The Pension Benefit Guaranty Corporation (PBGC) provides a safety net for participants in private-sector defined-benefit plans by insuring the participants' benefits under the plan. This federal corporation was established by the Employee Retirement Income Security Act (ERISA) of 1974 to give participants in plans covered by the PBGC guaranteed "basic" benefits in the event that their employer-sponsored defined benefit plans become insolvent. In this article, we'll show you what the PBGC can tell you about the health of your company's pension plan.

How It Works
The basic benefits that are covered by the PBGC consist of a pension upon achieving retirement age, most early retirement benefits, annuities for survivors of plan participants and disability payments for those receiving such payments before the covered plan terminates. For plans that closed in 2005, eligible participants can receive a maximum pension of $3,801.14 a month ($45,613.68 a year) at age 65. For 2006, that number rose to $3,971.59 ($47,659.08 a year). Early retirement reduces the benefit, while retirement after age 65 increases the benefit. For instance, for 2006 the monthly/annual benefit for someone who retires at age 45 would be $992.90/$11,914.80, and the benefit for someone who retires at age 75 would be $12,073.63 /$144,883.56.

Note: The PBGC does not cover certain death and supplemental benefits. Also, if a defined benefit plan is terminated within five years of being amended, benefit-increases that are as a result of the amendment may only be partially covered.

Plans participating in the PBGC include two types: single-employer plans and multi-employer plans. The tax code defines a multi-employer plan as one in which more than one employer is required to contribute and that is maintained according to a collective bargaining agreement between one or more employee-organizations or employers. It must also satisfy other requirements the secretary of labor may prescribe by regulation. A single employer plan is one that is maintained by one employer, either through a collective bargaining agreement or unilaterally.

How It Is Funded
While the PBGC is a federal agency, it not funded with tax dollars. Instead, it is funded by premiums* collected from defined-benefit plan sponsors, assets from defined-benefit plans for which it serves as trustee, recoveries in bankruptcy from former plan sponsors and with earnings from invested assets.

*Effective 2006, the flat-rate per-participant premiums for single employer plans was increased from $19 to $30 under the Deficit Reduction Act of 2005. The multi-employer premium was also increased from $2.60 to $8 per participant. Rates will be adjusted for cost of living adjustment (COLA), indexed to national average wages

The PBGC Takes Over Pension Plans
In general, the termination of a defined benefit plan is initiated by the employer, either by a standard termination or a distress termination. Under a standard termination, the employer must demonstrate to the PBGC that there are sufficient assets under the plan to pay all benefits owed under the plan to participants. A distress termination occurs when the plan is being terminated but there are not sufficient assets under the plan to pay benefits. Generally, the PBGC steps in to take over the administration of a pension plan when either a distressed termination is initiated by the plan sponsor or the PBGC determines that a plan will be unable to meet its obligations and mandates a takeover. Distress terminations generally occur in conjunction with bankruptcy, but in most cases, a PBGC mandated takeover is the method by which the entity becomes responsible for a plan.

The Notification Process for Plan Terminations
In the event of a distress termination or a PBGC mandated takeover, plan participants generally receive notification of the termination from the PBGC when they assume trusteeship of the plan. The PBGC itself also publishes a notification in various newspapers to announce the takeover, but national media outlets generally provide coverage of the story only when major pension plans fail.

In a standard termination, plan participants must be provided with a written "notice of intent to terminate" at least 60 days prior to the termination date. The plan may pay plan participants a lump-sum payment or purchase an annuity that is purchased for them from an insurance company. The PBGC oversees standard terminations by reviewing the plan to determine whether it has enough money to meet its obligations. If so, the PBGC approves the termination.

What's in the News
According to the PBGC's 2005 Annual Performance and Accountability Report, it currently guarantees payment of basic pension benefits earned by 44.1 million American workers and retirees participating in 30,330 private-sector defined benefit pension plans. At the close of the 2005 fiscal year, the PBGC was $23,111 million dollars in debt and headed toward the need for a taxpayer-funded bailout. In an effort to avoid such a bailout, legislators passed the Pension Protection Act of 2006 (PPA), which requires pension providers to fully fund their defined-benefit plans. (To learn more about the PPA, see Pension Protection Act Of 2006 Becomes Law and The Pension Bill: A Wolf In Sheep's Clothing.)

The PBGC's troubles began in 2001. Prior to that time, the PBGC had a surplus of funds, but a slew of failed airlines and steel producers abandoned their pension obligations. These two industries alone accounted for 75% of the claims against PBGC funds. By comparison, the PBGC supported 243,000 pensioners and their beneficiaries to the tune of $900 million in 2000. An additional 226,000 were waiting in the wings, but were not yet eligible to retire. By 2005, those numbers jumped to 698,000 payees with 489,000 waiting.



To make matters worse, funding dried up as companies accelerated a trend that began in 1985 and continues to increase its pace - employers are shifting away from employer-funded, defined-benefit plans in favor of optional employee and employer-funded defined-contribution plans. Today, the PBGC insures only about 25% of the number of plans it did in 1985. An additional 9% of plans have frozen their contributions. If these trends continue, the burden of funding the PBGC may fall on the taxpayers' shoulders. (For further reading, see The Demise Of The Defined-Benefit Plan.)

Remember to Check Your Plan
If you are covered by a defined-benefit plan, your plan's "Summary Plan Description" will include a reference to the PBGC. Your employer or plan administrator should also be able to tell you whether or not the plan is covered. To check the health of your plan, pay attention to your mail. Single-employer sponsored plans are required to provide a written notification if the plan has been funded at less than an 80% level for the past one or two years and less than 90% for in excess of two years. You can also request the information from you plan administrator.

For more on the PBGC, visit their website.

by Lisa Smith, (Contact Author | Biography)