The Pension Benefit Guaranty Corporation is an independent agency of the United
States government that was created by the Employee Retirement Income Security
Act of 1974 to encourage the continuation and maintenance of
voluntary private defined benefit pension plans, provide timely and
uninterrupted payment of pension benefits, and keep pension insurance
premiums at the lowest level necessary to carry out its operations. Subject to
other statutory limitations, the PBGC insurance program pays pension benefits
up to the maximum guaranteed benefit set by law to participants who retire at age
65. The benefits payable to insured retirees who start their benefits at
ages other than 65, or who elect survivor coverage, are adjusted to be
equivalent in value. During fiscal year 2010, the PBGC paid
$5.6 billion in benefits to participants of failed pension plans. That year, 147
pension plans failed, and the PBGC's deficit increased 4.5 percent to $23
billion. The PBGC has a total of $102.5 billion in obligations and $79.5 billion
in assets. Revenues and expenditures
The PBGC is not funded by general tax revenues. Its funds come from four
sources: Insurance premiums paid by sponsors of
defined benefit pension plans; Assets held by the pension plans it
takes over; Recoveries of unfunded pension
liabilities from plan sponsors' bankruptcy estates; and
Investment income. PBGC pays monthly retirement benefits to
approximately 631,000 retirees of 3,800 terminated defined benefit pension
plans. Including those who have not yet retired and participants in
multiemployer plans receiving financial assistance, the PBGC is responsible for
the current and future pensions of about 1.3 million people.
The PBGC regularly updates its investment strategy. In 2004, it chose
to invest heavily in bonds. Under new leadership, the agency in 2008 shifted a
substantial portion of its assets into stocks. Because of the market decline,
PBGC's equity investments lost 23% during the year ending September 30,
2008. Pension insurance programs
The single-employer program protects 34.0 million workers and retirees in
28,800 pension plans. The multiemployer program protects 9.9 million workers and
retirees in 1,540 pension plans. Multiemployer plans are set up by
collectively bargained agreements involving more than one unrelated
employer, generally in one industry. Plan terminations
An employer can voluntarily ask to close its single-employer pension plan in
either a standard or distress termination. In a standard termination,
the plan must have enough money to pay all accrued benefits, whether vested or
not, before the plan can end. After workers receive promised benefits, in
the form of a lump sum payment or an insurance company annuity, PBGC's
guarantee ends. In a distress termination, where the plan does not
have enough money to pay all benefits, the employer must prove severe financial
distress – for instance the likelihood that continuing the plan would force the
company to shut down. PBGC will pay guaranteed benefits, usually covering a
large part of total earned benefits, and make strong efforts to recover funds
from the employer. In addition, PBGC may seek to terminate
a single-employer plan without the employer's consent to protect the
interests of workers, the plan or PBGC's insurance fund. PBGC must act to
terminate a plan that cannot pay current benefits.
For multiemployer pension plans that are unable to pay guaranteed benefits when
due, PBGC will provide financial assistance to the plan, usually a loan,
so that retirees continue receiving their benefits.
Terminations are covered under Title IV of ERISA.
Premium rates Pension plans that are qualified under
the U.S. tax code pay yearly insurance premiums to the PBGC based on the number
of participants in the plan and the funded status of the plan.
The Bipartisan Budget Act, which was signed by President Obama at the end of
2013, set PBGC premiums as follows for single-employer pension plans:
Flat-rate premium $49 per participant for plan years
starting in 2014 $57 per participant for plan years
starting in 2015 $64 per participant for plan years
starting in 2016 Indexed to the National Average Wage for
plan years starting in 2017 and after Variable-rate premium
$14 per $1,000 of unfunded vested benefits for plan years starting in 2014
At least $24 per $1,000 of unfunded vested benefits for plan years starting
in 2015 At least $29 per $1,000 of unfunded
vested benefits for plan years starting in 2016
Indexed to the National Average Wage for plan years starting in 2017 and after
Maximum guaranteed benefit The maximum pension benefit guaranteed
by PBGC is set by law and adjusted yearly. For plans that end in 2011,
workers who retire at age 65 can receive up to $4,653.41 per month under PBGC's
insurance program for single-employer plans.
Benefit payments starting at ages other than 65 are adjusted actuarially, which
means the maximum guaranteed benefit is lower for those who retire early or when
there is a benefit for a survivor, and higher for those who retire after age
65. Additionally, the PBGC will not fully guarantee benefit improvements
that were adopted within the five-year period prior to a plan's termination or
benefits that are not payable over a retiree's lifetime.
