Order Code 95-118
Updated January 29, 2008
Pension Benefit Guaranty Corporation:
A Fact Sheet
http://wikileaks.org/wiki/CRS-95-118
John J. Topoleski
Analyst in Income Security
Domestic Social Policy Division
The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency
established in 1974 by the Employee Retirement Income Security Act (ERISA) (P.L. 93406). It was created to protect the pensions of participants and beneficiaries covered by
private sector, defined benefit (DB) plans. These pension plans provide a specified
monthly benefit at retirement, usually either a percent of salary or a flat dollar amount
multiplied by years of service. Defined contribution plans, such as §401(k) plans, are not
insured. The PBGC is chaired by the Secretary of Labor, with the Secretaries of Treasury
and Commerce serving as board members.
The PBGC runs two distinct insurance programs for single-employer and
multiemployer plans. Multiemployer plans are collectively bargained plans to which
more than one company makes contributions. PBGC maintains separate reserve funds for
each program. It insures private pensions for 44 million persons participating in more
than 30,300 plans, including about 1,500 multiemployer plans. In FY2007, PBGC paid
about $4.3 billion in benefits to almost 1.2 million people in almost 3,800 plans. A firm
must be in financial distress to end an underfunded plan. Most workers in singleemployer plans taken over by PBGC receive the full benefit earned at the time of
termination, but the ceiling on multiemployer plan benefits that could be guaranteed has
left almost all of these retirees without full benefit protection.
PBGC Financing. The PBGC is required by ERISA to be self-supporting and
receives no appropriations from general revenue. The most reliable source of PBGC
revenue is the premiums set by Congress and paid by the private-sector employers that
sponsor DB pension plans. Other sources of income are assets from terminated plans
taken over by the PBGC, investment income, and recoveries collected from companies
when they end underfunded pension plans. The PBGC is authorized to borrow up to $100
million from the U.S. Treasury. P.L. 96-364 requires that the PBGC’s receipts and
disbursements be included in federal budget totals.
Premiums. The minimum annual premium charged for each participant in a
single-employer DB plan was raised for the 2006 plan year from $19 to $30 by the Deficit
Reduction Act (DRA) of 2005 (P.L. 109-171). This law also raised the multiemployer
plan premium from a flat $2.60 annually per participant to $8. Because these premiums
CRS-2
are now adjusted for inflation, the 2008 rates will be $33 and $9, respectively. The DRA
added a new $1,250 per participant premium for certain plans terminated after 2005. This
premium is payable for the year of termination and each of the next two years. An
additional premium of $9 for each $1,000 of “unfunded vested benefits,” as newly
defined by the Pension Protection Act (PPA) of 2006 (P.L. 109-280), is assessed against
plans that are not fully funded. Effective in 2008, the PPA also eliminates certain
exemptions from this variable premium that are presently available.
http://wikileaks.org/wiki/CRS-95-118
Pension Benefit Guaranty. ERISA sets a maximum on the individual benefit
amount that the PBGC can guarantee. The ceiling for single-employer plans is adjusted
annually for national wage growth. The maximum pension guarantee is $51,750 a year
for plans that terminate in 2008. This amount is decreased if a participant retires before
age 65 or if the pension plan provides benefits in some form other than equal monthly
payments for the life of the retiree. Only “basic benefits” are guaranteed. These include
benefits beginning at normal retirement age (usually 65), certain early retirement and
disability benefits, and benefits for survivors of deceased plan participants. Only vested
benefits are insured.
In contrast, the ceiling on guaranteed benefits for multiemployer plans is not adjusted
annually. The amount set in 1980 did not change until the Consolidated Appropriations
Act, 2001 (P.L. 106-554) became law in December 2000. These plans determine benefits
by multiplying a flat dollar rate by years of service, so the benefit guaranty ceiling is tied
to this formula. The new ceiling equals 100% of the first $11 of monthly benefits per year
of service plus 75% of the next $33 of monthly benefits per year of service.
Current Financial Picture. In 1996, the PBGC showed a surplus in its singleemployer program for the first time in its history. That surplus peaked at $9.7 billion in
2000, helped by the strong performance of the equity markets in the 1990s. The weakness
in the economy, particularly in the steel and airline industries, has led to large and
expensive plan terminations that have eliminated the surplus and left the single-employer
program with a deficit of $18.1 billion at the end of FY2006. The deficit decreased to
$13.1 billion at the end of FY2007. The multiemployer program had a surplus from 1982
to 2002, but the PBGC reported that it had a deficit of $955 million at the end of FY2007.
