Are Your Pension Benefits Guaranteed?

Your Plan May Be Covered by the PBGC

Elderly couple looking at pension information
•••   Peter Cade/Getty Images 

If you have a pension plan, you've secured yourself a steady income when you retire. But while you may think of a pension as guaranteed, plenty of cases have arisen where companies have gotten into financial trouble and were forced to reduce benefits paid out to employees. So how do you know your pension is truly guaranteed?

What Is a Pension?

Generally speaking, a pension is a retirement plan with a defined benefit, which is paid out to employees after they retire. Pensions are different from retirement plans such as a 401(k), which have a defined contribution as opposed to a defined benefit. The details of the benefits secured by a pension are typically worked out between the workers' representatives—say, a union—and the management of the company.

If the pension plan you're participating in struggles or even fails, your benefits may still be protected.

How the PBGC Can Help

A government agency called the Pension Benefit Guaranty Corporation (PBGC) provides insurance that can protect your pension benefits.

The PBGC, which insures the benefits of 35 million Americans, receives money not through general taxes but via insurance premiums, which are set by Congress and paid by plan sponsors. Money for the PBGC also comes from investment income, assets from the plans entrusted to it, and recovered funds from insurance companies who previously administered its plans.

Two kinds of pension plans are protected by the PBGC: single-employer and multi-employer plans (which are usually created through two or more employers and a union). The PBGC does not pay benefits to retirees directly for multiemployer plans, but rather supports the plans themselves with financial assistance.

If your company participates in the PBGC, most likely at least a portion of your pension benefit has been insured.

How Much of Your Pension Is Guaranteed

The PBGC caps the amount of monthly income it insures; this amount is set by law and adjusted yearly. In 2020, for a pension recipient age 65 whose company plan was covered by PBGC, and who is taking a joint life payout with 50% to be paid to a survivor, the maximum amount of benefit covered by insurance is $5,231.25 a month. For a single life payout, the maximum amount of insured benefit at age 65 is $5,812.50 per month . If your pension benefit is greater than the cap, the excess amount is not insured. These insured amounts apply to what is called single-employer plans.

The coverage increases each year you grow older, with the maximum insured amount available for those aged 75 or older. 

The maximum benefits paid by the PBGC for single-employer plans vary depending on age because the PBGC estimates that younger people will receive more monthly checks over their lifetime.

The ​​PBGC Maximum Monthly Guarantee Tables show the exact amount of monthly payment that is insured based on your age.

For insured amounts for multiemployer plans, the benefit is based on two factors:

  • How long you worked under the plan (years of service)
  • Your plan's benefit rate

According to the PBGC, summarizing the exact benefits is difficult, and they describe the guarantee as such:

PBGC’s maximum guarantee is lower for participants who worked fewer than 30 years and higher for those who worked more than 30 years. 

The PBGC treats multiemployer plans differently because that part is funded and maintained separately from the single-employer portion, and because the plans themselves are collectively bargained and offer a specified dollar-amount benefit per month multiplied by years of credited service.

Not All Pensions Are Insured

Private pension plans offered by large companies typically participate in PBGC; however, pension plans offered by states and city governments do not. You can find out whether your plan is covered by the PBGC by calling your plan administrator or your employer and asking for a Summary Plan Description.

Speak with your union, plan administrator, employer, or pension plan sponsor directly to see what insurance amounts apply to your pension. You can also ask them if your pension is insured by the PBGC.

How Divorce Affects Your Pension

Your stake in the pension depends on a few factors, including contributions made before or during the marriage, the state you live in, and the type of pension (single-life or joint-life payout). If you are entitled to pension benefits after a divorce, be sure a legal document called a qualified domestic relations order (QDRO) is drawn up and provided to the pension plan administrator.

The QDRO document legally binds the plan administrator to pay out benefits as directed.