I was a summer associate back in 1996 when, just steps from our old offices at 1585 Broadway, people lined up for blocks outside the Nederlander Theatre in the hopes of getting tickets to the hot, new-to-Broadway show that was captivating audiences nightly. Those lucky enough to score tickets to Rent would soon get to hear Mimi, played by original cast member Daphne Rubin-Vega, belt out the famous lyrics, “It’s gonna be a happy new year.”
Fast forwarding to the year 2022, will it be a happy new year? Many multiemployer plans and their participants, contributing employers and unions certainly hope so, as they eagerly anticipate the issuance of a Pension Benefit Guaranty Corporation (“PBGC”) final rule that may answer the question for them. Specifically, in its recent Statement of Regulatory and Deregulatory Priorities, released on December 10, the PBGC reported that it expects to publish in January 2022 a final rule on multiemployer pension relief for troubled plans, known as “special financial assistance.”
As we previously reported, on July 9, 2021, the PBGC issued an interim final rule pursuant to the American Rescue Plan Act of 2021 (“ARP”) explaining how it intends to calculate the special financial assistance for multiemployer plans in critical and declining status (i.e., generally, expected to be insolvent in 20 years) and certain other troubled plans.
Many troubled multiemployer plans were disappointed because, in that interim final rule, the PBGC took at relatively narrow view of the statutory language, which provided that the amount of special financial assistance is the “amount required for the plan to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment and ending on the last day of the plan year ending in 2051.” Moreover, the interim final rule allowed special financial assistance to be invested only in investment grade bonds, which for most plans produces a far lower return than the interest rate plans were required to use to calculate the amount of the special financial assistance.
These interpretations created a real possibility that many plans eligible for relief would not avoid insolvency permanently or even until 2051 (and some plans eligible for relief would have their relief calculated at $0), which many believe is inconsistent with ARP’s statutory intent. As a result, troubled multiemployer plans and other interested parties are watching carefully to see whether PBGC’s final rule changes some of the more troubling provisions in its interim final rule.
Perhaps the most likely provision to change is the definition of permissible investments. This could be an important step toward protecting the solvency of plans at least through 2051 because it could allow plans to invest the assets they receive through special financial assistance in a manner that would achieve a rate of return that more closely approximates the interest rate used to calculate the amount of the assistance needed in the first instance.
By way of background, the statute itself permits special financial assistance to be invested “in investment-grade bonds or other investments permitted by [PBGC]” (emphasis added). The interim final rule permitted special financial assistance to be invested only in investment-grade bonds (and certain commingled vehicles and derivatives that provide exposure to these bonds), and it did not take Congress up on its “offer” to permit other types of investments. However, the PBGC did seek comment on whether it should expand this interpretation.
As time passed, there was some room for optimism. In a session I moderated at the International Foundation of Employee Benefit Plans Annual Conference in October, representatives from the PBGC acknowledged that the PBGC took a conservative approach in the interim final rule. Notably, the representatives also stated that they understood the problem and that PBGC was taking a “close look” at stakeholder comments on the interim final rule that urged PBGC to expand the scope of permissible investments.
While no promises were made, these comments provided some hope that the final rule will modify the interim final rule in a way that addresses, at least to some extent, its perceived shortcomings. It will not be long before we find out whether Ms. Rubin-Vega was prescient and, for troubled multiemployer plans, it will, in fact, be a happy new year.
In the interim, on behalf of our entire Employee Benefits and Executive Compensation Group at Proskauer, allow me to wish all of our clients and friends a very happy holiday season and, of course, a Happy New Year!