From capital market return expectations to the rules that cover the program, a lot has changed in the two years since the American Rescue Plan Act was signed into law and created the Special Financial Assistance (SFA) program for struggling multiemployer pension plans.

A panel of speakers reviewed many of those changes during a recent International Foundation webcast.

The SFA program provides a lump-sum payment to severely underfunded multiemployer pension plans to allow them to make benefit payments through the plan year ending in 2051. According to a Pension Benefit Guaranty Corporation (PBGC) press release, as of late February, the PBGC had approved more than $45.8 billion in SFA to plans that cover more than 553,000 workers, retirees and beneficiaries.

Application Process: Waiting List Created

The most recent change to the program is the March 11 temporary closing of PBGC’s e-filing portal for new SFA applications. Beginning March 13, plans that have not yet applied can request to be placed on a waiting list.

PBGC had divided plans into six priority groups and began accepting applications in phases beginning in July 2021 over a priority group–only application period that ended March 11, 2023. The agency prioritized the plans that were closest to insolvency as well as the larger plans, explained James Donofrio, PBGC chief negotiating actuary. “Because of the priority period and because of the limit on our capacity . . . we had to meter the acceptance of applications to avoid running afoul of the 120-day deadline,” he said, referring to the law’s requirement to process applications within 120 days.

As of the date of the webcast, 41 SFA applications had been approved, and 31 were under review. Another seven were withdrawn, and only one has been denied. PBGC expects to receive another 94-150 applications. Now that the priority period has closed, all plans that meet the criteria may apply.

“Going forward, we will be constantly monitoring our capacity and will open the portal to the plans at the top of the waiting list as we are able to,” Donofrio said. When it has the capacity, PBGC will notify plans on the top of the waiting list that they may submit their applications. Those plans will have seven days to submit a full application. If they cannot do so, they will forfeit their place on the waiting list and will need to go through the process again.

PBGC has committed to opening the portal on April 1 and will take a few applications at that time.

Plans that are under review and have an application or are on the waiting list but withdraw an application after March 11, 2023 will have the ability to submit two revised applications without losing their position on the waiting list. Emergency applications are also not subject to the waiting list. PBGC will publish updates on the waiting list every Friday.

Plans that are concerned about the time they may spend on the waiting list can also file a “lock-in” application. This allows plans to lock in the base data (SFA measurement date, interest rates and participant census data) for their plans regardless of when they file their applications.

The lock-in application is separate from the waiting list process. If a plan intends to submit both a lock-in application and be placed on the SFA waiting list, they must submit separate requests to PBGC.

Application Timing and Interest Rates

Jason Russell, a senior vice president and actuary at Segal, commented that the lock-in application decision is an important one in the rising interest rate environment.

When PBGC first introduced the lock-in concept, the advantage appeared to be that “it gives plans certainty because they lock in this key base data,” Russell said. “But what this lock-in application really did once we started to see how the markets were moving, it actually was excellent in the fact that it locks in these interest rates that we know are going up.”

Russell explained that a plan that files a lock-in application by March 31, 2023 will lock in its measurement date as of December 31, 2022 and its interest rate as of December 2022. For calendar year plans, participant census data could be locked in [JM1] as of January 1, 2021 or January 1, 2022, depending on whether the plan actuary completed its valuation as of January 1, 2022.

However, plans that lock in on or after April 1, 2023 shift the measurement date and interest rates forward. A lock-in application by a calendar year plan submitted in April 2023 also means the plan must use January 2022 census data.

A plan that locks in by March 31 will lock in an interest rate of 3.77% for SFA assets and an interest rate of 5.85% for non-SFA assets. These interest rates are used as assumed rates of return in determining the SFA amount, Russell explained. Because interest rates have gone up, for example, a plan that files a lock-in application in June 2023 would have interest rates of about 4.4% and 6.2% (estimated). “With a higher rate, you’re going to have a lower SFA amount,” Russell said. “We know that interest rates are going to go up. That means you’re effectively reducing the amount of SFA if you keep pushing the measurement date back.”

That doesn’t mean that every plan should lock in by March of 2023, but it’s an important discussion to have, Russell stressed. For example, if there is a negative investment return in March, or if the plan trustees believe a market decline is coming soon after, they may decide to hold off on locking in. Capturing a significant investment loss in the SFA amount by pushing the measurement date back could more than offset the effect of higher interest rates.

Submitting the Official Application

Russell outlined the key steps of submitting an application, including timing, preparing the application and selecting actuarial assumptions.

New under the final rule is a requirement to demonstrate that plans have been doing death audits. Plans must certify that they have excluded participants that are deceased as of the census date. Plans can also include missing inactive vested participants as of the SFA measurement date as long as they are 85 and younger and they’re still alive, but they must reflect the deaths of these participants if they occurred prior to the measurement date.

Investment Restrictions

The final rules that dictated how SFA assets could be invested have created more opportunity for plans, said Annie Taylor, managing director and senior consultant at Verus.

