AAA on SFA and the Real Goal

From a P&I article titled “Multiemployer assistance rule from PBGC leaves stakeholders confused”:

The Aug. 11 letter mentioned the interim closing rule’s “flawed assumptions, taken along with incompatible funding restrictions, make it structurally unlikely to offer plans with funding enough to make sure solvency by 2051.”

The article left me confused too so I sought out an August 11, 2021 letter on multiemployer plans and found a 13-page one from the American Academy of Actuaries (AAA) titled “Comments on the Interim Final Rule [IFR] for Special Financial Assistance [SFA] by the PBGC”. Here is what I got out of it:

While the IFR provides flexibility for plans in critical but not declining status to demonstrate eligibility, the PBGC also recognizes that many plans in this category will not receive any SFA.

The inclusion of the withdrawal liability receivables in the asset value may cause some plans that would otherwise receive SFA to be ineligible.

The IFR prescribes a methodology under which the amount of SFA is the difference between two present values: the present value of plan obligations less the present value of plan resources. Plan obligations are plan benefits (including any reinstated benefits where applicable) and administrative expenses expected to be paid from the SFA measurement date through the plan year ending in 2051. Plan resources include current plans assets, and the present value of both withdrawal liability payments and future employer contributions.

Specifically, the vast majority of eligible plans will be subject to the interest rate limit, meaning their amount of SFA will be determined using an interest rate of about 5.5%. At the same time, the statute requires that SFA assets must be invested in investment-grade bonds (or other investments permitted by the PBGC). Currently, annual yields on investment-grade bonds are around 2.0%-2.5%. This disconnect introduces a “negative arbitrage” for the vast majority of plans that are eligible to receive SFA. Due to current, low yields on investment-grade bonds, many plans may not be able to attain a total return on plan assets of at least 5.5%. If investment returns on plan assets fall short of the interest rate used to determine the amount of SFA, the plan would fall short of its intended funding target. In other words—plans that cannot meet their benchmark investment return would become insolvent sooner than 2051. In fact, many plans that receive SFA—especially those that are already insolvent or close to insolvency—are likely to exhaust their assets 6-12 years before 2051.

Yes, if you base your assumptions on the plan getting 5.5% returns while being forced to invest in assets that return 2% you are screwed. But what is missing from this analysis is that the real goal of multiempoyer pension plan sponsors is not to come up with an accurate amount as to what will keep a plan solvent through 2051 but to get the largest number imaginable on that check that the U.S. Treasury will write to their plan.

For example, the Road Carriers Local 707 Pension Fund reported unfunded liabilities of $862 million as of 2/1/19. With artful projections about future assets and liabilities their SFA bailout check could be $2 billion.

Treasury rates fluctuate. Looking at their history they may be around 2% now but in the early 1980s they hovered around 12%. What if we return to hyper-inflation and those ‘safe’ assets that the Local 707 Fund has to invest in start making 12%? Are they going to give back any of the bailout money?

If ever there was a time for multiemployer plans to shop for creative actuaries this is it but whereas in olden days they were looking for liability low-ballers what they want now are the high-ballers.

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