The Pension Benefit Guaranty Corporation (PBGC) has already approved financial assistance to 32 troubled multiemployer retirement plans under the Interim Final Rule released in July 2021. The PBGC asserts that as of October 4, 2022, it has approved over $7.7 billion in assistance to retirement plans that cover over 154,000 workers, retirees, and beneficiaries.
The PBGC received over 100 comments regarding the Interim Final Rule. Many of the comments dealt with the mismatch between the interest rate used to determine the amount of assistance and the earnings rate that could be assumed. The Interim Final Rule requires that 100% of the Special Financial Assistance Program (SFA) assets be segregated and invested only in high-quality fixed-income securities. This mismatch caused many retirement plans to project that they would run out of funds, including SFA funds, well before 2051, the target year in SFA calculations.
To address this problem, the PBGC made several changes to the Final Rule issued on July 6, 2022. Two of these changes will affect most of the retirement plans seeking assistance and go a long way to keep them solvent well past 2051:
- A new two-rate method of determining SFA amounts
- The ability to invest up to 33% of SFA funds in return-seeking investments
New Two-Rate Method of Determining SFA
The July 2022 Final Rule changes the SFA calculation method to use separate interest rates for a retirement plan’s SFA assets and non-SFA assets. The rate that applies to the existing assets is the same rate that applied under Interim Final Regulations. The rate that applies to the SFA assets is based on an average of segment rates (high-quality, fixed-income securities). For most retirement plans this second rate will be much lower. This lower rate will provide more SFA funds and prevent SFA calculation/investment return mismatches. A typical rate under the Interim Final Regulations was 5.0%; the likely SFA fund rate under the new method could be near 3.0%.
Retirement plans that haven’t applied yet can apply under the Final Rule. Retirement plans that already received funds can submit a supplemented application. Plans with original rates close to or over 5.0% could receive a significant increase in SFA funds, while retirement plans with original rates lower than 5.0%, but still above the new rate, will get a more minor increase in SFA funds. Retirement plans with original rates that were already lower than the rate determined under the new methodology might not receive any additional SFA funds.
SFA Investment Opportunities
The second significant change to July 2022’s Final Rule is the ability to invest up to 33% of SFA funds in return-seeking investments (RSI). The remaining 67% must still be invested in high-quality, fixed-income securities. This investment change applies when an application is filed under provisions of the Final Rule.
The timing of this rule change is very fortunate; from the date the first plan received SFA funds (January 14, 2022) until August 8, 2022, the S&P 500 fell over 11%. These retirement plans consequently avoided a possible loss and now can buy equities at a discount. There are several restrictions to this type of investment, such as equities traded on US exchanges only. These restrictions are outlined in the regulations.
Motivated by new investment opportunities and SFA fund increases, 8 retirement plans filed supplemented applications on August 8, 2022, the first day for applications under the Final Rule. Four more plans were filed in the following two days. These two changes, along with several others in the Final Rule, will help troubled multiemployer retirement plans avoid insolvency altogether, not just until 2051. Plans have until December 31, 2026, to apply.
Watkins Ross’ experienced retirement plan team is available to assist and help translate PBGC SFA options for your retirement plan. We collaborate with our clients to provide a comprehensive view of your retirement plans’ health and compliance. Connect with us here to learn more about our retirement plan services.