To date, the Pension Benefit Guaranty Corporation has awarded approximately $53.4 billion to struggling multiemployer plans that have either cut or are considering cutting benefits to their approximately 767,000 participants.
The money was made available through the Special Financial Assistance Program created by the American Rescue Plan Act of 2021. A pension fund may be eligible if it is insolvent, in critical and declining status, or has imposed a reduction in benefits under the Pension Reform Act of many employers since 2014.
The PBGC requires that recipient pension funds invest at least two-thirds of the grants in investment-grade fixed-income securities, but the remaining third may be invested in “return-seeking assets,” although plans are not required to invest anything in RSAs.
The distinction between the two categories was recently clarified by the PBGC. IGFIs can include government bonds, investment grade debt and money market funds. RSAs include US common stocks and funds registered with the Securities and Exchange Commission.
Determining the “big increase” asset allocation
Colyar Pridgen, lead pension solutions strategist at Capital Group, says recipient plans typically take one of two approaches to investing SFA funds. The first is to view the SFA’s funds as “siloed a bit”, keeping their legacy assets invested as before and deciding how best to maximize the SFA’s funds. The other approach is to seek the “best overall solution” by pooling all plan assets into one strategy and then checking to make sure the strategy complies with the PBGC’s regulations for SFA funds.
Pridgen explains that because the PBGC’s funds are statutorily limited, it may be “wise to inject some risk into non-SFA assets.” Some plans have taken greater equity and illiquidity risks with their legacy assets or invested in the more “exotic areas of fixed income,” such as private or high-yield debt.
While that might sound reasonable, Pridgen says that “in practice we’re seeing some of that, but not as much as one might expect.” She says this is because “it’s a big contribution to invest those SFA assets and rethink their whole asset allocation.”
It is also difficult for pension trustees to explore the trade-offs between long and short investments and the needs of their older and younger participants. They are therefore reluctant to make significant changes in risk tolerance or overall strategy, even if SFA grants superficially appear to enable them to do just that.
Appetite to revisit the old investment strategy varies from plan to plan, and “there hasn’t been any convergence” on how SFA money is invested, says Pridgen, saying SFA investment strategies are “quite plan-specific “.
The conservative approach continues
Michael Scott, executive director of the National Coordinating Committee for Multiemployer Plans, agrees that investment strategies are largely considered on a case-by-case basis, but says pension funds receiving SFAs have acted quite conservatively.
The interim rules governing SFA funding used interest rate assumptions that made the use of IGFI assets an unfeasible investment strategy to maintain long-term solvency. To make matters worse, under these rules SFA recipients could only invest in IGFIs.
The final rules adopted by the PBGC in July 2022 used a lower discount rate assumption and were therefore more favorable to an IGFI-focused strategy, Scott says. In addition, higher interest rates have made IGFI even more attractive to pension plans. The combination of these market and regulatory factors has caused pension funds to invest their SFA money conservatively, and most plans are not filling their RSA “bucket”, according to Scott.
Central States: Too early to tell
As for legacy assets, Scott explains that many plans were in such bad shape that they had few legacy assets to speak of. One plan that had significant legacy assets, the Central States plan, historically followed a conservative strategy, Scott says, and even after receiving SFA funding, it continued to pursue an IGFI-managed portfolio.
The Central, Southeastern and Southwest Retirement Plan received $35.8 billion in special financial assistance in December 2022, bringing its total assets at the end of 2022 to $42.6 billion. The actuarial value of the funds’ assets at the end of 2022, excluding SFA money, was just under $6 billion.
In its 2022 Form 5500, received by the Department of Labor on October 12, 2023, but finalized just days after the 2022 SFA was approved, Central States stated: “It is not yet known what the updates to the investment policy” while the PBGC finalizes the grant size and investment restrictions.
Scott adds that the most common asset managers for SFA assets were “JP Morgan [Asset Management]BlackRock, BNY Mellon, Loomis Sayles, Invesco and similar asset managers.”
According to 2021 and 2022 Form 5500 filings, Central States used Northern Trust Investments, Mellon Investments Corp., BNY Mellon and BlackRock Financial Management as its investment service providers. The fees paid to these managers remained largely stable despite the large influx of cash, no doubt because the grant came in the final weeks of the year. The biggest year-over-year increase in fees was for Mellon Investments Corp., which received $3.1 million from Central States in 2022, up from $1.9 million in 2021, according to the filings.
Pridgen and Scott say that special financial assistance dollars are mostly invested in more conservative portfolios, although there is considerable variation among plans. The 2023 Form 5500 filing may provide more information about plans’ investment strategies after special financial assistance, but these will not be released until October 2024.
Labels: PBGC, SFA