The impact of the American Rescue Plan Act (ARPA)
This paper illustrates how the U.S. pension regulatory environment, characterized by funding relief and high Pension Benefit Guaranty Corporation (PBGC) premiums, influences the optimal investment strategies for pension plans. The American Rescue Plan Act (ARPA) funding relief significantly reduced funding requirements. Concurrently, dramatic increases to the PBGC variable-rate premium impose a meaningful headwind for many plan sponsors seeking funded status improvement.
Prior to 2022, funding relief allowed plan sponsors to use interest rates far above market levels to value liabilities for funding purposes. This eliminated cash contribution requirements for many plans. With market interest rates now at much higher levels, the relief is less helpful. In fact, many sponsors of well-funded plans have contribution requirements for the first time in several years — as asset losses from 2022 are incorporated into their funding valuations with almost no corresponding gain funding liabilities, since high rates were already in use. This is even true for many plans investing in liability-driven approaches through 2022, with funded ratios holding steady during the year on a market basis. Sponsors for these plans are now acutely aware that funding liabilities cannot be hedged.
The regulatory framework for pension plans must be considered as investment strategies are being developed. The most important ways in which the structures of funding relief and PBGC premiums affect optimal investment strategies for pension plans are outlined throughout the following sections.
This paper will explore the actions plan sponsors can take to best position themselves to succeed in this challenging market environment, including:
- Funding relief background
- Two primary mechanisms by which funding relief reduces funding requirements for U.S. pension plans
- Impact of funding relief on future funding requirements
- Investment implications
- Strategic implementation
- Elevated PBGC premiums and the application of the VRP cap