For more information on PBGC finances, see CRS Report RL33937, The Financial
Health of the Pension Benefit Guaranty Corporation, by William Klunk.
Pension Funding Levels. Private sector DB pension plans are required to report
their level of funding to the PBGC, and in 2005 over 1,100 companies reported
underfunding greater than $50 million (the most recent year available). One reason cited
for the increase in underfunding is the low interest rate used by PBGC to determine the
present value of pension liabilities. (The higher the interest rate, the lower the present
value of the liabilities, and vice versa.) Many of the underfunded plans are sponsored by
financially healthy firms and pose no real risk to the PBGC. However, underfunding in
plans whose sponsors have below investment grade credit ratings or meet one or more
financial distress criteria was $66 billion in September 2007, down from $73 billion the
previous year. As of September 30, 2006, the PBGC estimated that the total shortfall in
all pension plans exceeded $350 billion.
Additional information is available at the PBGC website at [http://www.pbgc.gov].Pension Benefit Guaranty Corporation
(PBGC): A Fact Sheet
John J. Topoleski
Analyst in Income Security
June 28, 2010
Congressional Research Service
7-5700
www.crs.gov
95-118
CRS Report for Congress
Prepared for Members and Committees of Congress
Pension Benefit Guaranty Corporation (PBGC): A Fact Sheet
Contents
Pension Benefit Guaranty Corporation ........................................................................................1
PBGC Financing ...................................................................................................................1
Premiums..............................................................................................................................1
Pension Benefit Guaranty......................................................................................................1
Current Financial Picture.......................................................................................................2
Defined Benefit Pension Funding................................................................................................ 2
Funding Relief ......................................................................................................................3
Single-Employer Funding Relief .....................................................................................4
Certain Other plans .........................................................................................................4
Plans Run by Charities ....................................................................................................4
Multiemployer plans .......................................................................................................5
Contacts
Author Contact Information ........................................................................................................5
Congressional Research Service
Pension Benefit Guaranty Corporation (PBGC): A Fact Sheet
Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency established in
1974 by the Employee Retirement Income Security Act (ERISA; P.L. 93-406). It was created to
protect the pensions of participants and beneficiaries covered by private sector, defined benefit
(DB) plans. These pension plans provide a specified monthly benefit at retirement, usually either
a percentage of salary or a flat dollar amount multiplied by years of service. Defined contribution
plans, such as §401(k) plans, are not insured. The PBGC is chaired by the Secretary of Labor,
with the Secretaries of Treasury and Commerce serving as board members.
The PBGC runs two distinct insurance programs: single-employer and multiemployer plans.
Multiemployer plans are collectively bargained plans to which more than one company makes
contributions. The PBGC maintains separate reserve funds for each program. In FY2009, the
PBGC insured about 27,900 DB pension plans covering 33.6million people. It paid benefits to 1.3
million people, took in 144 newly terminated pension plans, and had about 201,000 new
participants. A firm must be in financial distress to end an underfunded plan. Most workers in
single-employer plans taken over by the PBGC receive the full benefit earned at the time of
termination, but the ceiling on multiemployer plan benefits that could be guaranteed has left
almost all of these retirees without full benefit protection.
PBGC Financing
The PBGC is required by ERISA to be self-supporting and receives no appropriations from
general revenue. The most reliable source of PBGC revenue is the premiums set by Congress and
paid by the private-sector employers that sponsor DB pension plans. Other sources of income are
assets from terminated plans taken over by the PBGC, investment income, and recoveries
collected from companies when they end underfunded pension plans. The PBGC is authorized to
borrow up to $100 million from the U.S. Treasury. P.L. 96-364 requires that the PBGC’s receipts
and disbursements be included in federal budget totals.
Premiums
The minimum annual premium charged for each participant in a single-employer DB plan was
raised for the 2006 plan year from $19 to $30 by the Deficit Reduction Act (DRA) of 2005 (P.L.
109-171). This law also raised the multiemployer plan premium from a flat $2.60 annually per
participant to $8. Because these premiums are now adjusted for inflation, the 2008 rates will be
$33 and $9, respectively. The DRA added a new $1,250 per participant premium for certain plans
terminated after 2005. This premium is payable for the year of termination and each of the next
two years. An additional premium of $9 for each $1,000 of “unfunded vested benefits,” as newly
defined by the Pension Protection Act (PPA) of 2006 (P.L. 109-280), is assessed against plans that
are not fully funded. Effective in 2008, the PPA also eliminates certain exemptions from this
variable premium that are presently available.
