US President Joe Biden’s pension bailout might do more than just support troubled retirement plans. It could also spur tens of billions of dollars in demand for corporate bonds with the lowest investment-grade ratings, according to
Struggling multi-employer pensions, which are often tied to unions, will be able to apply for special financial assistance, thanks to the $1.9 trillion pandemic-relief bill signed into law in March. Pension Benefit Guaranty Corp, which insurers plans, will make a single lump-sum payment to eligible funds.
Citigroup estimates roughly 230 pensions will be eligible to receive $86 billion as early as 2022, though the amount may change when the pension insurer releases application guidance in July, strategists Daniel Sorid and Jason Williams said in an interview. The plans will have to invest the money in high-grade bonds or other securities approved by the agency.
The strategists said pension managers may try to extract as much yield as possible by loading up on bonds in the lowest investment-grade rung, which yield 2.46% on average, versus 2.23% for the broader market. Existing funds could get reallocated into riskier investments like stocks, they added. But in credit, the new demand may entice companies rated BBB to issue longer-dated paper than they usually do and flatten the curve for bonds maturing in 10 years and 30 years even further.
“If there was ever a time when 30-year credit should be having its moment in the sun, it’s now,” Sorid said.
Multi-employer plans were hit hard early in the pandemic, with plunging markets resulting in the biggest quarterly deterioration in how well they were funded since 2007, according to a report from actuarial firm Milliman. But the market’s subsequent rally boosted the funding percentage to 88% at the end of last year from 85% a year earlier, according to Milliman’s report. However, many are far less funded than that.
“This keeps many, many funds alive that would have gone to the PBGC to pay those benefits in the next 10 years or so,” Sue Crotty, a senior vice president at Segal Marco Advisors, said. “It’s very good news for the participants.”
How much Biden’s rescue sways the bond market may depend on PBGC’s final guidance in two months. When pensions apply and PBGC ships out the money will guide that impact.
PBGC may in July clarify what it considers “other investments” that it’ll permit plans to invest in alongside investment-grade bonds. While it’s easy to expect this recommendation to be conservative, JPMorgan Asset Management’s Jared Gross suggests that giving plans flexibility to buy things that eke out higher returns could be beneficial in the long run.
“The devil is in the details,” said Gross, head of institutional portfolio strategy at JPMorgan Asset Management. “My hope is that the plans will be given some amount of flexibility, hopefully with the new capital but certainly with respect to their existing capital, to take steps to achieve the right level of risk-adjusted returns so that this actually can be successful over the long horizon and it’s not just a short-term fix.”