On July 9, 2021, the PBGC issued an interim final rule (IFR) for the SFA program. This IFR and related guidance specifies the process eligible multiemployer plans must follow to apply for SFA. The IFR also clarifies the PBGC’s position on certain provisions in the statute that may have been open to interpretation.

We continue to analyze the PBGC IFR and discuss its implications with our clients. Some aspects of ARPA and the PBGC IFR remain unclear, and the PBGC may decide to issue further guidance on the SFA program. With these points in mind, the following reflects our initial commentary and reactions to the PBGC’s IFR on the SFA program.

For more information about the SFA program, see our summaries of:

• The PBGC IFR
• The accompanying IRS guidance
• The DOL statement on the SFA program

A welcome, but temporary, solution

Prior to the passage of ARPA, over 130 plans had formally determined that they would run out of money in the next 20 years, and the PBGC multiemployer insurance program itself was projected to become insolvent in 2026.

Under the new SFA program, the PBGC estimates that over 200 multiemployer plans will meet eligibility requirements, and the PBGC estimates that total grants to eligible plans will total $94 billion. The SFA program will significantly extend solvency for scores of troubled plans covering more than one million plan participants and their families.

Nevertheless, as the PBGC states in the preamble to the IFR, the SFA program is “not a permanent solution.” While the PBGC believes that the intent of ARPA was to delay the insolvency of the many troubled multiemployer pension plans, many others believe that the intent of ARPA was to restore these plans and the PBGC to solvency. As described below, most plans that receive SFA will still be projected to become insolvent. SFA extends the plans’ solvency period but does not do so indefinitely.

Read comments from the National Coordinating Committee for Multiemployer Plans.

Insolvency in 2051, perhaps sooner

As outlined in the IFR, the PBGC interpretation of the statute is that the amount of SFA available to an eligible plan is the amount intended to enable the plan to pay benefits and expenses through its plan year ending in 2051, taking into account the plan’s available assets and future contributions. This means that, using a required interest rate and other actuarial assumptions that are regulated, the amount of SFA is to be calculated as if the plan were to become insolvent at the end of its 2051 plan year.

Interest rate disconnect

Under ARPA, there is a disconnect between the interest rate that must be used to determine the amount of SFA an eligible plan may receive and the requirement that SFA assets be invested in relatively low-yielding investment-grade corporate bonds (or other similar investments permitted by the PBGC). For most plans, the amount of SFA will be determined using an interest-rate assumption of about 5.5 percent. Investment-grade corporate bonds, however, currently have yields between 2 percent and 3 percent. With SFA assets invested in low-risk corporate bonds, plans may have to modify the allocation of their existing assets to achieve an overall annual investment return of 5.5 percent.

For many plans, achieving an overall return of 5.5 percent may not be possible, due to a limited availability of investible assets. As a general guideline, plans that will receive SFA that is less than their existing assets may be able to obtain an overall 5.5 percent return without taking excess risk with their overall asset allocation. However, for plans that must use the 5.5 percent assumption and receive SFA that is greater than their existing assets, it will be a very difficult challenge to reach an overall return of 5.5 percent. Plans that are unable to achieve that benchmark return will be projected to become insolvent before 2051.

As an extreme example, when an eligible plan that is already insolvent receives SFA, 100 percent of its assets will be in SFA. Because SFA assets must be invested entirely in investment-grade bonds, there is virtually no possibility that the plan will achieve the 5.5 percent annual return needed to remain solvent through 2051. The plan will be projected to become insolvent again several years before 2051.

The PBGC acknowledges in the IFR the potential disconnect between the interest rate used to determine the amount of SFA and expected returns on plan assets, and has asked for public comments on this issue. 

Many eligible plans will receive nothing

As noted above, the PBGC estimates that more than 200 multiemployer plans will be eligible to apply for SFA. Although eligible, many of these plans will not receive any SFA under the required calculation methodology described in the PBGC IFR.

A plan that is in critical (but not declining) status will be eligible for the SFA program if it meets certain other criteria — specifically, if its modified funded percentage is under 40 percent and its active to inactive participant ratio is under 2 to 3. The IFR provides some flexibility to critical status plans to demonstrate eligibility through these criteria.

