Pension Benefit Guaranty Corporation

The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum. Defined benefit pension plans promise to pay a specified monthly benefit at retirement, commonly based on salary and years on the job.

Money PBGC takes in and pays out

PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over. PBGC pays monthly retirement benefits, up to a guaranteed maximum, to about 518,000 retirees in 3,479 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,061,000 people.

PBGC's two pension insurance programs

The single employer program protects 34.6 million workers and retirees in 29,651 pension plans. The multiemployer program protects 9.8 million workers and retirees in 1,587 pension plans. Multiemployer plans are set up by collectively bargained agreements involving more than one unrelated employer, generally in one industry.

Ending Pension plans, or 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 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 close 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 pay PBGC yearly insurance premiums: US$8 per worker or retiree in multiemployer plans; $30 per worker or retiree plus $9 for each $1,000 of unfunded vested benefits in single employer plans. Premium rates increase only if Congress approves. For plan years beginniing in 2006, Congress approved a rate increase from $19 to $30 for single employer plans, and from $2.60 to $8 for multiemployer plans. The law has a provision for annual rate increases as wages increase.

Maximum guaranteed benefit

The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly. For plans ended in 2005, workers who retire at age 65 can receive up to $3,801.14 a month (or $45,613.68 a year).

Because benefits starting at ages other than 65 are adjusted actuarially, the guarantee is lower for those who retire early or when there is a benefit for a survivor. Likewise, the guarantee is increased for those who retire after age 65. The guarantees here are for the SEP single employer program. For the multiemployer plans, the amount guaranteed is based on years of service. For plans terminating after December 21, 2000, the PBGC insures 100% of the first $11 monthly payment per year of service and 75% 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, and if their plan terminates, they will receive: (100% * $11)*(20 YOS) + * $(19-11)*(20 YOS) = $17 * 20 = $340 per month.

Multiemployer plans terminating before that, and after 1980 had a maximum guaranteed limit of 100 percent of the first $5 of the monthly benefit accrual rate and 75 percent of the next $15.

PBGC Leadership

PBGC is headed by an executive director (Vince Snowbarger is acting executive director, as of June 2006), who reports to a board of directors consisting of the Secretaries of Labor, Commerce and Treasury, with the Secretary of Labor as chairman. Bradley Belt has announced his intention to resign in May 2006 in a letter to President Bush on Thursday March 23, 2006. FT article

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 (a.k.a. minimum 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 (1984), 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.

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 (f) to section 1113 (effective for cases that commenced on or after July 10, 1984):

"(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 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 (2004). 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 (see ). 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 (i.e, a lien that is not valid against parties other than the debtor) 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 (see ). 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.

No insurance for Defined Contribution plans

One reason ERISA was enacted was to prevent employers from purposely underfunding their plans. Normally, if no plan amendments are made, the pre-existing past-service liability is amortized away. However, with the cooperation of the unions, the Studebaker automobile company continually amended the pension plan to provide benefit enhancements. This caused their plan to never catch up. Defined contribution plans -- by contrast and by definition -- are always "fully funded." Therefore, Congress thought that there is no need to protect participants in defined contribution plans. This is before the Enron scandal in 2001 and the 401(k) plan losses. Congress inserted trust law fiduciary liability upon employers who did not prudently diversfy plan assets to avoid the chance of large losses inside Section 404 of ERISA. However, if the fiduciaries are broke when the plan fails, there are no deep pockets to make the employees whole.

External links

Bankruptcy in the United States | Financial regulation in the United States | Independent Agencies of the United States Government | Retirement in the United States | United States government corporations

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