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Commentary: One size will not fit all when investing PBGC financial assistance

About a year ago, I wrote in this space about a singular challenge facing the PBGC along with plan sponsors, consultants and asset managers. Each of those groups was trying to decipher Congress’ intent in its decision to provide billions of dollars in Special Financial Assistance to seriously underfunded multiemployer plans. Everyone faced the same problem: how to make assets that yielded about 2% meet liabilities that were calculated with a discount rate of 5.5%.

The amount of assistance was to be calculated using a discount rate (approximately 5.5%) but, under the PBGC’s interim final rule, that amount would have been required to be invested entirely in investment-grade fixed-income securities (then yielding 2% or so). The PBGC asked for comments on its interim final rule, and sure got them.

Stakeholders argued variously and vigorously for a permissible allocation to “return-seeking assets.” To its credit, the PBGC and the Biden administration listened and made changes that are now expressed in the final rule. The most significant change is that up to 33% of the SFA funds may be invested in return-seeking assets (essentially, public equities).

Paradoxically, the solution to the problem that faced all stakeholders has highlighted a different reality — the reality that, in fact, there is not one solution that fits all situations. Each trustee board will have to answer certain fiduciary-level questions before determining how it will allocate SFA assets.

Some plans have such low levels of funding that, as a practical matter, the SFA will be the entirety of the plan’s assets. Thus, in those cases, the greatest allocation to return-seeking assets will be 33%.

Other plans will have significant legacy assets, which are permitted to be invested as the trustees see fit. So, for example, if a plan is currently 40% funded (e.g., $400 million of assets for $1 billion of liabilities), then it might receive $600 million in SFA. Then $200 million of that SFA could be invested in equities, while the total legacy assets could also be invested in equities. Then the overall asset allocation would be 60/40 equities/fixed income.

The legislation that created the SFA only requires that the PBGC provide sufficient funds for the plan to meet its liabilities through the year 2051. Should trustees adopt conservative asset allocations to attempt to ensure that the plan remains solvent until 2051? Or should they take marginally increased risk in order to increase the potential that the plan can continue (perhaps indefinitely) beyond 2051? And how will younger participants view their post-2051 security?

There is one simple question facing all eligible plans — what to do with the SFA. But it is a problem that will be solved differently depending on the plan’s demographics, current funded status and philosophy.

The PBGC has provided extensive guidance to address many stakeholder questions. The questions above, however, cannot be answered by the PBGC, because they were not addressed in the legislation. Trustees whose plan demographics are young will view the challenges differently than trustees whose demographics are older. Relatively better-funded plans will think differently than worse-funded plans. And predictions about Congressional actions 30 years in the future are surely unreliable.

So, while the PBGC did well to solve the math problem that affected everyone, now consultants and investment managers must address the needs of each plan on a case-by-case basis.

Charles E.F. Millard is a senior adviser for Amundi US, based in New York. He is the former director of the U.S. Pension Benefit Guaranty Corp. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.