Pension Benefit Guaranty Corporation: A Fact Sheet

Pension Benefit Guaranty Corporation: A Fact Sheet

Order Code 95-118 EPW
Updated January 5, 2005
CRS Report for Congress
Received through the CRS Web
Pension Benefit Guaranty Corporation:
A Fact Sheet
Paul J. Graney
Analyst in Social Legislation
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. 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 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. In 2004, it insured private pensions for 44 million persons participating
in about 30,200 plans, including about 1,600 multiemployer plans. In FY2004, PBGC
paid over $3 billion in benefits to almost 520,000 people in about 3,500 plans. A firm
must be in financial distress to end an underfunded plan. Most workers in single-
employer 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 is $19. An additional premium of $9 for each $1,000 of
“unfunded vested benefits” is assessed against plans that are not fully funded.
Multiemployer plans pay a flat $2.60 annually per participant.
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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 $45,613.68 a year
for plans that terminate in 2005 as opposed to $44,386.32 a year for those that terminated
in 2004. 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 single-
employer program for the first time in its history. That surplus peaked at $9.7 million 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 $23.3 billion. The multiemployer program had a surplus from
1982 to 2002, but the PBGC reported that it had a deficit of $236 million in 2004. For
more information on PBGC finances, see CRS Report RL32702, Can the PBGC Be
Restored to Financial Health?, by Neela K. Ranade.
Pension Funding Levels. Private sector DB pension plans are required to report
their level of funding to the PBGC, and in 2002 over 270 companies reported
underfunding greater than $50 million. 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, total underfunding in plans that may result in
“reasonably possible claims,” according to PBGC estimates for September 2004, rose to
$96 billion with most of this exposure coming from airline and steel plans. The general
weakness in the economy and the stock market decline’s role in eroding the assets of
pension plans have also contributed to the underfunding problem. Many companies
whose pension plans reached overfunded status due to appreciation in the value of their
assets during the rising stock market are now facing the need to make large contributions.
Retirement Protection Act of 1994. Pension changes proposed by the
Retirement Protection Act of 1994 were included in the General Agreement on Tariffs
and Trade (P.L. 103-465). This law required underfunded pension plans to pay higher
insurance premiums and fund their obligations faster. It eliminated funding loopholes and
prescribed interest rate and mortality assumptions that must be used in determining plan
liabilities. This law improved PBGC’s access to the records of certain troubled plans and
required sponsors of underfunded plans to provide participants with simple notices that
state the degree of underfunding and explain the PBGC benefit guarantee. Additional
information is available at the PBGC website at [http://www.pbgc.gov].