The mandated interest rate used for calculating the amount of special financial assistance a plan receives is currently about 5.5%. But under the interim final rule, the PBGC also requires that special financial assistance assets must be invested in investment-grade bonds, which currently have annual yields of about 2% to 2.5%.
The roughly 300-basis-point disconnect between the two numbers introduces a "negative arbitrage," said Joseph Hicks, vice chairman of the Washington-based American Academy of Actuaries' multiemployer plans committee. "If you calculate a projected solvency date assuming that the assets are going to earn 5.5% and instead they're invested in something that only earns 2% to 3%, does that mean that the plan is going to go insolvent prior to the 30-year period ending in 2051?" Mr. Hicks said.
Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, said the interim final rule's investment restrictions will have the biggest negative impact.
"They are so restrictive that plans are prevented from being able to get what we would consider a normal return on the investment," Ms. Robinson said. "When Congress implemented the SFA, their idea was that this money would help plans remain solvent through 2051, but with these restrictions we feel that this won't be enough money for plans to remain solvent through that time."
Several stakeholders in comment letters to the PBGC and in interviews lauded the PBGC with issuing the interim final rule so soon after Congress passed the American Rescue Plan. But those stakeholders also said more work is needed.
"When you've got members of Congress writing in to explain what their congressional intent is, you would hope that that will have some influence on the PBGC," Mr. Brenner said. A comment letter from Senate Majority Leader Chuck Schumer, D-N.Y., and six fellow Senate Democrats "goes to the heart of the discount rate/interest rate assumption part," Mr. Brenner said.
The Aug. 11 letter said the interim final rule's "flawed assumptions, taken together with incompatible investment restrictions, make it structurally unlikely to provide plans with funding sufficient to ensure solvency through 2051."
The senators' comment letter continued: "An interpretation which assumes that Congress intended for the PBGC to assume a 5.5% return on a class of assets that typically yield about 2% on average is illogical and inconsistent."
Ms. Robinson of the ERISA Industry Committee said investment restrictions on special financial assistance assets may also create an incentive for plans to take on riskier investments with current plan assets in order to make up the deficit. "We think by removing restrictions or including more flexibility, it reaches the goal of making sure plans are solvent through 2051 and also makes sure that plans are able make more secure investments with their current assets," she said.