Russell: Borrowing Is Cheaper Than PBGC Premiums

As Pension Benefit Guaranty Corporation (PBGC) premiums skyrocket, underfunded plan sponsors might be better off borrowing to fully meet their liabilities, according to Russell Investments.

In a research note, Managing Director James Gannon argued that borrowing to fund the pension plan eliminates the need to pay increasingly expensive PBGC variable-rate premiums.

Unlike flat-rate premiums, which plan sponsors pay per participant, the variable-rate premium is based on a plan’s unfunded liabilities. The recently passed budget bill has pushed the variable-rate premium to $34 per $1000 in underfunded liabilities in 2017, 7, followed by hikes to $39 in 2018 and $44 in 2019, once inflation is taken into account.

These ever-increasing premiums, Gannon wrote, mean that is “generally cheaper for sponsors to fully fund their pension plan—even if they needed to borrow money to do so—than to maintain the underfunded position.”

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For his analysis, Gannon compared two options plan sponsors have for meeting liabilities: contributing to reduce the unfunded amount over seven years—and paying variable-rate premiums until the pension is funded—or borrowing money to fund the full amount now through issuing bonds.

“PBGC premiums… will make it more favorable for sponsors to borrow and fund their pension plans, and will even allow them to borrow at higher rates,” wrote Gannon.

Assuming a plan is $20 million underfunded and uses a 5% discount rate, a plan sponsor opting for the seven-year amortization would pay nearly $3.5 million per year, plus a total of $3.2 million in PBGC variable-rate premiums over that period.

In contrast, the same plan would need to issue a 10-year bond at an interest rate as high as 6.77% to fund the plan at once for the same expense.

Additionally, Gannon said funds that borrow to meet their liabilities can “take advantage of a tax arbitrage, especially if contributions and loan interest payments are tax-deductible.”

“The higher the [tax] rate, the more a sponsor would be willing to borrow, because the breakeven interest rate will increase with higher tax rates,” Gannon wrote. “Borrowing allows for the double impact of not paying PBGC premiums and being able to take advantage of a tax arbitrage.”

Fink1 BlackRock Chairman & CEO Larry FinkBlackRock has rolled out a wide-ranging restructure of its leadership, boosting its multi-asset staff and overhauling its equity, fixed income, and real assets teams.

In a note to staff, seen by CIO, BlackRock CEO Larry Fink and President Rob Kapito detailed how the world’s biggest asset manager was to create a single, “globalized” fixed income business and combine its “scientific” and “fundamental” equity teams into one department.

The company’s infrastructure and real estate teams are to become a single real assets division. Its research department—the BlackRock Investment Institute (BII)—is also to expand, with BlackRock Vice Chairman Philipp Hildebrand switching from the Multi-Asset Strategies (MAS) group to lead the BII.

From February 1, Tim Webb will become global head of fixed income with Rick Rieder as CIO. Webb joined exchange-traded product provider Barclays Global Investors (BGI) in 2000, which merged into BlackRock in 2009. At BGI he was global head of fixed income investments.

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Rieder worked at Lehman Brothers for more than 20 years before moving to R3 Capital Partners, a fixed income hedge fund. R3 was subsequently bought by BlackRock in 2009, with Rieder becoming a managing director.

In addition, Milan Lint and Alex Claringbull will oversee the fixed income team’s collaborations with BlackRock’s “portfolio solutions” teams in the US and UK.

“A deliberate and consistent approach to reshaping our organization to maximize the full power of BlackRock is something we are deeply committed to.”“Given the uncertainty created by central bank actions around the world, clients are valuing guidance on fixed income markets from a global perspective,” Fink and Kapito wrote.

“We will meet that need and build on the strong investment performance that our fixed income teams are delivering today by creating a truly global franchise under the leadership of widely respected, world-class investors.”

BlackRock’s real estate and infrastructure teams will combine into one real assets department from February 1, under the leadership of Jim Barry. Barry is currently head of the company’s global infrastructure group. Marcus Sperber, head of global real estate, will report to him under the new structure.

The company is also set to combine its Fundamental Active Equity and Scientific Active Equity groups. The “unified active equities platform” will be jointly led by Chris Jones, Nigel Bolton, Raffaele Savi, and Jeff Shen. Savi and Shen are both former BGI staff, while Jones joined BlackRock in 2014 after a 32-year career at JP Morgan Asset Management.

“In a market environment characterized by more volatility, lower beta and increased dispersion, clients are increasingly looking for active equity solutions irrespective of whether they are fundamental or quantitative strategies,” Fink and Kapito wrote.

Elsewhere, several staff will take on new roles within an expanded Multi-Asset Strategies (MAS) division.

Rich Kushel, previously chief product officer and head of strategic product management, will become head of MAS, while Pierre Sarau will be CIO. BlackRock’s “LifePath” target date funds and impact investing team will become part of the MAS division.

“A deliberate and consistent approach to reshaping our organization to maximize the full power of BlackRock—including mapping our talent to new opportunities—is something we are deeply committed to,” Fink and Kapito concluded.

“Across all of the changes we are announcing today, our ability to match the right skills to the ambitious goals and priorities of our firm in this organizational evolution is a tribute to the depth, diversity and talent of our people.”