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Federal Register / Vol. 86, No. 130 / Monday, July 12, 2021 / Rules and Regulations
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difficult for plans to retain their active members. Plans could suffer irreparable harm to the contribution base as a result, which would likely guarantee that plans would go insolvent. As a result, PBGC determined that this regulatory alternative would harm plan participants and the multiemployer insurance program.
Conditions Related to Retroactive Benefit Improvements PBGC first considered the implication of foregoing any regulatory authority provided under section 4262m of ERISA to impose reasonable conditions related to retroactive benefit improvements. The primary support for not regulating is that additional constraints on benefit improvements may be unnecessary and may be considered onerous. Plans that receive SFA are deemed to be in critical status through the plan year ending in 2051
and will be subject to the terms of their applicable rehabilitation plan. A
rehabilitation plan generally restricts a plan from increasing benefits unless the plan is able to provide additional contribution income that is not already contemplated with the rehabilitation plan.
However, as with the advantages of a condition on future benefit accruals discussed earlier, a secondary condition on retroactive benefit increases could prevent plans from adopting benefit improvements that ultimately prove to be unaffordable for the plan. PBGC
estimates that a one-time 10 percent increase in retroactive accrued benefits for all active participants could increase the aggregate nominal amount of future financial assistance under section 4261
by approximately $7 billion to $10
billion. Absent regulatory action, the extent to which employers can and would increase retroactive benefits is unknown. PBGC would generally expect the financial impact to be less than this estimated range due to existing rehabilitation plan constraints, but the true impact is unknown and subject to a great deal of uncertainty.
Another regulatory alternative considered would allow for retroactive benefit improvements, subject to rehabilitation plan constraints, but only up to a specified limit. The alternative would provide plans with limited flexibility to increase benefits, but also prevent excessive improvements that would impair a plans financial position. Yet another alternative would be to limit the amount of retroactive benefit increases to a restoration of accrued benefits to levels available before reductions applied pursuant to rehabilitation plan requirements in
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recent years. The benefit of this approach would be to improve potentially the retirement security of active plan participants, who have experienced the disproportionate impact of benefit reductions. However, increases to future accrual rates more effectively bolster the future engagement of active participants than retroactive benefit improvements. By prohibiting all retroactive benefit improvements, plans will remain on a more favorable financial path and any surplus income would be better utilized by improving future accruals to help attract and retain active members.
Conditions Related to Allocation of Plan Assets PBGC first considered the implications of foregoing any regulatory authority provided under section 4262m of ERISA to impose reasonable conditions related to asset allocation.
There were two primary factors in support of this approach. First, section 4262l already restricts the investment of SFA to investment-grade bonds and other investments as permitted by PBGC. This condition alone serves as a significant constraint on a plans ability to pursue higher returns in risk-seeking assets, particularly for plans that had previously been insolvent or close to insolvency and received an amount of SFA that is large in proportion to the amount of existing plan assets. Second, imposing conditions that severely restrict the level of return-seeking assets may impair a plans ability to achieve greater investment returns and forestall insolvency. Although a higher proportion of return-seeking assets exposes plans to greater losses in the event of adverse market conditions, the long-term investment horizon affords plans the risk capacity to recoup these losses.
The primary risk to foregoing any regulatory action to impose conditions on asset allocation is the potential for a scenario under which plans that receive SFA invest heavily in highly risky, speculative assets and the market experiences a severe, prolonged downturn. Plans may choose to pay all benefits and administrative expenses from the SFA account before exhausting any existing plan assets. Following the depletion of SFA, plans would then experience no constraints on their asset allocation and could seek to invest in highly risky assets. Although the longterm investment horizon does afford plans with time to recoup losses, a severe and prolonged downturn could cause irreparable harm to the plans financial position. PBGC is unable to measure a precise financial impact for
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foregoing any regulatory condition with respect to asset allocation. However, under most economic scenarios, PBGC
expects a more favorable outcome both to plan solvencies and future PBGC
program outlays by imposing less restrictive conditions related to asset allocation, such as the condition in the interim final rule.
A separate regulatory alternative was considered under which PBGC would require all plan assets to be invested in accordance with the restrictions for SFA
under section 4262l of ERISA i.e., investment-grade bonds or other investments as permitted by PBGC.
This condition would effectively require plans to pursue a liability-driven investment strategy under which fixed income assets are matched to expected benefit payments to immunize the portfolio from risk. This condition would be highly restrictive on a plans ability to select plan assets. It would mitigate year-to-year volatility in plan funded status and would severely restrict a plans attainable investment returns and thus potentially accelerate the insolvency of the plan. Because available fixed income yields are expected to be lower than the interest rate limit defined under section 4262e3, plans would generally become insolvent before the 2051 plan year. Based on modeling using ME
PIMS, PBGC estimates that this regulatory alternative could increase future financial assistance payments under section 4261 by $5 billion to $15
billion over the next four decades. Due to the increased financial impact of this option and the adverse impact to plan participants resulting from accelerated plan insolvencies, PBGC did not choose to pursue this alternative.
Conditions Related to Reductions in Employer Contribution Rates PBGC first considered the implications of foregoing any regulatory authority provided under section 4262m of ERISA to impose reasonable conditions related to reductions in employer contribution rates. The primary benefit of this option is that it could provide plans with flexibility to reduce contribution rates if it is expected to attract or retain employers in the plan. Any mechanism that allows plans to bolster their active membership could help to improve their funded status through increased contribution levels. A plans authority to allow for reduced contribution rates during the collective bargaining process is already constrained by the terms of their rehabilitation plan, which is mandated for plans certified in critical status.
However, if plans are able to allow for
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