may be requested from here.

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