What Is the Special Financial Assistance Program?

And what does the federal program for struggling multiemployer plans mean for the future of defined benefit plans?
Reported by Paul Mulholland

Art by Bill Mayer

 

Updated with correction.

The Special Financial Assistance Program, enacted with the American Rescue Plan in March 2021, is designed to rescue struggling multiemployer pension plans with grants so that they can stay solvent through the end of 2051.

In its application to the Pension Benefit Guaranty Corporation for an SFA grant, the plan forecasts its expenses and assets through 2051. The size of the grant provided to the plans makes up the difference between plan assets and liabilities for that period.

In order to qualify, a plan must meet one of four criteria:

  • be in critical and declining status
  • had cut benefits under the Multiemployer Pension Reform Act of 2014 by March 11, 2021
  • became insolvent after December 14, 2021 and did not regain solvency by March 11, 2021; or
  • had a modified funding percentage of less than 40% in a plan year between 2000 and 2022 and has a ratio of active to non-active participants of less than 2 to 3.

Before the SFA, the PBGC’s multiemployer insurance program was projected to go insolvent itself in 2026, according to Jason Russell, a senior vice president and actuary with Segal, a pension consultancy firm, in recent remarks to the National Institute on Retirement Security’s Annual Conference. The SFA program removed the need for the PBGC to administer many failing plans, and now most projections place PBGC multiemployer insolvency well past 2051.

The SFA program has permitted hundreds of thousands of workers and retirees to receive the benefits they expected when they first enrolled in their pension.

Changes Made From the Interim Final Rule

In July 2021, the PBGC enacted an interim final rule governing the administration of SFA grants, which was later replaced by the final rule in August 2022. The key differences were: how the SFA money can be invested; the actuarial assumptions used to calculate the grant; how plan improvements can be made; and the treatment of MPRA plans.

John Lowell, a partner in October Three Consulting, an actuarial consulting firm, explains that the PBGC had required all SFA assets to be invested in investment-grade fixed-income securities under the interim rule. The PBGC wanted to be highly risk-averse with government money, because if higher-risk assets performed poorly, then the pension funds that invested them might have to come back for more money, according to Lowell.

Due to public comments requesting additional flexibility, the PBGC’s final rule required that only two-thirds of the funds be invested in investment-grade and fixed-income securities, with the final one-third available to be invested in return-seeking assets, such as stocks. The pre-existing assets of the plan, often called “legacy assets,” do not have additional investment restrictions.

The interim rule assumed a single rate of approximately 5.5%; however, the conservative restrictions placed on SFA grants could have made this return difficult to achieve and therefore threatened the PBGC’s solvency goals, according to Susan Boyle, the multiemployer retirement practice leader at Segal. The final rule used two interest rate calculations: one for the SFA funds and another for legacy assets, both using recent interest rates as a benchmark. This new calculation had the effect of being more generous to the plans and will better guarantee their solvency through 2051, according to Boyle.

The effect of the changed interest calculation, says Seth Almaliah, a senior vice president in Segal Marco’s New York office, is that the applied interest rate is typically lower than 5.5%, which means in order to achieve the same level of solvency, more money must be provided up front. Since some plans applied under the old rules, they would have received more money if they had waited for the formula under the new rules. Such plans can file a supplemented application to receive the difference as additional SFA funding.

The interim rule did not allow plans receiving SFA funding to make benefits improvements unless they were paid for by contributions. The final rule changed this. SFA plans can now make benefits improvements 10 years after receiving SFA, but only if they can demonstrate to the PBGC that they can still remain solvent through 2051.

 

MPRA Plans

Plans that had cut benefits under 2014’s MPRA left many comments on the interim rule, according to Boyle. Their primary concern was that MPRA plans had made benefit cuts and were in many cases projected to be solvent long past 2052 as a result of those cuts. If they accepted SFA money and thereby reduced their solvency to 2052, this could be a breach of their fiduciary duty by compromising their long-term solvency.

The final rule addressed these concerns by providing for three methods of benefit calculation for MPRA plans. The plan receives the largest sum that any of the three methods produce. The methods are: the standard SFA calculation used by non-MPRA plans; a calculation which projects increasing assets after 2051 instead of insolvency; and the present value of the plan’s future and retroactive benefits through 2051. Methods 2 and 3 typically produce a greater sum than the first, according to Boyle.