Other limitations also apply to supplemental benefits in excess of
normal retirement benefits, benefit increases within the last five years
before a plan's termination, and benefits earned after a plan sponsor's
bankruptcy. For the multiemployer plans, the amount
guaranteed is based on years of service. For plans that terminate after December
21, 2000, the PBGC insures 100 percent of the first $11 monthly payment per
year of service and 75 percent of the next $33 monthly payment per year of
service. For example, if a participant works 20 years in a plan that promises
$19 per month per year of service, the PBGC guarantee would be $340 per month.
Multiemployer plans that terminated after 1980 but before December 21, 2000,
had a maximum guarantee limit of 100 percent of the first $5 of the monthly
benefit accrual rate and 75 percent of the next $15.
Leadership PBGC is headed by a Director, who
reports to a board of directors consisting of the Secretaries of Labor,
Commerce and Treasury, with the Secretary of Labor as chairman.
Under the Pension Protection Act of 2006, the Director of the PBGC is
appointed by the President and confirmed by the Senate. Under prior law, PBGC's
Board Chairman appointed an "Executive Director" who was not subject to
confirmation. Charles E. F. Millard became the first
Senate-confirmed Director on December 14, 2007. Prior to coming to PBGC,
Millard was managing director at Broadway Partners, LLC. He previously
held leadership positions at Lehman Brothers, the New York City Economic
Development Corporation, and Prudential Securities. In addition, Millard served
two terms on the New York City Council. Joshua Gotbaum was appointed as the
Director on July 2, 2010 through a recess appointment. Gotbaum served in
both the Carter and Clinton administrations in a variety of
financial service positions and led the bankruptcy reorganization of Hawaiian
Airlines. Pensions and bankruptcy
Several large legacy airlines have filed for bankruptcy reorganization in an
attempt to renegotiate terms of pension liabilities. These debtors have asked
the bankruptcy court to approve the termination of their old defined benefit
plans insured by the PBGC. The PBGC has attempted to resist these requests.
The PBGC would like required contributions to insured defined benefit
pension plans to be considered "administrative expenses" in bankruptcy,
thereby obtaining priority treatment ahead of the unsecured creditors. The
PBGC has generally lost on this argument, sometimes resulting in a
benefit to general unsecured creditors. In National Labor Relations Bd. v.
Bildisco, 465 U.S. 513, the U.S. Supreme Court ruled that Bankruptcy Code section
365(a) "includes within it collective-bargaining agreements subject
to the National Labor Relations Act, and that the Bankruptcy Court may approve
rejection of such contracts by the debtor-in-possession upon an appropriate
showing." The ruling came in spite of arguments that the employer should not
use bankruptcy to breach contractual promises to make pension payments
resulting from collective bargaining. General bankruptcy principles hold that
executory contracts are avoidable in practice, because neither party has
fulfilled its part of the bargain and thus breach by either party only gives
rise to expectation damages. Damages awards after commencement of a
bankruptcy filing results in claims that take after more senior creditors. They
are relegated to the status of general creditors because while breach would
occur after filing of the bankruptcy petition, the contract was entered into
before the filing. If a creditor is a general unsecured creditor and there is
not enough money, they usually are not paid; so as a matter of practical
economics, if the downturn in a company's fortunes which resulted in
bankruptcy makes the performance of an executory contract less valuable than
its breach, the rational company would breach. There would be no negative
monetary consequences of such breach because there would be no money left for
the other contract party to take because in practice general unsecured creditors
are left with nothing. US Airways has so far resisted in court
in making those required minimum contributions to their legacy pensions.
In Bildisco the Court also ruled that under the Bankruptcy Code as written at
that time, an employer in Chapter 11 bankruptcy "does not commit an unfair
labor practice when, after the filing of a bankruptcy petition but before
court-approved rejection of the collective-bargaining agreement, it
unilaterally modifies or terminates one or more provisions of the agreement."
After the Bildisco decision, Congress amended the Bankruptcy Code by adding a
subsection to section 1113: "(f) No provision of this title shall be
construed to permit a trustee to unilaterally terminate or alter any
provisions of a collective bargaining agreement prior to compliance with the
provisions of this section." According to commentator Nicholas
Brannick, "Despite the appearance of protection for the PBGC's interest in
the event of termination, the Bankruptcy Code frequently strips the PBGC of the
protection provided under ERISA. Under ERISA, termination liability may arise
on the date of termination, but the lien that protects the PBGC's interest in
that liability must be perfected [to be protected in bankruptcy]". Nicholas
Brannick, Note: At the Crossroads of Three Codes: How Employers Are Using
ERISA, the Tax Code, and Bankruptcy to Evade Their Pension Obligations, 65 Ohio
St. L.J. 1577, 1606. The retention of title as a security interest, the
creation of lien, or any other direct or indirect mode of disposing of or parting
with property or an interest in property is a "transfer" for purposes of the U.S.
