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 a steady income for when you retire.

You may think of a pension as a sure thing. But there are times when companies have gotten into financial trouble and were forced to reduce pension benefits paid out to employees.

So how do you know your pension is really going to be there for you?

Key Takeaways

  • You may think of a pension as a sre thing, but companies that get into financial trouble may be forced to reduce benefits paid out to employees.
  • A government agency called the Pension Benefit Guaranty Corporation (PBGC) provides insurance that can protect your pension benefits.
  • The PBGC caps the amount of monthly income it insures; this amount is set by law and adjusted every year.
  • Private pension plans offered by large companies typically participate in PBGC, but pension plans offered by states and city governments do not.

What Is a Pension?

A pension is a retirement plan with a defined benefit. This amount is paid out to employees after they retire.

Pensions are different from retirement plans such as a 401(k). These have a defined contribution instead of a defined benefit.

The details of the benefits in a pension are often worked out between the workers' representatives and the management of the company. These representatives may be a union or another workers' group.

How Can the PBGC Help?

Companies that run into financial trouble may have to lower the income paid to retirees from their pensions. But if the pension plan you're part of struggles or even fails, your benefits may still be protected.

A government agency called the Pension Benefit Guaranty Corporation (PBGC) provides pension insurance. This can protect your pension benefits and make sure you have a steady income after you retire.

The PBGC insures the benefits of 35 million Americans. It doesn't receive money through general taxes.

Instead, it is funded via insurance premiums. These are set by Congress and paid by plan sponsors. Money for the PBGC also comes from:

  • Investment income
  • Assets from the plans it protects
  • Recovered funds from insurance companies who administered its plans in the past

There are two kinds of pension plans protected by the PBGC. These are single-employer plans 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 multi-employer plans. Instead, it supports the plans with financial help.

If your company is part of the PBGC, at least part of your pension benefit has been insured. This can protect your income after you retire.

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 2021, for a pension recipient age 65 whose company plan was covered by PBGC, and who was taking a joint life payout with 50% to be paid to a survivor, the greatest amount of benefit covered by insurance is $5,430.68 a month. For a single life payout, the maximum amount of insured benefit at age 65 is $6,034.09 per month.

Your pension benefit might be more than the cap. In that case, the excess amount is not insured. These insured amounts apply to single-employer plans.

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

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

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

For insured amounts for multi-employer plans, the benefit is based on two factors:

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

PBGC’s maximum guarantee is lower for plan members who have worked for fewer than 30 years. It is higher for those who have worked for more than 30 years.

The PBGC treats multiemployer plans differently. That part of the insurance program is funded and maintained separately from the single-employer portion.

These types of plans also have different structures. They are collectively bargained and offer a specified dollar-amount benefit per month multiplied by years of credited service.

Are All Pensions Insured?

Not all pension plans are insured. Private pension plans offered by large companies often participate in PBGC. Pension plans offered by state and city governments do not.

You can find out whether your plan is covered by the PBGC. Call your plan administrator or your employer and ask for a Summary Plan Description.

You can also speak with your union, plan administrator, employer, or pension plan sponsor directly to see what insurance amounts apply to your pension. They should be able to tell you if your pension is insured by the PBGC.

How Does Divorce Affect Your Pension?

Your stake in the pension depends on a few factors. These include contributions made before or during a 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, you will need to get the amount in writing after your divorce happens. Have a legal document called a qualified domestic relations order (QDRO) drawn up. It should be given to the pension plan administrator.

The QDRO document legally binds the plan administrator to pay out benefits as directed. This will ensure that you receive part of whatever pension benefit is paid.