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Pension Insurer Limits Seen to Sabotage Plans’ Economic Recovery

Aug. 24, 2021, 9:31 AM

Employers and unions jointly operating some of the country’s most underfunded retirement plans are calling out the government’s private-sector pension insurer for setting limits on investments that they say could “sabotage” any possible economic rebound they would get from a massive Congressional rescue package.

The Pension Benefit Guaranty Corporation issued an interim final rule last month detailing how the agency would administer what has amounted to about a $94 billion bailout to prevent distressed multiemployer pension plans from going under. Millions of union workers’ retirement benefits have been threatened by a growing insolvency crisis facing labor-negotiated plans, and even the PBGC, which is tasked with propping up those sagging plans, would have run out of money itself by 2026 without the funding.

But now, many unions and industry representatives, in more than 100 comment letters on the interim final rule, are decrying strict investment limits and disparate interest projections the PBGC set on the money plans will receive as part of the American Rescue Plan that Congress passed earlier this year. Unless those change, they say, money that was supposed to last 30 years could dry up much sooner.

The ERISA Industry Committee, a trade group representing some of the largest companies on issues related to the Employee Retirement Income Security Act, recommended in its letter that the pension insurer eliminate those restrictions altogether.

“ERIC is concerned some of the requirements in the interim rule will sabotage the ability of those plans to remain solvent through 2051,” said Aliya Robinson, senior vice president of retirement and compensation policy, in an email separate from the group’s letter to PBGC. “Our recommendations are meant to align the interim rule with the American Rescue Plan Act of 2021.”

Under the American Rescue Plan, Congress allocated an unspecified amount of money to fund plans until 2051. The agency’s interim final rule sets interest rates at a level that means most plans would need to generate at least 5.5% annual returns to ensure the money lasts for 30 years, according to current PBGC variable rate premiums. That usually wouldn’t be a problem, except the agency also said the money can only be used to invest in “investment grade bonds,” such as highly rated corporate bonds or treasuries that usually return no more than 3.5% annually.

That would result in up to a 2% annual funding shortfall and leave most critical and declining plans cash-strapped by about 2040—11 years sooner than Congress intended.

The “incongruity” between interest rate assumptions and the likely rates of return on special financial assistance investments will translate into many plans that receive help becoming insolvent “well before 2051,” Elizabeth Shuler, the newly elected AFL-CIO president, wrote in the labor federation’s comment letter.

Seeking Flexibility

The AFL-CIO’s letter, written when Shuler was acting president, recommended bifurcated interest rate assumptions, whereby financial assistance would be subject to rates that are different than existing assets and future contributions but are still consistent with the investment limits.

She said a bifurcated approach “would have a relatively modest impact on the total cost,” bringing the program to $113 billion, or 20% more than its existing price tag of $94 billion.

JPMorgan & Chase Co. and BlackRock Inc. urged PBGC to consider allowing investments beyond fixed-income, such as preferred stocks.

Shivin Kwatra, head of liability-driven investment portfolio management at Insight Investment, told Bloomberg Law in July that the PBGC’s conservative investment limits could force plans to be more aggressive and potentially risky with the money they already have and will contribute in the future, separate from this special funding.

In its letter, Central States Pension Fund, one of the largest and most underfunded multiemployer plans in the country, told the PBGC that more investment flexibility would save fiduciaries from taking inappropriate risks with funds they already have.

An agency spokesman said the PBGC couldn’t discuss comments it was reviewing, but pointed to the interim final rule’s preamble, which states the agency is seeking comments specifically on the issue of investment limits.

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; John Lauinger at jlauinger@bloomberglaw.com

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