Since MPRA plans could potentially have increasing assets after 2051, their fiduciary duties are no longer compromised by accepting an SFA grant.

Investment Strategies for SFA Plans

Under the final rule, plans are allowed to invest up to one-third of SFA money in return-seeking assets, such as equities; their pre-existing assets, sometimes called “legacy assets,” have no additional restrictions.

Lowell explains that the aggressiveness with which plans invest that one-third of SFA and their legacy assets will vary considerably from plan to plan. Some will be quite conservative and “some will probably go as aggressively as they think the law permits with their return-seeking assets.”

Almaliah says that the one-third of SFA funding invested in return-seeking assets can be allocated to and cannot be invested in assets such as real estate, private equity or hedge funds. He agrees that plans will likely use legacy assets to take on more risk and aim for longer-term returns.

How the plans are actually investing the SFA money and their own assets will not be known until their annual reports are filed.

What Happens in 2052?

If SFA recipients are projected to become insolvent after 2051, does that mean we should expect a crisis of failed pension plans that year?

No.

Lowell explains that actuaries had to make many assumptions in order to implement the SFA program. They had to make assumptions for interest rates; the size of industries and their related pensions; and the benefits provided to participants.

Since actuaries are relying on many assumptions and cannot really account for unpredictable events such as a pandemic, 2051 is in every case an estimate. Lowell says that “essentially no plan is going to run out of money in 2051. Some will run out of money before then. Some of them will do better than expected.”

He notes that some workers, such as electricians, are projected to do rather well in the coming decades, and electricians’ pensions receiving SFA money might stay solvent well past 2051. Industries projected to decline, such as coal mining, might run into trouble even earlier.

Boyle explains that the PBGC uses these projections such that the balance of the pension projects to zero at the end of 2051. She adds though, that nearly 30 years is a long time to take “corrective action.” Pensions have time to add workers, cut benefits or change investment strategy.

“Thirty years to figure out a solution is a long time, ” she says. She clarifies that projecting insolvency is not the same as predicting it. Few, if any, pensions will actually become insolvent on January 1, 2052.

Russell agrees and says that the point of providing solvency until 2052 is not to kick the can down the road, but to give plans the time they need to make their own adjustments to stay solvent even longer.

How Did These Plans Become Insolvent?

According to Boyle, some of the main reasons why plans became insolvent or were projected to do so were the decline of the industry associated with the plan; bankruptcy laws not requiring employers to pay withdrawal liability; and the global financial crisis of 2008. Most multiemployer plans are well-funded, according to Boyle.

Almaliah echoes this sentiment and adds that because of the attention the SFA program has received, insolvencies in multiemployer plans can be overestimated. Most plans are well-funded and “are really well-managed plans.” He emphasizes the effect of dying industries as being perhaps the main reason for these insolvencies. He cites construction unions as an example of pensions that are typically in good shape for one simple reason: Construction is not a dying industry.

By and large, the plans receiving SFA funds are plans with high plan maturity, meaning they have a high ratio of plan recipients to contributors. This is usually an outcome of the related industry being in decline. The average critical and declining plan in 2020 had a recipient-to-contributor ratio of 7.2 to 1, whereas it was 1.4 to 1 for well-funded plans.

Russell also points out that high maturity plans are more vulnerable to return volatility, because if markets decline, then they must sell off assets to meet liabilities—assets which now cannot generate a return when markets increase again. This means that even if returns average out well enough, underlying volatility—such as that related to the 2008 crash—still leave mature plans vulnerable to insolvency.

Russell made one ominous warning in his remarks to the NIRS conference. Plans which were critical and declining in 2020 had a maturity ratio of 1.5 to 1 in 2001, and well-funded plans on average in 2020 have a ratio of 1.4 to 1. This could suggest that even the most solvent grouping of plans today could be vulnerable to insolvency in the event of another financial crash or other source of market volatility.

 

Tags
John Lowell, National Institute on Retirement Security, October Three Consulting, Pension Benefit Guaranty Corporation, Segal Marco Advisors, Seth Almaliah, Special Coverage: DB Plans, Special Financial Assistance Program, Susan Boyle,