As of May 2023, the PBGC is now rolling funds out to plans in the non-priority group.
The assets granted by the SFA also come with some restrictions on how the money may be invested; for example, only 33% of the assets can be invested in "return-seeking assets," and this is largely restricted to U.S. public equities. The fixed-income allocation therefore must be between 67% and 100% and is also restricted to U.S. public fixed-rate investment-grade bonds. While this leaves the plan sponsor with a clearly defined opportunity set to work within, the overall impact of these restrictions will depend upon how significant the SFA-granted assets are relative to the plan's existing funds and remaining benefit payments.
Having navigated the application process and now hopefully receiving funds, plan sponsors face a more complex challenge: how best to invest this much-needed boost in assets to ensure they can meet payments for their participants as far into the future as possible. For many, this comes down to a balancing act between two goals: generating the stable cash flow needed to pay benefits in the short-term, while making sure the assets are working as hard as possible to generate additional return for the long-term, all the while staying within the investment restrictions attached to SFA funds. While these might not sound like competing objectives, each requires a slightly different approach. Many plan sponsors are likely to find their optimal solution combines elements of both.
To help pay short-term benefits, many plan sponsors are opting to align the timing of the proceeds from their fixed-income portfolios with the timing of benefit payments going out to participants, a strategy often referred to as "cash flow matching." This approach reduces the need to sell assets to raise cash and can be an efficient way to manage the liquidity of the portfolio. Because of the current rate environment, it is possible for plans to cover a larger portion of remaining benefit payments than expected without taking on too much additional risk. In other words, sponsors now have the potential to meet benefits payments much further into the future than was originally anticipated when the SFAP was launched.
A good exercise on receiving SFA funds is to first see how many years into the future the funds could be used to meet benefit payments. For some plan sponsors, this may be sufficient to pay all remaining benefits, while for others, this might still leave some pensioners short. Even for those who prefer not to take this cash flow matching approach, it can be a beneficial exercise to understand the extent of any gap between assets and liabilities.
For those wishing to make the assets work a little harder, in the hope of generating excess returns that can help the plan pay benefits beyond what can be achieved through cash flow matching, a more flexible return-oriented fixed-income mandate may be more appropriate. While the SFA assets do come with some restrictions designed to protect the funds for plan participants, there are a number of ways in which plan sponsors can look to outperform. Giving the manager the freedom to actively manage within and across sectors, exploit securitized credit (where allowed under the SFA guidance) and to manage the risk positioning of the portfolio in different environments, can all add incremental returns to the portfolio. Over the lifetime of the plan, these incremental returns can be significant in extending the life of the funds.
While some plan sponsors may strongly prefer one of these two approaches, many will find a more appropriate strategy is one that combines elements of both.
That is, closely matching the cash flows for a few years, while investing the rest of the assets to facilitate growth. This enables benefit payments to be met from the cash flow-matched component, leaving the return-oriented fixed income to grow without concerns of raising cash to meet liquidity needs.
As an example, plan sponsors may opt to invest three to five years' worth of cash flows in a cash flow matching portfolio, while investing the rest of the assets in a more total-return-oriented fixed-income portfolio. Payments to participants are made from the income generated from the cash flow matching portfolio, which is then periodically replenished from the return-oriented fixed-income portfolio. This combination can provide plan sponsors some comfort that they will not be forced to sell assets in adverse economic periods to make benefit payments in the short term. It also means that they are making the assets work as hard as possible to provide benefit security for participants in the longer term.
Whatever the chosen approach, it is important that plan sponsors and the asset managers they work with operate and maintain the SFA assets in line within the PBGC's restrictions on allowable assets and asset allocation. Given this is a new program, it is also important to stay abreast of any changes or updates that could impact the appropriateness of the chosen investment strategy.
Similarly, changing market conditions may make one approach more or less attractive over time, and so advising clients to constantly reassess the balance between cash flow matching, return-oriented fixed income, and return-seeking assets is critical to ensure they are optimizing their choice.
The SFA has provided a much-needed boost for plan sponsors and for many a once-in-a-lifetime opportunity to secure their participants' retirement benefits. And yet with this opportunity comes the responsibility for asset managers to ensure they maximize the outcome for retirees, ensuring payments are made through different economic environments while also extending the lifetime of the plans as far as they can. When properly deployed, the SFA funds can help build more robust retirement portfolios that better meet the needs of multiemployer plans and their members. This is something we can all celebrate.
Tim Boomer is senior managing director, head of client solutions, at SLC Management in Wellesley, Mass. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.
