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Pensions

COLA Freeze Removed from Pension Bailout Plan

American Rescue Plan Act amendment from Chuck Schumer removes cost-of-living adjustment freeze.
By Michael Katz


The American Retirement Association (ARA) has successfully lobbied to have a provision removed from the latest COVID-19 relief bill that would have frozen the annual cost-of-living adjustments (COLAs) for overall contributions to defined contribution (DC) plans and for the maximum annual benefit under a defined benefit (DB) plan, effective for calendar years beginning after 2030.

A substitute amendment to the $1.9 trillion American Rescue Plan Act of 2021, submitted by Senate Majority Leader Chuck Schumer, D-New York, removed the COLA freeze limit from the bill (H.R. 1319). The bill— without the COLA freeze—was passed by the Senate on Saturday.

“This was a tremendous victory for the ARA and the retirement plan system,” ARA CEO Brian Graff said in a statement. “The government affairs team worked tirelessly to make this happen knowing that it would have been extremely challenging to get this fixed in the future, especially without the support of unions, which were exempted from the freeze.”

The ARA argued that if the freeze had been included in the bill, the qualified retirement plan contribution and benefit limits would have decreased significantly because they would have failed to keep up with the increase in the cost of living. The ARA also said the freeze would have reduced the incentive for employers to offer a qualified retirement plan and could cause some employers to terminate their plans.

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In an interview with CIO, Graff said that while “there’s no question” the pension reform is going to help very underfunded union plans of coal miners and teamsters, he also said it is “a little more limited in its application” than previous pension reform plans as “there’s nothing on defined contribution plans” in the bill.

However, Graff cited legislation introduced by Sen. Ron Wyden, D-Oregon, in December that he said the ARA is “excited about” and which would fill that void. The bill would restructure the existing, nonrefundable saver’s credit into a refundable, government-matching contribution of up to $1,000 a year for workers who save through 401(k)-type DC plans or individual retirement accounts (IRAs). The legislation also includes a COVID-19 recovery bonus credit that provides up to $5,000 in additional government matching contributions for the first $10,000 saved during a five-year period beginning in 2022.

The COVID-19 relief bill is back in the House, which is expected to approve the amended Senate version as soon as today.

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Home > News > Research > ESG-Backing Institutions’ Fave Allocation: Investment Grade Bonds
Research

ESG-Backing Institutions’ Fave Allocation: Investment Grade Bonds

They’re the top asset in those sustainable portfolios, with 81% opting for them, survey says.
By Larry Light


What do institutions devoted to sustainable investing prefer for their portfolios? Investment grade bonds.

Turns out that, in a survey of 80 midsized institutions, investment grade fixed income was used by 81% of environmental, social, and governance (ESG) adherents. Of course, they allocate capital to other asset classes, as well, but to a lesser degree. Those that use domestic equities amount to 73%, followed by non-domestic stocks at 69%.

For ESG-oriented institutions’ bond holdings, 72% were investment grade, which argues that the asset allocators don’t want to stray too far out on the risk curve. That allocation amounts to almost a quarter of total assets under management.

At the moment, investment grades aren’t tearing up the track. This year, the Bloomberg Barclays US Aggregate index (or the Agg), which tracks them, is down 3.2%. This has a lot to do with rising interest rates of late. But the longer-term view is better: Over three years, the Agg is up an annualized 5%.

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And why do these institutions opt for ESG? Nearly half (48%) of ESG-using respondents said it was to dovetail with their organizations’ values or as a means of helping the environment or society. And 22% of them thought it would bring the best returns. Enhancing returns and reducing risk were the top two most important goals.

“Institutions believe that adding ESG criteria to an investment grade portfolio can enhance resiliency and possibly performance,” said Andrew McCollum, head of investment management at Greenwich Associates. “In addition, investment grade portfolios represent a logical and relatively seamless starting point for the integration of ESG into their broader organizations.”

Propelled by tough market conditions in recent times, the study also found institutions are repositioning bond portfolios to attain several objectives, including capital preservation, diversification, income generation, liquidity, and risk management. Strategically, their allocations were positioned either to take on risk to secure a needed yield or else to slim riskier investments where they weren’t getting the rewards investors sought.

When looking to hire external bond managers, the study indicated, the institutions’ overall caution shone through. They generally went with those that outperformed during risk-off times, instead of those that did best under more normal conditions.

To Peter Coffin, Breckinridge’s president, “investment grade fixed income and ESG are a perfect pairing.” Investment grade paper allows investors to best measure risks, he said. “We’re encouraged to see that institutional investors are in fact leveraging investment grade fixed income as a foundation for ESG integration.”

By now, ESG’s ability to deliver superior returns is largely, although not exclusively, accepted in investing circles. Recent research from BlackRock and Bank of America shows that ESG investments outpaced their non-sustainable counterparts during the March 2020 market meltdown.

And Harvard Business School professor George Serafeim concluded in a study that ESG outperforms both in downturns and over the long term, which encompasses all manner of market conditions.

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