Congressional Republicans on Friday took another step in their quest to dismantle the Biden administration’s environmental, social and governance rule-making initiatives.
The House Financial Services Committee has formed a working group to “combat the threat to our capital markets posed by those on the far-left pushing environmental, social and governance proposals,” the committee’s Chairman Patrick McHenry, R-N.C., announced.
The group will be led by Rep. Bill Huizenga, R-Mich., and include eight other Republican committee members.
Among its priorities, the group will examine ways to “rein in the SEC’s regulatory overreach;” reinforce the materiality “standard as a pillar of the nation’s disclosure regime;” and hold to account market participants who “misuse the proxy process or their outsized influence to impose ideological preferences in ways that circumvent democratic lawmaking,” according to a news release.
“This group will develop a comprehensive approach to ESG that protects the financial interests of everyday investors and ensures our capital markets remain the envy of the world,” Mr. McHenry said in the news release. “Financial Services Committee Republicans as a whole will continue our work to expand capital formation, hold Biden’s rogue regulators accountable, and support American job creators.”
President Joe Biden on Thursday announced that the Pension Benefit Guaranty Corp. has approved $36 billion in federal assistance to shore up a massive union multiemployer pension plan facing steep cuts.
Teamsters Central States, Southeast & Southwest Areas Pension Fund, Chicago, will receive the funds under the Special Financial Assistance Program. The program, created by the American Rescue Plan Act that Democrats passed in March 2021, was designed to shore up struggling multiemployer pension plans through 2051. The PBGC estimates the total cost of the program will range from $74 billion to $91 billion.
The Central States Pension Fund covers more than 350,000 union workers and retirees who were facing estimated benefit reductions of roughly 60% in the next few years, according to a White House news release.
The pension plan had a funding ratio of 18% with $57.2 billion in projected benefit obligations as of Jan. 1, 2021, according to the plan’s most recent Form 5500 filing. As of Dec. 31, the plan had $10.1 billion in assets, the filing showed.
The PBGC approved the first SFA application in December 2021 and since then has awarded funds to 36 other struggling multiemployer plans. But Thursday’s announcement is by far the largest. As of Dec. 1, the PBGC had approved just over $8.9 billion in SFA funds to cover roughly 193,000 workers, retirees and beneficiaries.
The Bank of England’s emergency bond-buying last week helped shore up U.K. pension funds and threw a spotlight on a popular strategy among corporate plans known as LDI – or liability-driven investing.
Total assets in LDI strategies in the U.K. rose to almost £1.6 trillion ($1.8 trillion) at the end of 2021, quadrupling from £400 billion in 2011, according to the Investment Association, a trade group that represents U.K. managers. Many LDI mandates allow for the use of derivatives to hedge inflation and interest rate risk.
Here’s how LDI works: Liability-driven investing is employed by many pension funds to mitigate the risk of unfunded liabilities by matching their asset allocation and investment policy with current and expected future liabilities. The LDI portion of a pension fund’s portfolio utilizes liability-hedging strategies to reduce interest-rate risk, which could include long government and credit bonds and derivatives exposure.
Jeff Passmore, LDI solutions strategist at MetLife Investment Management, said the situation with U.K. pension plans “has been challenging, and the heavy use of derivatives in the U.K. LDI model has made the current situation worse than it would otherwise be.”
While most U.S. LDI portfolios rely on bonds rather than derivatives, ‘”those U.S. plan sponsors who have leaned heavily on derivatives and leverage should take a cautionary lesson from what we’re seeing currently across the Atlantic.”
The U.K. pension debacle “is a plain-and-simple problem of leverage,” Charles Van Vleet, assistant treasurer and chief investment officer at Textron, said in an email.
Many U.K. pension plans were interest rate-hedged at 70%, while also holding 60% in growth assets, suggesting 30% leverage, he said. The portfolio’s growth assets have lost around 20% of value if held in public equities and fixed income or about 5% down if held in private equity, he noted.
“Therefore, to make margin calls on their derivative rate exposure they had to sell growth assets – in some cases, selling physical-gilts to meet derivative-gilt margin calls,” Mr. Van Vleet said.
“The problem is worse for plans who gain rate exposure with leveraged ETFs. The leverage in those funds is commonly via cleared interest rate swaps. Margin calls for cleared swaps can only be met with cash – not posted collateral. Therefore, again selling physical-gilts to meet derivative-gilt margin calls.”
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LIBOR, which has been plagued by cases of bank manipulation, is set at different currencies, including the U.S. dollar, British pound sterling and euro. New LIBOR-based contracts will cease at the end of 2021, but in November, the Intercontinental Exchange Inc. announced that the ICE Benchmark Administration, which administers LIBOR, would explore ceasing the most utilized U.S. dollar LIBOR tenors in June 2023 instead of late 2021. On March 5, Britain’s Financial Conduct Authority confirmed the 2021 and 2023 cessation dates for LIBOR, although it retains the option for a synthetic calculation if needed.
The extension to June 2023 would allow more time for outstanding contracts to mature, thereby reducing the chance of potential disruptions, U.S. regulators said in a December statement.
But the majority of contracts extend beyond mid-2023.
The Biden administration will review a recent Department of Labor rule stipulating that ERISA plan fiduciaries cannot invest in “non-pecuniary” vehicles that sacrifice investment returns or take on additional risk.