However, even if such a plan is eligible for SFA, it may find that the amount of SFA it will receive is zero. Under the PBGC methodology, if the discounted present value of a plan’s existing assets, future contributions and investment income are sufficient to cover the discounted present value of benefits and expenses through 2051, it will not receive any SFA but may still be deeply troubled. Examples include many critical-status plans that are projected to become insolvent after 2051 but have exhausted all reasonable measures and cannot forestall insolvency indefinitely, and critical-status plans that are projected to remain solvent but have unsustainably high employer contribution rates and low benefit accrual rates.

Trustees of plans with suspended benefits face a dilemma

Under the Multiemployer Pension Reform Act of 2014 (MPRA), severely troubled plans are permitted to suspend benefits if doing so enables the plan to return to projected solvency. The Treasury Department (Treasury) must approve the suspension and many rules and restrictions apply. Plans with suspended benefits (MPRA plans) are eligible for SFA but must undo the suspension, both prospectively and retroactively, in order to receive SFA. Read Segal's comments to the PBGC.

As of March 11, 2021 (the date ARPA was passed), there were 18 MPRA-approved plans. The trustees of these plans face a difficult choice in deciding whether to apply for SFA, as discussed below.

• As required under MPRA, benefits are suspended to the extent necessary (but not below 110 percent of the PBGC guaranteed amount) for the plan to remain solvent indefinitely. Post suspension, many MPRA plans project that their funding levels will improve over time. If the trustees leave the benefit suspensions intact, the plan will have a strong chance of remaining solvent indefinitely, with the lower benefit levels in place.
• If, however, the trustees take SFA, they must restore the previously suspended benefits to their original amounts and pay back amounts that had been suspended in prior years. Plan participants and retirees will receive increased benefits but the plan will be headed toward insolvency, possibly several years before 2051. After the plan becomes insolvent, benefits will be reduced to the PBGC’s modest guarantee levels. If the PBGC’s multiemployer program also becomes insolvent, benefits will be reduced to pennies on the dollar.

The decision by the trustees to apply for a MPRA suspension is never done lightly and the process of applying for approval represents a significant burden on plan resources. (Of the 18 MPRA plans, 11 applied multiple times before receiving approval from Treasury.) With the passage of ARPA and the issuance of the PBGC IFR, the trustees of MPRA plans face another difficult decision on whether to apply for SFA, unwind the MPRA suspensions and head back towards insolvency, or to retain the suspended benefits and remain solvent for a longer period. A recent announcement by the DOL acknowledges the situation these plans face, but does not believe that accepting SFA by MPRA plans would be a fiduciary breach. Nevertheless, MPRA plan trustees have a huge challenge to choose between accepting SFA in order to reinstate suspended benefits for retirees, which will put the plan into a projected insolvent position, or maintain the status quo of a solvent plan with suspended benefits.

PBGC insolvency still possible

Prior to the passage of ARPA, the PBGC projected its multiemployer insurance program would be insolvent in 2026. While the SFA program extends the multiemployer program’s solvency, it does not do so indefinitely. Note: The PBGC has not provided a revised insolvency date but the Congressional Budget Office analysis of the SFA program dated February 17, 2021, estimated the PBGC’s multiemployer program would become insolvent in the mid-2040s.

Most plans that receive SFA will not be able to extend their solvency beyond 2051. As discussed earlier, many of these plans will become insolvent several years before 2051. As these plans become insolvent — likely in the decade leading up to 2051 — they will fall on the PBGC’s multiemployer insurance program.

Another component of ARPA was to increase the flat-rate PBGC premium for multiemployer plans to $52 per participant, beginning in 2031. While this increase is significant, it is unlikely to provide the PBGC with enough resources to sufficiently bolster its multiemployer program.

Upcoming investment decisions

ARPA requires SFA assets to be invested in “investment-grade corporate bonds or other investments as permitted by the corporation (PBGC).” In the preamble to the IFR, the PBGC appears to be open to providing flexibility to plan trustees and asks for input in refining its guidance on permissible investments for SFA assets. Note, however, the PBGC seeks input only on investment vehicles for SFA assets that would not be “materially riskier” than investment-grade fixed-income securities. For many plans, especially those that are already insolvent or only a few years from insolvency, this is very unlikely to sufficiently address the interest rate disconnect previously discussed.

