Pension Benefit Guaranty Corporation

Will Your Pension Be There When You Retire?

This couple is grateful to find out their pension is covered by PBGC. Photo: Caiaimage/Trevor Adeline/Getty Images

Definition: The Pension Benefit Guaranty Corporation (PBGC) is a government entity pays pension benefits if the company cannot. It only covers defined benefit plans. Congress created it with the Employee Retirement Income Security Act  of 1974 (ERISA).

The PBGC is primarily financed with premiums made by the companies whose pensions it guarantees. It also makes some money from pension funds it takes over from bankrupt companies.


What It Does

PBGC guarantees the pension incomes for 44.1 million workers in over 30,000 pension plans. If the companies that have offered these plans can no longer afford to provide them, PBGC steps in. That could happen if your company goes bankrupt, even after you retire. It may not provide enough funds for the pension. Worst of all, the pension fund itself could be mismanaged. 

How It Works

PBGC doesn't cover a plan until it's been trusteed over. That means the company has terminated the plan and PBGC has agreed to become the trustee. That can only happen if a bankruptcy court determines the company cannot continue to operate if it keeps its pension liability. Sometimes PBGC will decide to take over a plan that's underfunded. A company's plan administrator should provide that information each year to every employee. Once PBGC has become the trustee, the employee cannot earn additional benefits.


PBGC Benefits

PBGC only guarantees basic pension benefits. In addition to retirement-age pension benefits, they include early retirement benefits, disability benefits, and annuity benefits for survivors.

The benefits depend on your particular plan, legal limits, your age, and plan assets. PBGC does not guarantee health benefits, severance pay, vacation pay, some life insurance death benefits and other non-pension benefits.

There are no cost-of-living adjustments (COLAs). (Source: "PBGC Faqs," PBGC.)

How It Affects the U.S. Economy

Many experts believe that an unknown number of companies will not be financially capable of funding their pension plans. If too many companies apply for protection from PBGC, it too will not be able to pay the pensions. This will leave millions of retired workers without an income, dependent on Social Security and possibly forced to continue working...if they can.

In 2006, President Bush signed the Pension Protection Act of 2006, which requires companies to more fully fund their plans. They had seven years to become 100% funded. They could take increased tax deductions for the contributions. Plans that weren't at least 80% funded could not provide additional benefits. 

Companies that trusteed their plans to PBGC and then emerged from bankruptcy had to pay a penalty. That was $1,250 per participant for three years. 

The Pension Protection Act also allowed businesses to automatically enroll employees in their 401(k) plans. Without it, workers were more likely to spend the money instead of saving for retirement. (Source: "Pension Protection Act," UnionPlus Retirement Planning Center.)

U.S. Pension Crisis

PBGC currently only provides benefits for 683,000 retirees. It couldn't afford to pay for two or three times as many retirees. It could not provide for the 44 million retirees it guarantees. Therefore, PBGC is just a stop-gap measure. It's not set up to address a large-scale pension crisis.

Although many pensions are better funded, many more are not. As a result, some are cutting benefits.  That's due to a 2014 law that allowed multi-employer funds to cut benefits it they didn't have the funds. The Central States Pension Fund applied to the U.S. Treasury to cut benefits for 250,000 truckers and their families. Treasury denied the cuts. As a result, the Fund says it will go bankrupt in 2025 (Source: "One of the Nation's Largest Pension Funds Could Soon Cut Benefits," Washington Post, April 20, 2016.)

The PBGC would have to pick up the benefits. But it can't afford to pay full benefits. In fact, the PBGC multi-employer fund will run out by 2025. That's because the premiums paid by employers aren't enough to cover projected payouts. (Source: "Who Will Save Central States?" Politico, June 15, 2016. "Five Year Report," PBGC, June 2016.)

Are You Protected by PBGC?

Find out if you have a pension plan, also known as a defined benefit plan. Most new workers today don't have one, because their companies now offer 401(k)s instead. 

If you haven't received one, ask your plan administrator for a copy of the Summary Plan Description. That will tell you if you are covered by PBGC. Also ask if the pension is at least 80% funded.