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PBGC Approves First Special Financial Assistance Funds

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The Pension Benefit Guaranty Corporation (PBGC) has approved the first multiemployer plan application for special financial assistance, from a pension plan that covers transportation workers, under the Special Financial Assistance (SFA) program that was created by the American Rescue Plan Act (ARPA) earlier this year.

The approved application is from the Local 138 Pension Plan based in Baldwin, N.Y., which covers 1,723 participants working in transportation. The pension plan will receive $112.6 million in special financial assistance, including interest to the expected date of payment to the plan.

“PBGC’s approval of the first application for special financial assistance is a major milestone in implementing the American Rescue Plan Act,” says PBGC Director Gordon Hartogensis. “The SFA program is estimated to protect the benefits of 3 million people in over 250 multiemployer pension plans that are severely underfunded. This is a significant advancement of PBGC’s mission to provide retirement security for America’s workers, retirees and their families.”

Without the special financial assistance, the pension, which was expected to run out of money in 2022, would have been forced to reduce participants’ benefits to the PBGC guarantee levels upon plan insolvency. This would have reduced benefits roughly 20% below the benefits payable under the plan’s terms. The special financial assistance funds will allow the plan to continue making benefit payments without reduction for payees and to pay plan expenses.

“Today more than 1,700 workers, retirees and their families will go to sleep easier knowing the secure retirement they were promised will exist for many years to come,” says U.S. Secretary of Labor Marty Walsh, who also is chair of the PBGC board of directors.

ARPA provides an avenue for multiemployer plans that are in critical or declining status and at risk of running out of money to receive lump-sum funds to make benefit payments three decades out, or until 2051. The bill approved $1.9 trillion in total for coronavirus relief, earlier this year and included provisions aimed to assist both single-employer defined benefit (DB) plans and multiemployer plans.

The PBGC issued an interim final rule earlier this year that detailed the requirements for the Special Financial Assistance program for multiemployer plans. Plans are required to use the money to make benefit payments and pay plan expenses. 

Plans that receive special funding assistance must monitor the money received and the earnings on those funds separately from other funds. PBGC has also detailed restrictions and conditions on the amounts received, which include the interest rate assumption to be used in calculating a plan’s benefit obligations to be considered when determining the amount of assistance, as well as how SFA assets can be invested.

The agency is accepting applications ahead of its final rule being published and has said any changes will not reduce the benefits that a plan may receive. Stakeholders have expressed concerns that permissible investments for the funds received will not earn the rate used for calculation of assistance payments. The concern is that, at that rate, the SFA will run out of money earlier than the 30 years it is intended to assist plans paying out promised benefits.

Shivin Kwatra, head of liability-driven investing (LDI) portfolio management at Insight Investment, says PBGC made it clear that the rate plans will need to use is the lesser of the third segment rate plus 2.5 basis points (bps), which is roughly 5.5%, or the interest rate the plan used in its Form 5500 filing with the Department of Labor (DOL).

“We were hoping for better alignment with market rates, but that’s not the direction regulators wanted to take,” Kwatra says.

PBGC said that it was only allowing only investment-grade bonds as permissible investments for the SFA payments, under the interim final rule.

Some stakeholders that have commented on the interim final rule, including human resources (HR) consulting firm Segal Marco Advisors, have expressed concerns that under the existing investment restrictions, plans won’t be able to get enough assistance to reach a 5.5% return. 

“Even a high-yield bond today is returning around 3.8%, and that isn’t even contemplated at some durations,” says Sue Crotty, senior vice president and multiemployer practice leader at Segal Marco Advisors. “Investment-grade bonds return around 2%, and there’s no leverage on that, so it’s a problem.”