PBGC Proposes Technical Changes to Special Financial Assistance Program

The Pension Benefit Guaranty Corporation has proposed a series of technical amendments to its Special Financial Assistance Program aimed at clarifying investment rules, simplifying administrative requirements and reinforcing safeguards intended to ensure federal rescue funds remain dedicated to pension benefits.

The proposal clarifies what types of fixed-income investments are permitted for plans that receive federal SFA funding; establishes a clearer standard for determining when PBGC approval is required for large withdrawal liability settlements; and eliminates a provision that allows pension plans to seek approval to redirect employer contributions to cover health benefit costs.

According to the PBGC, the changes are intended to improve administration of the SFA Program, which was created under the American Rescue Plan Act to provide financial relief to struggling multiemployer pension funds. The agency emphasized that many of the proposed amendments codify guidance already provided through frequently-asked-question responses and other sub-regulatory communications.

Among the most significant changes, the PBGC would expand and clarify the types of investment-grade fixed-income securities that SFA recipient pension funds may hold. The proposal would formally permit certain securities to be exempt from federal registration requirements, including some bank-issued and nonprofit-issued debt securities, provided they meet investment-grade standards.

It would also clarify the rules regarding ownership of fixed-to-floating-rate convertible securities and certain debt instruments that can convert to equity only through regulatory action.

The agency is also seeking to clarify its rules governing derivative investments. Under the proposal, pension plans would be allowed to use derivative positions for short periods when they closely replicate permissible securities that are temporarily unavailable in the market, but would be prohibited from using derivatives designed to alter investment risk based on future market events.

In addition, the PBGC proposed revising how plans calculate the value of an employer’s withdrawal liability settlements that may require agency approval. The change would establish a fixed valuation date—the last day of the plan year preceding an employer’s withdrawal—to provide greater consistency and to reduce uncertainty for plan sponsors.

The proposal would also remove an exception process that currently allows plans, under limited circumstances, to seek approval to reallocate employer pension contributions for increased health benefit costs. According to the PBGC, the exception is inconsistent with the statutory purpose of the SFA Program, which is intended to support pension benefit payments and related plan expenses.

According to the agency, the proposed changes are expected to reduce compliance costs and provide greater clarity for pension plans and their advisers. The PBGC estimated that the amendments could generate approximately $18.65 million in annual cost savings, largely through expanded investment flexibility and the elimination of certain administrative filing requirements.

The proposed rule was published in the Federal Register on June 16 and will be open for public comment through August 17.