Bankruptcy Code). Some transfers may be avoidable by the bankruptcy trustee
under various Code provisions. Further, under ordinary principles of bankruptcy
law, a lien or other security interest that is unperfected at the time of case
commencement is generally unenforceable against a bankruptcy trustee. Once the
bankruptcy case has commenced, the law generally stays any act to attempt to
perfect a lien that was not perfected prior to case commencement(4)). Thus,
the PBGC with a lien that has not yet been perfected at the time of case
commencement may find itself in the same position as the general unsecured
creditors. Annual Pension Insurance Data Book
The PBGC has published the Pension Insurance Data Book since 1996 to
present detailed statistics on PBGC's programs, operations, and benefits on
single-employer and multi-employer plans. The data book is broken into four
main sections; Figures, Single Employer plans, Multiemployer plans, and a
research article. The figures section displays all statistics at a glance.
Obvious trends are the precipitous decline in the enrollment of employees
in defined benefitover the past 20 years and the spike in PBGC deficit during
times of recession/defaults. The single employer section gives all data and
statics on single employer programs. Section S-3 through S-19 are the claims
tables. The show all of the claim brought by single employer DB plans to
PBGC. Section S-20 through S-29 are the
payment table. These table show how much PBGC is paying out every year in
insurance protection. Section S-30 through S-38 are the
insured tables. These table show how many participants are insured under the
PBGC. Section S-40 through S-44 Premium
tables. These table show how much premiums the insured pension plans are
paying. Section S-45 though S-52 Show the
underfunded Plans, overfunded Plans, and the funding ratios by NAIC business
code, state, and participant count. The multi-employer section, the M
sections, follow a similar organization. The article usually is a research paper
or an extended explanation of operations at the PBGC.
Pension Protection Act of 2006 The Pension Protection Act of 2006
represents the most significant pension legislation since ERISA. Some of the
provisions of the Act that affect the PBGC include:
The method for calculating the "variable-rate" PBGC premium is changed.
If the PBGC takes over a terminated plan, the guarantee of employees'
pension benefits is frozen as of the date of the plan sponsor's bankruptcy
filing, which may be months or years before the plan terminates.
The PBGC's guarantee of pension benefits that become payable on a plant shutdown
is limited if the shutdown occurred within five years of the bankruptcy
filing. The complicated rules that govern the
PBGC's pension guarantee for business owners are simplified.
If the PBGC takes over a terminated plan, the plan sponsor is required to
pay a "termination premium" of $1,250 per participant per year for three
years. No insurance for defined contribution
plans One reason Congress enacted ERISA was
"to prevent the 'great personal tragedy' suffered by employees whose vested
benefits are not paid when pension plans are terminated." When a defined benefit
plan is properly funded by its sponsor, its assets should be approximately equal
to its liability, and any shortfall should be amortized in a relatively
short period of time. Before ERISA, employers and willing unions could agree
to increase benefits with little thought to how to pay for them. A classic case
of the unfortunate consequences of an underfunded pension plan is the 1963
shutdown of Studebaker automobile operations in South Bend, Indiana, in
which 4,500 workers lost 85% of their vested benefits. One of ERISA's stated
intentions was to minimize underfunding in defined benefit plans.
Defined contribution plans – by contrast and by definition – are always "fully
funded." Thus Congress saw no need to provide insurance protection for
participants in defined contribution plans. The Enron scandal in 2001
demonstrated one potential problem with defined contribution plans: the company
had strongly encouraged its workers to invest their 401(k) plans in their
employer itself, violating primary investment guidelines about
diversification. When Enron went bankrupt, many workers lost not just
their jobs but also most of the value of their retirement savings. Congress
inserted trust law fiduciary liability upon employers who did not prudently
diversify plan assets to avoid the chance of large losses inside Section
404 of ERISA, but it is unclear whether such fiduciary liability applies to
trustees of plans in which participants direct the investment of their own
accounts. See also
Title 29 of the Code of Federal Regulations
Pension Bankruptcy in the United States
Federal Deposit Insurance Corporation Social insurance
Securities Investor Protection Corporation
Pension Rights Center Pension Protection Act of 2006
Notes and references Notes
–––––––––––––––––––– Secondary references
–––––––––––––––––––– Primary references
Further reading Basics of the Pension Benefit Guaranty
Corporation Pension Warning Signs
News on July 2006 Congressional overhaul Multiemployer Pension Reform Act of 2014
Mary Williams Walsh, "Whoops! There Goes Another Pension Plan," New York Times,
September 18, 2005 External links
Official website Pension Benefit Guaranty Corporation in
the Federal Register ^ Andrew Douglass and Bradley Kafka,
"Legal Trends — Progress for Multiemployer Pension Plans,"
HRMagazine, Vol. 60, No. 2, 2015, pg. 71; OCLC 5826024469, ISSN 1047-3149