The PBGC and ERISA
The Pension Benefit Guaranty Corporation (PBGC) was created by Congress as part of the Employee Retirement Income Security Act of 1974 (ERISA). The purpose of the PBGC is to protect pension payments when private sector defined benefit pension plans fail. Currently the PBGC guarantees payment of basic pension benefits for 44 million Americans in more than 27,500 ongoing private sector plans.
Neither ERISA nor the PBGC applies to state and local government plans, however, in part due to the potential for conflict between federal and state authority. Private sector 401(k) and other defined contribution plans are also excluded from PBGC protection.
Funding Sources for the PBGC
The PBGC is funded in three ways. First, employers that sponsor insured pension plans pay an annual premium to the PBGC. These premiums are calculated on a flat-rate basis of $35 per plan participant, plus a variable rate premium of $9 per $1,000 assessed only to underfunded plans. Secondly, the PBGC earns investment income on the assets it manages. Finally, assets of terminated pension plans are transferred to PBGC control.
In fiscal year 2010 the PBGC paid nearly $5.6 billion for approximately 801,000 retirees in 4,200 failed plans. While this is a lot of money, it translates into less than $7,000 per covered plan participant annually, or only $582 per participant per month.
Private Pension Safety Net
A common misconception regarding the PBGC is that pensioners will be completely protected if their employer-sponsored defined benefit pension plan fails. While it is true that the PBGC is designed to act as a safety net, it is not a replacement for the full pension payment that many plan participants had hoped to receive.
Pension benefits paid by the PBGC are subject to maximum levels set by Congress. The maximum guarantee is determined by the plan termination date or, if applicable, the bankruptcy filing date, and not the date at which the participant would begin receiving benefits. Once calculated, the maximum benefit is not subject to any future cost of living adjustments or other adjustments.
PBGC Single Employer Plan Payment Schedules
The PBGC only pays annuities. The 2011 maximum guarantee for a single employer defined benefit plan with no survivor benefits is as follows:
• $4,500 per month or $54,000 annually at age 65
• $3,500 per month or $42,660 annually at age 62
• $2,025 per month or $24,300 annually at age 55
If a 45 year old participant’s private defined benefit plan is taken over this year, for example, and they plan to retire in 2021 at age 55, the 2011 guarantee level applies. Equally important, benefit payments are subject to vesting schedules and other qualifying factors outlined in the Summary Plan Description (SPD). Many participants may find that their individual payment is less than the maximum allowed.
The PBGC only honors the early retirement features of a plan for participants who meet all of the plan’s early retirement rules at the time it takes control. For example, if a plan’s early retirement option requires age 55 and 20 years of service, participants who have the 20 years, but are not age 55 when the plan is taken over must wait until the plan’s “normal retirement age” (typically 65) to commence benefits.
PBGC Multi-Employer Insurance Programs
The PBGC provides substantially lower financial protection levels for multiemployer plans, which are typically associated with unions. In this situation, a plan becomes insolvent when all contributing employers have withdrawn from the plan. This leaves the plan with no funding source, at which point the PBGC provides some financial assistance for benefit payments and administrative expenses.
The PBGC paid $97 million in financial assistance in fiscal year 2010 to nearly 54,000 pensioners in 50 multiemployer pension plans. Calculated on an individual level, this translates into an average of $150.00 per month per participant.
The PBGC estimates a doubling in the number of insolvent multiemployer plans over the next five years.
Underfunding Clouds the PBGC's Future
$170 billion is the PBGC’s estimated exposure for reasonably possible terminations of single-employer plans, according to its 2010 Annual Report. While this exposure has been relatively steady in recent years, the agency’s estimate of its multiemployer reasonably possible exposure increased significantly from $326 million in 2009 to $20 billion in 2010, due primarily to the addition of two large plans.
As of September 30, 2010, the PBGC had single-employer assets totaling $77.8 billion, compared to single-employer liabilities of $99.4 billion (measured in present value though they will be paid over decades). The net single-employer deficit is $21.6 billion. The multiemployer insurance program had a FY 2010 deficit of $1.4 billion, with $1.6 billion in assets to cover about $3 billion in liabilities.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
ERISA Benefits, Inc. provides benefit consulting and advisory services and does not engage in the practice of law. May 2011.
Copyright ERISA Benefits Consulting, Inc.
More information about this article at ERISA Benefits Consulting, Inc.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.