"For over 25 years, we've been helping pension plans achieve financial success."
The Pension Benefit Guaranty Corporation's (PBGC's) Special Financial Assistance (SFA) program was enacted as part of the American Rescue Plan Act of 2021 and makes up to $91 billion available for multiemployer pension plans that may otherwise become insolvent, leaving potentially millions of workers across the country without a pension or benefits.
The final rule came into effect on August 8, with welcome changes following over 100 public comments received on the interim rule, including from Manulife Investment Management. Three of the most significant changes—as outlined in the final rule’s fact sheet—include:
- Lifting investment restrictions on SFA funds
- Changes to the conditions imposed on plans that receive SFA
- Amendments to the application process
1 Lifting investment restrictions
Under the final rule, plans are allowed to invest up to 33.0% of their SFA funds in return-seeking investments, including equities. The remainder 67.0% is restricted to high-quality investment-grade fixed income. Previously, plans were restricted to investing in investment-grade fixed income only, which led to what many comments referred to as an “interest-rate disconnect.” Plans require a return on assets of 5.5% to meet intended funding targets; however, investments restricted to investment-grade bonds would only reach half that target, resulting in a higher likelihood of plans becoming insolvent sooner than 2051.
The final rule also provides two separate interest-rate assumptions: one for calculating expected investment returns on a plan’s non-SFA assets and a separate rate for calculating expected investment returns for SFA assets.
2 Conditional changes
Changes to several conditions that apply to plans receiving SFA include:
- Retroactive and prospective benefit increases—Plans will now be permitted to apply for retroactive and prospective benefit increases after 10 years, with PBGC approval, provided they can demonstrate the plan's ability to remain solvent. Previously, only prospective benefit increases were approved, and only where contributions covered the increase.
- Clarifying plan mergers—The final rule provides greater clarity on the conditions that apply—and how they apply—following a merger of an SFA and non-SFA plan. The change removes certain conditions and allows for a waiver of others to encourage beneficial plan mergers, further boosting plans’ potential longevity and solvency.
- Reallocating to a health plan—After five years, and with PBGC approval, plans may temporarily reallocate up to 10.0% of contributions to a health plan, if it can be demonstrated that the reallocation addresses an increase in healthcare costs due to changes in federal law. Any reallocation cannot put the plan’s solvency at risk.
3 Application process
To ease some of the administrative burden plans faced in the application process, the final rule simplifies some of the steps to be followed, such as:
- Setting the SFA measurement date—Plans can now set their SFA measurement date, which enables assumptions and data to be set in advance of submitting an application. This will help eliminate the need to rework applications due to changes in the timing of a submission.
- SFA measurement date changed—At the same time, the SFA measurement date has changed to the last day of the third calendar month preceding the application date, rather than the last day of the preceding calendar quarter. For example, where an application date is July 15, the SFA measurement date will be April 30. This change aims to ease data availability and timing conflicts for plans.
- Revising and resubmitting plans—Plans not approved or previously denied for SFA under the interim final rule can withdraw and revise their applications. The final rule describes how plans that filed applications under the interim final rule may supplement or revise their applications.
Challenging investment environment
While these changes are good news for plan participants, the plans themselves face the important task of making sound financial and investment decisions that ensure they not only remain solvent but can earn a minimum 5.5% return and protect against persistently high inflation.
What are the main investment challenges pension plans face right now?
Making the right investment choices to steadily grow SFA assets without introducing undue risk is critically important, and while pension plan decision makers face a unique combination of challenges in this market environment, they don’t need to face them alone.
Your investment partner
At Manulife Investment Management, we have a long history of serving Taft-Hartley plans and are experienced in the unique challenges that multiemployer pensions face in meeting future liabilities. Our passion for this sector of the pension plan market is demonstrated in our active stance in supporting the Butch Lewis Emergency Pension Plan Relief Act. In 2017, our firm was one of only two investment management companies to provide written public support of the Act. In 2021, we provided written feedback and guidance on the solvency risks that plans face within 20 years if not allowed to access a wider spectrum of investment opportunities.
As a firm, our focus is on partnering with pension plans and guiding them through prudent investment choices that provide an optimal risk/return balance, and that helps to grow returns over the long term. We have sizable and strong fixed-income investment capabilities and manage more than $204 billion1 in fixed-income assets for clients worldwide. Coupled with this is our deep expertise in equities, managed by a global team of investment professionals.
For over 25 years, we've been helping pension plans achieve financial success. We welcome you to contact us today to find out how our global organization can partner with you to help secure the long-term future and benefits of your plan's participants.
1 AUM in U.S. dollars as of December 31, 2021, rounded to the nearest billion. May not add to 100% due to rounding. AUM includes money market, index bonds and absolute return rates assets and excludes liability driven investing (LDI) assets; includes certain equity and fixed income portions of balanced investments. The methodologies used to compile the total assets under management are subject to change.
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