Future guidance from PBGC on this issue could have a significant effect on plans that receive SFA. Trustees of such plans have important investment decisions ahead of them with respect to both existing assets and SFA grants, especially if PBGC permits more flexibility on how plans invest SFA assets.

Read Segal Marco Advisors' comments to the PBGC.

Other areas of uncertainty

There are several other areas of uncertainty:

• Possible contribution rate reductions — Many SFA-eligible plans have imposed high contribution rates that employers may not be able to sustain over the long term. The PBGC’s IFR provides a potential window for eligible plans, under certain circumstances, to apply for approval to reduce unsustainable contribution rates for purposes of determining their SFA. How receptive the PBGC will be to these discussions remains to be seen.
• PBGC review of assumptions — The PBGC IFR and accompanying guidance provides additional insight into what the agency considers to be reasonable actuarial assumptions — or changes in assumptions — for purposes of determining the amount of SFA. It is unclear, however, how much scrutiny the PBGC will place on actuarial assumptions already in place when reviewing SFA applications. (For applications to suspend benefits under MPRA, Treasury offered little to no deference to professional judgment on actuarial assumptions.)
• Withdrawal liability — Under the PBGC’s IFR, plans that receive SFA must include the SFA assets when calculating withdrawal liability amounts and are also required to use PBGC-issued “mass withdrawal” interest rates. These rules apply to employers that withdraw within 10 years of the plan’s receipt of SFA or until the plan has depleted all of its SFA assets, whichever is later. The effect of these rules will vary from plan to plan. Trustees of eligible plans should consider the potential impacts of these rules on continued employer participation and withdrawal liability assessments.
• Mergers — A merger completed after July 9, 2021 will not be considered as a basis for additional SFA. However, after receiving SFA, some plans may pursue mergers with larger, healthier plans. Whether a plan that receives SFA will be an attractive merger candidate depends on the situation.
• Partitions and facilitated mergers — Under ARPA, a plan that receives SFA is prohibited from subsequently applying for a MPRA suspension of benefits. If a plan is certified to be in critical and declining status after receiving SFA, however, it may still consider applying for a MPRA “partition” or a financially facilitated merger. Both transactions are subject to PBGC approval, and PBGC’s willingness to consider such applications from plans that have received SFA is unknown.

Possible future reforms

The SFA program is welcome relief to the multiemployer pension system. Before the passage of ARPA, a significant portion of the multiemployer plan community was facing an extreme near-term solvency crisis with PBGC’s multiemployer program projected to become insolvent in 2026. That insolvency has now been deferred for many years.

However, the multiemployer pension system is in need of legislative reform. As we have emphasized in recent years, any system reforms should provide a solution to the multiemployer solvency crisis — not just a temporary relief — and strengthen the system for future generations.

Looking ahead, the following are components of comprehensive reform of the multiemployer pension system:

• Any federal financial assistance for troubled multiemployer plans should provide them a reasonable opportunity to remain solvent indefinitely. Federal assistance that extends solvency to 20 or 30 years is temporary relief, not a permanent solution.
• Reforms must avoid imposing unreasonably high PBGC premiums on healthy plans and must be mindful of the particularly damaging impact of high premiums on plans in low wage, low-benefit industries.
• Any changes to funding rules should be tailored to the real-world circumstances of multiemployer plans. Multiemployer plans have unique dynamics, which differ significantly from single-employer plans. Multiemployer funding rules under the Pension Protection Act of 2006, such as zone status criteria, could be expanded to provide trustees with more tools, earlier access to existing tools, and flexibility to take corrective action.
• Multiemployer plan stakeholders need to work towards finding consensus on alternative plan designs that reduce or eliminate investment risk for plan sponsors with respect to benefits that participants earn in the future. This consensus needs to include elimination of existing regulatory ambiguity and ease adoption when multiemployer trust settlors and plan sponsors reach agreement.
• Legislation should also remove barriers to participation by employers new to the multiemployer system. New employers serve to increase contribution income, which will strengthen the overall plan and reduce unfunded liability for existing employers.