“It’s really been a long road as far as the allowable investments,” she said. “And the environment has also changed quite drastically over that time period.”

The interim rules had more restrictions on investments, and there was a disconnect on the return needed from investment and the actual potential for achieving those returns.

The final rules create more opportunity for plans to achieve additional returns through return-seeking assets.

Key restrictions on the investment of SFA funds are:

• 67% must be in investment-grade fixed income investments that pay [JM2] interest and are U.S. dollar–denominated. High-yield bonds are permissible if they were investment grade at purchase.
• 33% can be invested in return-seeking assets such as common stock, mutual funds, commingled funds, and exchange-traded funds denominated in U.S. dollars and registered with the Securities and Exchange Commission (SEC).

The final rule also required plans to segregate SFA assets from legacy assets. There are no encumbrances on investments for legacy assets (non-SFA funds), Taylor said.

In addition to the expanded universe of investments for SFA assets, “the big change is that interest rates have increased significantly, and this is very helpful in achieving these returns without having to take as much risk,” she said. “Some plans may not even need to invest a third of their assets in return-seeking assets. They might be able to get there with taking a much more conservative approach.”

Taylor suggested that plans look at cash-matching strategies to lower the volatility of their investments, especially over a shorter time frame. Plans can accomplish that by investing in fixed income securities that match their expected benefit payments and expenses over a specific period of time. The plans will receive income payment and the bonds will mature in line with the cash needs. It may not be a fit for every plan but should be discussed or considered, she said.

In addition, Taylor mentioned that many investment firms have come up with customized products designed specifically for SFA assets. Using these “off-the-shelf” products may help plans minimize costs.

“We’re in a much better position today in investing these assets . . . the broader guidelines surrounding the allowable investments and the changing markets dynamics are going to allow us to have better success given higher interest rates,” Taylor concluded.SFA Compliance Issues

Andrew B. Lowy, associate at Schulte Roth & Zabel LLP, reviewed the compliance requirements for plans that have been approved and the open questions that remain. Compliance concerns start with the application, he said.

Compliance Statements

• Plans must execute an amendment stating that the plan will be administered in accordance with Section 4262 of ERISA with the application. PBGC has a model amendment on its website.
• Plans that have received SFA must submit a statement of compliance annually beginning in the year the plan receives SFA through 2051. PBGC has a model statement that is set up as more or less a checklist including the important issues that must be tracked and complied with. Several documents must be submitted with the statement that PBGC will use to verify the plan’s compliance.

Use of SFA funds

• SFA funds may be used only to pay benefits and administrative expenses.
• SFA funds must be segregated from legacy assets and may be invested only in permissible investments.
• Plans must meet allocation restrictions on return-seeking assets.

Benefit Increases and Contribution Decreases

Lowy explained that there are restrictions on adopting retrospective benefits or benefit increases as well as on decreases in plan contributions.

• Plans may not adopt retrospective benefits or benefit increases attributed to service accrued before the adoption date of the amendment to the plan.
• Plans are restricted from adopting prospective benefits or benefit increases unless the plan actuary certifies that a contribution increase will be sufficient to pay for the benefit increase and the increased contributions were not included in the determination of SFA.
• After ten years, plans may apply to PBGC for an exception to some of these benefit increase restrictions.
• Contributions to plans must not be less than those contained in collective bargaining agreements (CBAs) or plan documents in effect on March 11, 2021.
• The definition of contribution base units (CBUs) can’t be different from those in effect in plan documents on March 11, 2021.

*Some exceptions apply.

Lowy noted that plans will need to make sure there is coordination with union locals and contributing employers during contract negotiations to ensure compliance.

Withdrawal Liability

• Plans must use PBGC interest rates set forth in ERISA Section 4044 to calculate withdrawal liability.
• When calculating withdrawal liability, plans must determine the amount of SFA that has been phased in each year over the projected life of SFA assets.
• When plans are negotiating settlements of withdrawal liability, a plan must receive PBGC approval before making any settlement of withdrawal liability if the amount of liability settled is more than $50 million.

Open Questions for Compliance

Lowy said one question remaining is how heavily PBGC will rely on self-reporting. Plans that are not in compliance need to attach an explanation of what happened and explain any corrective action. It remains to be seen whether PBGC will issue guidance on appropriate remedial action, he said.

PBGC may also conduct periodic audits of plans that have received SFA to review compliance. These would be time-consuming and costly, so Lowy said observers are waiting to see how heavily the agency relies on them and whether it will approach them on a randomized regular schedule where plans are subject to audits over a period of time or if PBGC will limit them to plans that have disclosed issues on their self-reports.

Another open question is how PBGC will approach enforcement. The regulations are not clear as to what penalties and remedies there will be for noncompliance, Lowy noted. It’s hoped that answers will emerge as the SFA program moves out of the application period.

The Department of Labor (DOL) is considering issuing guidance to address the records and information that plans will need to maintain and retain to comply with Title I of ERISA.