What Is the Pension Benefit Guaranty Corporation (PBGC)?
The PBGC Explained
The Pension Benefit Guaranty Corporation (PBGC) is a government entity that pays pension benefits if the company cannot. It only covers defined benefit plans.
The PBGC is primarily financed with premiums paid by the companies whose pensions it guarantees. It also makes some money from pension funds it takes over from bankrupt companies. Learn more about the PBGC, its history, and how it works.
What Is the Pension Benefit Guaranty Corporation (PBGC)?
Pension plans provide workers with guaranteed income during retirement. While not many private companies offer pension plans anymore, government entities do. Employers that offer pension plans are responsible for funding and managing the plan. If they make a mistake, it could affect the income for the retirees involved.
The Pension Benefit Guaranty Corporation guaranteed the pension incomes for 34 million workers in 25,000 pension plans in 2020. If the companies that offered these benefits can't provide them, PBGC steps in and provides monthly benefits up to a statutory limit. PBGC insures single-employer plans and multi-employer plans, using separate reserve funds for each type.
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.
How the PBGC Works
PBGC is funded by insurance premiums it collects from employers who sponsor insured plans. It also collects funds from its investments and from the plans it takes over. It is not tax-supported.
When an employer terminates a pension plan and can't afford to pay out all the benefits as promised, the PBGC steps in and pays them out.
Participants receive the benefit they are owed up to the limit required by law. If they are owed more than the limit allows, they won't be able to collect it.
The PBGC operates a single-employer fund and a multi-employer fund. In 2020, the single-employer fund ran a surplus of $15.5 billion. However, the multi-employer fund ran a deficit of $63.7 billion, putting the program in an overall deficit of $48.2 billion,
The Government Accounting Office (GAO) rates the PBGC a high-risk institution due to collective risk of the underfunded plans that it ensures. More importantly, the risk that its multi-employer plan will not be able to fulfill its long-term obligations is nearly certain.
The GAO warns that changes are necessary to protect the solvency of these plans. Specifically, it recommends instituting reforms to strengthen funding requirements, diversify its governance, and develop a more robust, long-term strategy for stabilization.
History of the PBGC
The PBGC was created by Congress with the Employee Retirement Income Security Act (ERISA) of 1974. Before this, private pensions were, for the most part, unprotected.
For example, when Studebaker terminated its pension plan in 1963, more than 4,000 of its auto workers lost part or even all of their benefits, and there wasn't anything they could do.
When it was enacted, ERISA spelled out accountability requirements for employer sponsors of pension plans and determined vesting and disclosure rules.
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 of $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.
PBGC currently pays the pension benefits of nearly a million workers in 4,600 plans whose companies went under and could no longer afford to pay them the benefits they are owed.
Will the PBGC Last?
The PBGC faces many challenges. With the deficit in the multi-employer program, it's expected to run out of money by 2026. There's a risk that could even happen before then.
If that happens, PBGC would be unable to continue paying out benefits at current levels, leaving pensioners with only a small portion of their expected monthly income.
And while the single-employer program began 2020 with a surplus, the COVID-19 pandemic brought unexpected and unprecedented financial challenges to its members. The CARES Act provided relief by deferring funding contributions until 2021. However, the pension obligations owed by many of these companies, combined with the PBGC required premiums, has burdened many companies as they try to restore their financial health.
- The Pension Benefit Guaranty Corporation insures millions of American workers and their pensions across thousands of pension plans.
- When a company terminates its pension plan, PBGC steps in to assure benefits are still paid out.
- PBGC is funded by plan premiums, investments, and the assets of the plans it takes over.
- While PBGC's single-employer program is running a surplus, the COVID-19 pandemic has caused many member companies to take a financial hit, endangering their pension plans.
- PBGC's multi-employer program is expected to run out of funds by 2026. When that happens, benefits for those plans will be drastically reduced.