PBGC Updates Terminated Single-Employer Plan Benefits

The Pension Benefit Guaranty Corporation finalized new rules Tuesday concerning benefit payments from terminated single-employer plans. The changes are largely clarifications of ambiguously worded regulations and the codification of existing practices.

The final rule explains that when a single-employer plan terminates, either under a distress situation or in an involuntary termination, the PBGC normally becomes the trustee for that plan and is responsible for administering its benefits. Once under the PBGC’s trusteeship, lump sum payments are not permitted unless the amount payable to a beneficiary is “de minimis,” meaning $5,000 or less. The second exception is if a participant wants their mandatory contributions returned as a lump sum.

The PBGC clarifies that this general prohibition on lump sum payments applies even when the participant requested a lump sum prior to plan termination, but it has not yet been paid out. The PBGC will not honor the request “regardless of the reason for not paying the lump sum” unless one of the other two exceptions apply. The rule explains that investigating instances in which a participant requested a lump sum would require a burdensome “facts and circumstances analysis” that the PBGC lacks the resources to conduct.

“De minimis” amounts, for the purpose of the lump sum exception, were also clarified. Under the final rule, PBGC regulations will refer to Section 203 of the Employee Retirement Income Security Act instead of a specific dollar amount. The de minimis threshold is currently $5,000, but it will be updated to $7,000 starting in 2024.

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The final rule also clarifies that an estate cannot elect a life annuity upon the death of the participant. Current regulations state that an estate may elect a lump sum, which implies that the traditional alternative, a life annuity, would also be available. However, the final rule states that “a life annuity is inappropriate for an estate” and clarifies that an estate must take a lump sum payment if the participant dies.

Lastly, the PBGC clarified its rules for calculating plan assets, liabilities and a sponsor’s net worth. When a plan terminates, the PBGC attempts to recoup assets from the sponsor to make up any unfunded liabilities, considering the net worth of the sponsor in the process. The final rule explains that the PBGC currently uses a “fair market value” for assets which are easy to appraise and “fair value” for assets, such as private equity, which are harder to appraise. The final rule updates PBGC regulations to codify this existing practice.

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Finding the money to build vital infrastructure in the developing world is best done by sovereign wealth funds, as private investors by themselves lack the capacity, according to a paper by three Stanford-affiliated scholars, including Ashby Monk, executive and research director at the university’s Long-Term Investing initiative.

The trick, they contend, is to construct a wealth fund with the ability to attract “private and public investors from other nations to invest in domestic industries” in emerging markets and other less-developed countries.

The report offered a blueprint on how to create a well-run sovereign wealth fund that can attract sufficient capital. It focused on the success of India’s National Investment and Infrastructure Fund, set up in 2015 by its government. To the authors, the NIIF has helped propel the subcontinent over the past decade to 7.1% of the global economy from 4.5% previously. It has done so by adopting a collaborative policy that harnesses relationships with private enterprise and asset allocators.

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While India’s government set up the fund, seeding it with $3 billion, it operates independently from New Delhi. The NIIF sets up separate funds to attract outside capital, and these have been over-subscribed, the paper indicated.

The report outlined how infrastructure investing worldwide has remained “stagnant for the eighth year running, despite almost returning to pre-pandemic levels in primary markets.” Private investors committed $172 billion to infrastructure projects in 2021, but that “falls far below what is needed to close the infrastructure investment gap,” the paper explained.

For sure, developed nations are pumping up their infrastructure investing lately, growing 8.3% in 2021 and constituting 80% of global infrastructure investment, the paper stated. Witness the $1 trillion U.S. infrastructure package that Congress passed two years ago. Yet elsewhere, the paper warned, the picture is bleak, as “investments made in middle- and low-income countries have fallen by 8.8% and now make up only 20% of total investment volumes.”

The paper argued that less-developed nations can tap large institutional investors, namely pension funds, endowments and family offices. The trouble is, it continued, “governments sponsoring long-term investment opportunities, especially in infrastructure projects, struggle to tap into institutional investor capital.” A professional sovereign wealth fund with an eye toward bringing in outside money is the answer, in the paper’s view.

As Monk and his colleagues put it, “Bringing public and private capital together therefore requires a proactive yet structured approach with aligned coordination between governments, industry leaders, and global asset owners.”

Well-organized infra-oriented sovereign wealth funds generate good returns, the report declared, citing Singapore’s Temasek’s 40-year annual return of 16% and United Arab Emirates’ Mubadala Investment Co., with a 12.2% gain since 2017. “This means strong investment performance and national development priorities are not mutually exclusive,” the authors wrote.

The paper was written by Monk, along with two other Stanford-affiliated scholars, Rajiv Sharma and Carter Casady.