Pension Benefit
Guaranty Corporation (PBGC)
The first company to initiate a private pension plan was American Express Company in 1875. Thereafter, many other companies followed suit including banks, utilities and manufacturers. These early pensions were nearly all defined benefit plans in which participants paid in contributions and received a specific monthly amount at retirement. These plans were largely unprotected. In an example of one of the most appalling incidents of workers losing there retirement benefits took place in 1963 when Studebaker ended its employee pension plan and approximately 4000 worker lost their promised pension benefits.
In September 1974,
the Pension Benefit Guaranty Corporation (PBGC) was established under ERISA.
The entity started with a $100,000 borrowed from the DOL under the provisions
of ERISA. “PBGC issued its first pension check for $140.75 on
The Pension Benefit Guaranty Corporation (PBGC) is a non-profit, federally chartered, and quasi-independent entity created for the purpose of protecting, and the continuation and maintenance of defined benefit plans under the private sector. If a plan should end up without sufficient funds to pay benefits to its participants, PBGC insurance program will pay the benefit up to the limits prescribed by law. In most cases participants receive the full amount accumulated before the pension plan ended.
“PBGC’s Board of
Directors consists of the Secretaries of Labor, Treasuries, and Commerce, with
the Secretary of Labor serving as the chairperson. PBGC is headed by an Executive Director — On
In effect the PBCG is an insurance company for privately held pension plans. Its objective is to provide payments to participants and their beneficiaries, and to maintain insurance premiums at optimal levels to secure its objectives.
The
PBGC finances its operation from insurance premiums of insured pension plan,
from investment income, and from recoveries of bankruptcies. The PBGC receives
no funds from general tax revenues. In 2003 total premium revenue was estimated
at $973 million. Single employer-pension plans pay a flat fee of $19 per
participant. Underfunded plans of single-employer
pensions are subject to an addition annual variable rate that ranges from $9
per $1000 of unfunded vested benefits. Smaller programs in which there are
multiemployer pay an annual fee of $2.60 per participant. The premiums that
PBGC collects are dependent on the information reported by plan administrators.
PBGC established a compliance program (Premium Compliance Evaluation) to help
it members in adherence in accessing accuracy of participant numbers reported
by the single-employer plans and determining variable-rate premiums. 
PBGC guarantees the basic benefits
before termination date of the plan which include the following:
- Pension benefits at normal retirement age.
- Most all early retirement benefits.
- Disability benefits for disabilities which occurred
before the plan terminated.
- Certain benefits for survivors of plan participants.
PBGC does
not guarantee health care, vacation pay, or severance pay. The pension benefit
PBGC pays depends on provisions of your plan, legal limits, the form of your benefit,
your age, and amounts PBGC recovers from employers for plan underfunding.
PBGC has guaranteed payment to
834,000 workers and retirees in 3,287 insolvent single-employer plans and over
100,000 participants in multiemployer plans. There limits on amounts, set by
law, which PBGC can guarantee. For example, in 2004, a single-employer plan
adjusted annually for Social Security and based on the date the plan terminates
is guaranteed $44,386.32 annually ($3,698.86 monthly) for a single life annuity
beginning at age 65. The amount is adjusted downward on a graduated scale
according to age (see table below). This amount is a fixed amount and is not
contain cost of living adjustments (COLA).
|
Year Plan Terminated |
Monthly Guarantee
Limit At Age 65 |
Monthly Guarantee
Limit At Age 62 |
Monthly Guarantee
Limit At Age 60 |
Monthly Guarantee
Limit At Age 55 |
|
2004 |
$3,698.86 |
$2,922.10 |
$2,404.26 |
$1,664.49 |
|
2003 |
$3,664.77 |
$2,895.17 |
$2,382.10 |
$1,649.15 |
|
2002 |
$3,579.55 |
$2,827.84 |
$2,326.71 |
$1,610.80 |
Recent trends in private pension plans suggest an overall decrease in these types of plans. This trend started in the mid-1980s and has continued to present. The total number of single-employer and multiemployer pension plans reached its peak in 1985 with 114,000 and has since has declined to 31 million in 2003. In the same time frame the number of participants in these plans increased from 38 million to 43.9 million. The reduction in plans is primarily concentrated in small businesses with less than 100 participants.[3]
Business failures along with pension plan losses in the
financial markets, in addition to low interest rate have increase the claims
against PBGC. This resulted in a net loss in 2003 of $7.600 billion compared
with a net loss of $11.370 billon in 2002 and a loss of $1.972 billion in 2001.
The improvement in revenue in 2003 was attributed to an increase of $3,179
billion of investment income, $161 million premium revenue, and an overall
decrease in from completed and possible terminations of pension plans. This was offset by increases in actuarial charges of $3.359
billion and administrative and other charges of $147 million. Overall losses
decreased from of $9.313 billion in 2002 to a loss of $5.377 billion in 2003,
this was primarily due to new plans classified as probable and the termination
of underfunded pension plans. “Future losses remain
unpredictable as PBGC’s loss experience is highly
sensitive to losses from large claims.”[4]