Pension Benefit Guaranty
ERISA sets a maximum on the individual benefit amount that the PBGC can guarantee. The
ceiling for single-employer plans is adjusted annually for national wage growth. The maximum
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Pension Benefit Guaranty Corporation (PBGC): A Fact Sheet
pension guarantee is $54,000 a year for workers aged 65 in plans that terminate in 2009. This
amount is adjusted annually and is decreased if a participant retires before age 65 or if the
pension plan provides benefits in some form other than equal monthly payments for the life of the
retiree. Only “basic benefits” are guaranteed. These include benefits beginning at normal
retirement age (usually 65), certain early retirement and disability benefits, and benefits for
survivors of deceased plan participants. Only vested benefits are insured. The median monthly
benefit received in FY2008 was $289.
In contrast, the ceiling on guaranteed benefits for multiemployer plans is not adjusted annually.
The amount set in 1980 did not change until the Consolidated Appropriations Act, 2001 (P.L.
106-554) became law in December 2000. These plans determine benefits by multiplying a flat
dollar rate by years of service, so the benefit guaranty ceiling is tied to this formula. The new
ceiling equals 100% of the first $11 of monthly benefits per year of service plus 75% of the next
$33 of monthly benefits per year of service.
Current Financial Picture
In 1996, the PBGC showed a surplus in its single-employer program for the first time in its
history. That surplus peaked at $9.7 billion in 2000, helped by the strong performance of the
equity markets in the 1990s. The weakness in the economy, particularly in the steel and airline
industries, has led to large and expensive plan terminations that have eliminated the surplus and
left the single-employer program with a deficit of $18.1 billion at the end of FY2006. The deficit
decreased to $10.7 billion at the end of FY2008 and increased to $21.1 billion at the end of
FY2009. The multiemployer program had a surplus from 1982 to 2002, but the PBGC reported
that it had a deficit of $473 million at the end of FY2008 and $869 million at the end of FY2009.
For more information on PBGC finances, see CRS Report RL33937, The Financial Health of the
Pension Benefit Guaranty Corporation (PBGC), by William Klunk.
Defined Benefit Pension Funding
To ensure that sufficient money is available to pay promised pension benefits to participants and
beneficiaries, ERISA sets rules that require plan sponsors to fully fund the pension liabilities of
defined benefit plans. The funding requirements of ERISA recognize that pension liabilities are
long-term liabilities. Consequently, plan liabilities need not be funded immediately, but instead
can be amortized (paid off with interest) over a period of years.
The assets of the pension plan must be kept in a trust that is separate from the employer’s general
assets. Assets in the pension trust fund are protected from the claims of creditors in the event that
the plan sponsor files for bankruptcy. ERISA requires employers that sponsor defined benefit
plans to fund the pension benefits that plan participants earn each year. This is referred to as
funding the target normal cost of the plan. In addition, the funding obligation for plan sponsors
may be affected by
•
Pension benefits granted to employees for past service, but for which no monies
were set aside.
•
Increases in the level of benefits by plan amendment.
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Pension Benefit Guaranty Corporation (PBGC): A Fact Sheet
•
Changes in the present value of future benefit obligations as a result of interest
rate changes. Because DB pension benefits are generally paid as a stream of
payments over several years in the future, the plan calculates a current value of
the benefits by discounting the future cash flows using a specified interest rate.
Changes in the interest rate cause the value of future benefit obligations—and the
amount that plans must set aside to meet them—to change.
•
Changes in the value of investments. Since many pension plans invest a least a
portion of their assets in equities and other financial assets like bonds, changes in
the stock market and other financial markets cause changes in the value of
pension plans’ assets. Decreases in value of investments must be made up by
increases in plan sponsor contributions while increases in the value of
investments may be used to offset future funding obligations.
Pension plan underfunding has increased in recent years. An analysis by Milliman found that the
average funding by the 100 largest corporate DB plans has been less than 100% since July 2008
and was 78.6% as of May 31, 2010.1
Funding Relief
The funding obligations for pension plans increased sharply in 2008 as a result of the economic
recession that began in December 2007. Three factors have contributed to the increase in DB
pension plans sponsors’ funding obligations: (1) the PPA changed some of the methods that plan
sponsors use to value plan assets and liabilities; (2) the decline in the stockmarket in 2008 caused
the value of pension plan assets to decrease because many pension plans hold part of their
portfolios in equities; and (3) the decline in interest rates caused the value of pension plan benefit
obligations to increase. In addition, the economic downturn may have hurt the ability of some
pension plans to pay for their funding obligations. Some have suggested that monies that plan
sponsors would use to fund their benefit obligations would be better spent on other, more
immediate company priorities.
Several bills in the 111th Congress would provide funding relief to DB pension plan sponsors.
