As part of the Biden administration’s American Rescue Plan Act of 2021 – which unleashed US$1.9trn of stimulus spending – the US government is injecting US$80bn–$90bn of cash into underfunded pension plans.
A large part of this infusion is making its way into the bond market this year, either in the form of investments in highly rated corporate paper or US Treasury debt.
“A lot of money is coming from the pension relief provided by the government,” said a senior DCM banker.
The Special Financial Assistance programme is intended for so-called Taft-Hartley pension plans, such as those run by labour unions like the Teamsters, which represents millions of truck drivers and delivery workers across the US. Funding levels for many of these plans have deteriorated because of a declining base of contributors and the overhang of benefit increases in the 1990s.
Despite the amount of cash deployed by the SFA, the measure has not attracted much attention as it only represented a sliver of the broader stimulus bill. In addition, much of the assistance has only started to flow this year after a lengthy public consultation.
“It fell under the radar, maybe because it was a bit too technical to warrant those snazzy headlines,” said Christopher Wroblewski, co-head of solutions strategy for LGIM America. “This is a once-in-a-generation opportunity for these plans. It’s not a loan, and it doesn’t need to be paid back."
The Pension Benefit Guaranty Corp – a US government agency which serves as an insurance scheme for insolvent pension plans – has funnelled around US$52bn into Taft-Hartley pension plans as of August 1.
The agency expects to disburse more funds this year, with applications from nearly two dozen pension plans still under review. The goal is for the programme to provide pension funds with enough assets to pay for member benefits until 2051.
Under the finalised SFA rules, pension plans must direct around 66% of the funds towards investment-grade fixed-income assets, which includes US Treasuries. If invested in corporate bonds, the securities must be registered with the SEC. The remaining 33% can go to riskier investments such as equities.
“If US$90bn needs to be distributed, and two-thirds goes to investment-grade fixed income, US$60bn is a lot of new money,” said Wroblewski, using the higher range of estimates for the programme's eventual size.
He noted the pension relief measure was a clear "tailwind" for the asset class.
Staying conservative
When the PBGC started to solicit comments on the programme in 2021, the federal agency had initially proposed all the funds go to high-grade bonds.
Asset managers including Invesco and BlackRock pushed back, noting such meager-yielding assets were unlikely to match the discount rate used to calculate the level of assistance for pension plans. In 2021, an index comprising high-grade corporate bonds and US Treasuries might have only yielded 1%–2%, as the US Federal Reserve had kept its benchmark interest rate at rock-bottom that year.
But after a series of rate hikes in 2022 and 2023, highly rated corporate bonds are now more than able to meet pension funds' hurdle rates. The average US investment-grade bond yield was 5.68% as of August 30, according to ICE BofA index data.
Moreover, hurdle rates are dictated by the time of the application. Pension funds that submitted their requests earlier in 2023 were able to have a lower discount rate even as the Fed has raised interest rates by 100bp this year.
"The rates for many plans are still closer to 3.5%–4% as opposed to where current market rates would indicate," said Wroblewski. "This is why many plans are opting for a more conservative approach. They are able to exceed these hurdle rates of closer to 4% with a conservative portfolio, built with Treasuries and corporate bonds. There is less of a need to include equities in the mix."
Some pension funds are throwing all the SFA funds into high-grade fixed income, eschewing the opportunity to earn additional returns in riskier investments, he said.