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.
The PBGC does not cover defined-contribution plans, such as a 401(k) or 403(b). In this article we’ll show you what the PBGC can tell you about the health of your company’s pension plan.
- The PBGC insures participants in private-sector defined-benefit plans, but not defined-contribution plans.
- The PBGC is funded not by government funds but by premiums charged to defined-benefit plan sponsors.
- The PBGC covers both single-employer plans and multiemployer plans.
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 2019 eligible participants can receive a maximum pension of $5,608 a month ($67,295 a year) at age 65. Early retirement reduces the benefit, while retirement after age 65 increases the benefit. For instance, for 2019 the monthly/annual benefit for someone who retires at age 45 would be $1,402/$16,824, and the benefit for someone who retires at age 75 would be $17,048/$204,578. (All stats are rounded numbers.)
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 multiemployer plans. 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 requirements the U.S. 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. In 2018 the PBGC “insured about 25,000 defined-benefit pension plans covering approximately 37 million people,” according to the Congressional Research Service.
In 2018 the PBGC insured nearly 25,000 defined-benefit plans in which almost 37 million people took part.
How 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 with earnings from invested assets.
For 2019 the flat-rate-per-participant premium for single-employer plans was increased from $74 to $80. The multiemployer premium increased from $28 to $29. Future increases are subject to indexing per the Bipartisan Budget Act of 2015.
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 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 PBGC will notify plan participants by mail when it takes over a defined-benefit 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 it assumes 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 its 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 a little over $23 billion 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 861,000 workers and retirees in over 4,900 terminated single-employer plans have come to rely on PBGC for their retirement income.
Unfortunately, funding for PBGC is drying up as companies have accelerated a trend that began in 1985 and has greatly increased its pace: Employers have shifted away from employer-funded, defined-benefit plans in favor of optional employee- and employer-funded defined-contribution plans. Today the PBGC insures only about 22% of the number of plans it did in 1985, when at its height it covered 114,400 plans. At the end of fiscal year 2018, the PBGC had a deficit of $51.4 billion, with a $2.4 billion surplus from the single-employer program overwhelmed by a $53.9 billion deficit from the multiemployer program.
PBGC projects that the single-employer program’s financial health will improve slightly in the future, but the multiemployer program is likely to “worsen considerably over the next 10 years,” says the Congressional Research Service. Indeed, PBGC “projects that the multiemployer program will be likely become insolvent in FY2025 and there is a less than 1% chance that the program will remain solvent in FY2026. Both the single-employer and multiemployer programs are on the Government Accountability Office’s (GAO’s) list of high-risk government programs,” again according to the Congressional Research Service. These statistics indicate that the PBGC’s future is, to say the least, precarious.
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 your plan administrator.