Representatives Earl Pomeroy and Paul Tiberi introduced H.R. 3936, the Preserve Benefits and
Jobs Act of 2009, on October 27, 2009. Many of the funding relief provisions in this bill have
been incorporated in subsequent bills that include provisions for DB funding relief.
H.R. 4213 was introduced in the House by Representative Charles Rangel on December 7, 2009,
as the Tax Extenders Act of 2009. H.R. 4213 passed the House on December 9, 2009, and did not
include pension funding relief provisions. On March 10, 2010, the Senate passed an amendment
that provided for DB funding relief. On May 28, 2009, the House passed the American Jobs and
Closing Tax Loopholes Act of 2010, an amended bill that included DB funding relief and also
included provisions from H.R. 2989, the 401(k) Fair Disclosure and Pension Security Act of
2009. As of June 23, 2010, the Senate has not acted on the most recent House-passed bill. Senator
Baucus has offered a substitute amendment that would maintain the DB funding relief provisions
1
Details of the analysis are available at http://www.milliman.com/expertise/employee-benefits/products-tools/pensionfunding-index/.
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Pension Benefit Guaranty Corporation (PBGC): A Fact Sheet
but would remove the provisions related to H.R. 2989. As of June 23, 2010, the Senate has not
acted on Senator Baucus’ amendment.
H.R. 3962, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act
of 2010, was introduced by Representative John Dingell on October 29, 2009. The bill passed the
House on November 7, 2009, and did not contain any pension funding relief provisions. On June
18, 2010, an amended bill passed the Senate. The Senate approved bill contains funding relief
provisions. The House passed the Senate’s amendment to H.R. 3962 on June 24, 2010. The
president signed the bill into law on June 25, 2010.
Single-Employer Funding Relief
Changes to a pension plans funding level that result in increased required funding by a plan
sponsor may be amortized over a period of seven years. H.R. 3962 allows pension plan sponsors
to amortize their funding shortfalls either over nine years, with the first two years of payments
consisting of interest only on the amortization charge and the next seven years consisting of
interest and principal, or over 15 years.
H.R. 3962 contains provisions that would require plan sponsors that choose one of these
amortization schedules to make additional contributions to the plan if the plan sponsors pays
excess compensation or declares extraordinary dividends.
Specifically, the provisions require additional contributions to the plan from plan sponsors that
•
provide more than $1 million in compensation to any employee;2 and
•
(1) pay dividends or redeem company stock greater than the value of a
company’s net income for the prior year or (2) pay dividends greater than the
sum of a company’s dividends in the previous five years.
Certain Other plans
A provision in the funding relief proposals apply to plans that would otherwise be ineligible.
Certain rural cooperatives and defense contractors were allowed to delay the implementation of
the funding requirements of the PPA. PBGC settlement plans were not subject to any of the
provisions of the PPA. These plans would otherwise be ineligible for the funding relief provisions
currently under consideration. H.R. 3962 allows these plans to choose either the nine year
amortization period (with the first two years of payments consisting of interest only on the
amortization charge) or the 15-year amortization period.
Plans Run by Charities
A credit balance is an amount of a plan sponsor’s contributions to a pension plan that exceed the
minimum funding requirement. Under current law, plans that are funded in excess of 80% may
2
The following are exempted from the calculation of compensation: (1) amounts set aside for paying deferred
compensation as part of a nonqualified deferred compensation arrangement; (2) compensation for services performed
before March 1, 2010; and (3) payments for certain types of compensation as a result of a contract that was in effect
prior to March 1, 2010.
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Pension Benefit Guaranty Corporation (PBGC): A Fact Sheet
apply previous years’ credit balances to offset the current year’s required funding. H.R. 3962
allows charities as described in 26 U.S.C. 501(c)(3) to use prior years’ credit balances if the plan
was least 80% funded in the plan year that ended prior to September 1, 2008.
Multiemployer plans
Multiemployer plans may currently amortize their investment losses over a 15-year period. Under
the DB funding provisions passed in H.R. 3962, multiemployer plans can
•
elect to amortize their net investment losses over 30 years if the plan sponsor can
certify the plan’s solvency over the amortization period; and
•
use asset valuation methods that result in asset values that range from 80% to
130% of market value. They could use these valuation methods for up to 10
years.
Multiemployer plans that elect to use either of these funding relief methods are not be allowed to
increase plan benefits for two years unless the benefit increases are funded by additional
contributions to the plan.
Author Contact Information
John J. Topoleski
Analyst in Income Security
jtopoleski@crs.loc.gov, 7-2290
Congressional Research Service
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