PBGC’s multi-employer assistance rule eases investment restrictions

Following the approval of the US bailout plan, the PBGC issued a preliminary final rule in July 2021 specifying how plans from multiple employers can apply for special financial assistance, developed a method for calculating that amount, and set out limitations on how those assets can be invested, including other things.

Many stakeholders have submitted comments to the PBGC contrary to the provisional final rulein part because it requires plans to use current assets, future income, and income from payments of withdrawal obligations when making their auxiliary calculations. That reduces the amount of help a plan can receive, they said.

In addition, the mandatory interest rate used to calculate the amount of special financial assistance a plan receives is based on a return of 5.5%. But under the preliminary final rule, the PBGC also required special financial assistance assets to be invested in investment-grade bonds, which currently have annual returns of around 2% to 2.5%.

The final rule revealed on Wednesday that investment restrictions were relaxed and that 33% of the SFA can be invested in “yield-seeking assets,” such as public stocks, equity funds that invest primarily in public stocks and bonds. The remaining 67% of SFA funds must be invested in investment grade fixed income products.

Also, the latest rule, which takes effect on August 8, changes the SFA calculation method to provide two separate interest rate assumptions: one to calculate the expected return on investment on the plan’s non-SFA assets, and a separate rate for the plan’s non-SFA assets. calculating the expected return on investment. are earned on the plan’s SFA assets, according to a PBGC factsheet

“This change aligns the interest rates used to calculate SFA with reasonable expectations of future returns on investment on the plans’ SFA assets, addressing the interest rate mismatch issue identified in public comments,” the factsheet reads.

In addition, the latter rule requires phase-in recognition plans for SFA funds to calculate employer withdrawal liability, which aims to ensure that SFA funds do not subsidize employer withdrawals, according to the factsheet.

Michael P. Kreps, director and co-chair of the pension services practice at Groom Law Group, said that in its final rule, the PBGC has “softened some of its stances in a way that will better effectuate the law’s intent and some may weakens. of the earlier criticism.”

By allowing one-third of the SFA to be invested in public stocks, “it should allow for plans to take a little more risk and boost returns so that all of them have a better chance of being full for 30 or more years.” solvency,” he said. Kreps added.

The PBGC approved more than $6.7 billion in special financial aid on July 6 for 27 eligible plans that cover more than 127,000 employees and retirees.

Also on Wednesday, President Joe Biden spoke to a hall full of union members in Cleveland and said the special financial assistance program has partially fulfilled a campaign promise he made to help middle-class families and unions. “With today’s actions, millions of workers will receive the dignified retirement they deserve,” said Mr. Biden, pointing out that without the special financial assistance program, millions of workers would have seen their benefits cut.

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