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    Liability Driven Insights: American Rescue Plan implications explained

    Liability Driven Insights: American Rescue Plan implications explained

    March 17, 2021 Liability-driven investment

    Last week, President Biden signed the $1.9trn American Rescue Plan, which enhances and extends funding relief for Single Employer pension plans. We view the funding rule changes to be important and as significant in scale as the original introduction of the Pension Protection Act (PPA) in 2006.

    Key takeaways for Single Employer plans

    The effect of the new relief is to significantly defer near-term and medium-term minimum required contributions (MRCs) farther into the future.

    Similar to existing relief measures (such 2012’s MAP-21, 2014’s HATFA and 2015’s BBA), this is largely achieved by applying interest rate stabilization measures, which will increase the assessed PPA funded status by 30-40% relative to more mark-to-market measures such as GAAP. Combining this with the longer 15-year amortization period and resetting of shortfall amortization bases will allow many plan sponsors to have materially lower MRCs in the near term.

    Plan sponsors will, however, need to keep an eye on their voluntary contribution policies in order to control underfunding, mitigate variable rate PBGC premiums and/or pay for the cost of new benefit accrual.

    Please click here for a full summary of our further perspectives and analysis.

    Time for plan sponsors to re-evaluate strategy?

    Underfunded plans will now have greater flexibility on the size and timing of contributions to their plans and can take advantage of this new relief to rebalance their deficit reduction strategies between investment returns and funding (target contributions).

    Perhaps counterintuitively, while projected contributions may be lower, the provisions can allow plans to pursue lower volatility and higher-certainty strategies, taking advantage of a longer effective time-horizon to generate returns before contributions may be due.

    As a result, we believe the new relief rules can help plan sponsors to more aggressively pursue liability de-risking ambitions and expect to see:

    • An acceleration in the long-term trend of plans allocating away from equities into fixed income and alternatives
    • A step-up in cashflow matching and hibernation strategies
    • A near-term to medium-term slowdown in the pursuit of pension risk transfers (PRT)

    Once again, please click here for a full summary and analysis.

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