The Pension Benefit Guaranty Corporation (PBGC) is a safety net for private-sector defined-benefit pension plans. This federal corporation was established by the Employee Retirement Income Security Act (ERISA) of 1974 to provide participants in plans covered by the PBGC with guaranteed “basic” benefits in the event that their employer-sponsored defined-benefit plans became insolvent. The PBGC does not cover defined-contribution plans, such as 401(k)s or 403(b)s. This article looks at how the PBGC works, and the challenges it faces.
- The Pension Benefit Guaranty Corporation (PBGC) insures many private-sector defined-benefit pension plans, but it does not cover defined-contribution plans such as 401(k)s.
- The PBGC is largely funded by premiums paid by defined-benefit plan sponsors.
- The PBGC covers both single-employer plans and multiemployer plans.
- To help financially at-risk multiemployer plans, the American Rescue Plan Act of 2021 has made special funding available through the PBGC.
How the Pension Benefit Guaranty Corporation (PBGC) Works
The PBGC’s job is to step in if an insured pension plan is unable to fulfill its obligations. It will then cover pension benefits at normal retirement age, most early retirement benefits, annuities for survivors of plan participants, and disability payments for those receiving such payments before the covered plan was terminated.
PBGC benefits are limited to certain maximums and may not pay as much as someone would have received had their pension plan remained in effect. In 2021, eligible participants can receive a maximum pension of $6,034.09 per month if they are 65 years old and elect to receive their pension as a straight life annuity, or $72,409.08 per year.
Early retirement reduces the insured benefit, while retirement after age 65 increases it. For example, the 2021 maximum benefit for someone who retires at age 45 is $1,508.52 per month, while for someone who retires at age 75, it is $18,343.63 a month. Again, this assumes that they take their benefit as a straight life annuity rather than a joint and survivor annuity, which would result in a lower amount.
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 resulted from the amendment may be only partially covered.
PBGC pension plans fall into two categories: single-employer, and multiemployer. The tax code defines a multiemployer 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 Labor Department requirements. A single-employer plan is maintained by one employer, either through a collective bargaining agreement or unilaterally.
The PBGC only covers these private-sector plans, not government or military pensions. As of 2021, the PBGC insured defined-benefit pension plans covering approximately 34 million people.
How the PBGC Is Funded
While the PBGC is a federal agency, it is 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 earnings from its invested assets. The flat-rate, per-participant annual premium for single-employer plans in 2021 is $86. For multiemployer plans, it is $31.
The PBGC’s funding has not always been sufficient, however. At the close of the 2005 fiscal year, for example, the PBGC was more than $23 billion in debt and on the verge of needing a taxpayer-funded bailout. To avoid that, Congress passed the Pension Protection Act (PPA) of 2006, which required pension providers to fully fund their defined-benefit plans.
Even so, at the end of its 2020 fiscal year, the PBGC had a net deficit of $48.2 billion. While its single-employer program had a $15.5 billion surplus, the multiemployer program had a $63.7 billion deficit. The Congressional Research Service reported that the “PBGC projects the financial position of the single-employer program is likely to continue to improve, but the financial position of the multiemployer program is expected to worsen considerably over the next 10 years.”
However, the massive American Rescue Plan Act of 2021, passed in March 2021, includes provisions to help the PBGC shore up multiemployer plans. Plans that are in serious financial difficulty can apply for special assistance through the PBGC. That financial assistance will be in the form of a single, lump-sum payment calculated to cover the plan’s obligations through the year 2051. Unlike most other PBGC funding, the money will come from the government’s general tax revenues, rather than from insurance premiums.
When the PBGC Takes Over a Pension Plan
The termination of a defined-benefit plan is generally initiated by the employer, either as a standard termination or a distress termination. Under a standard termination, the employer must demonstrate to the PBGC that there are sufficient assets in the plan to pay all benefits owed to participants. A distress termination occurs when a plan is being terminated but lacks sufficient assets to pay its benefits.
In a distress termination, which often occurs in conjunction with a bankruptcy, the PBGC will step in to take over the administration of the plan. The PBGC also may take over a plan if it determines that the plan will be unable to meet its obligations. There's also an involuntary termination, when PBGC steps in "to protect a pension plan or the pension insurance system." In this case, the agency initiates the process and, as in a distress termination, assumes responsibility for paying benefits to retirees, "up to legal limits."
During its 2020 fiscal year, the PBGC paid benefits to more than one million plan participants.
If your pension plan is terminated, then you should be notified by either your employer or the PBGC.
Notification Process for Plan Terminations
In the event of a distress termination or PBGC-mandated takeover, plan participants generally receive notification from the PBGC when it assumes trusteeship of the plan. The PBGC also publishes notices in newspapers to announce the takeover, but national media outlets generally cover the story only when major pension plans fail.
With a standard termination, the plan must provide participants with a written “notice of intent to terminate” at least 60 days before the termination date. The plan may make a lump-sum payment to participants or buy an annuity for them from an insurance company to provide future benefits. The PBGC oversees standard terminations by reviewing the plan to determine whether it has enough money to meet its obligations. If so, then the PBGC will approve the termination.
How to Check on Your Plan
If you are covered by a defined-benefit plan from a current or former employer, then its summary plan description (SPD) should tell you whether or not it has a pension guarantee from the PBGC. The employer or plan administrator also is required to provide you with a pension funding notice every year, to show how your plan is doing financially. Also, you can request a copy of the Form 550 annual report that your plan must submit to the government each year.