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. (For background reading on the benefits and drawbacks of pensions, see Pension Plans: Pain Or Pleasure?)

How the Pension Benefit Guaranty Corporation 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 2013, eligible participants can receive a maximum pension of $4,789 a month ($57,477 a year) at age 65. Early retirement reduces the benefit, while retirement after age 65 increases the benefit. For instance, for 2013 the monthly/annual benefit for someone who retires at age 45 would be $1,197/$14,369, and the benefit for someone who retires at age 75 would be $14,560/$174,730.

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. (For further reading, see The Demise Of The Defined-Benefit Plan.)

How PBGC 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.

*For 2013, the flat-rate-per-participant premium for single employer plans was increased from $35 to $42. The multi-employer premium will remain at $9 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
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 required pension providers to fully fund their defined-benefit plans. Since its creation in 1974, more than 1.4 million workers and retirees in 4,400 terminated single-employer plans have come to rely on PBGC for their retirement income.

Unfortunately, funding for PBGC is drying up as companies accelerate 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.

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.

Related Articles
  1. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  2. Retirement

    Retirees: How to Survive When Interest Rates Drop

    Low interest rates are a portfolio killer if you're living off of investment income. Some strategies for dealing.
  3. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
  4. Retirement

    5 Reasons Millennials Lead in Saving for Retirement

    Say what you want to about millennials but the one thing they are doing better than any other generation is saving for retirement. Here's why.
  5. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  6. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  7. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  8. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  9. Your Clients

    Tips for Making Your Nest Egg Last Longer

    If you’re trying to figure out how to make your hard-earned nest egg last, there’s one piece of advice that stands above the rest.
  10. Personal Wealth & Private Banking

    What People Hate About Financial Advisors

    Advisors need to make a living too, but doing so by cutting corners at a client's expense isn't right. Here are the top complaints against advisors.
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  3. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  4. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
  5. Are 401(k) rollovers taxable?

    401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>
  6. Are catch-up contributions included in the 415 limit?

    Unlike regular employee deferrals, catch-up contributions are not included in the 415 limit. While there is an annual limit ... Read Full Answer >>
Trading Center