You may have never heard of the Pension Benefit Guaranty Corporation (PBGC), but if you are one of the dwindling number of future retirees who are covered by a defined benefit program instead of a defined contribution program, you should take the time to know a little more about the final protector of your retirement finances.
What is the Pension Benefit Guaranty Corporation?
PBGC was created as part of the 1974 Employee Retirement Security Income Act (ERISA) in order to protect retirees in defined-benefit programs in the private sector. Should your plan terminate without enough money in hand to meet all the obligations, PBGC steps in to fill the gap and provides benefits up to the legal limit (currently $60,136 annually for a 65-year-old recipient but fluctuating depending on your age at first receipt of benefits and whether you have included spousal benefits or those for other beneficiaries).
The coal producer/exporter Walter Energy, Inc., is one of the most recent examples of PBGC action. Walter Energy filed for Chapter 11 bankruptcy in June of 2015. Their pension plan was approximately 70% funded and Walter's likely buyers do not intend to assume responsibility for the pension after any sale. Therefore, the plan ended at the end of the 2015 calendar year, with retirees continuing to receive their benefits from the remaining funds. Once the Walter funds run out, PBGC will take over the obligations to Walter Energy's current and future retirees — in this case, approximately $96 million in future obligations.
Where does the money come from? PBGC is not funded by taxes; it is funded by employers. The employers pay premiums to PBGC to provide pension protection to their companies — around $3.7 billion in 2015. Further funding comes via recoveries from companies that are responsible for failed pension plans, assets acquired when the PBGC assumes the trusteeship of failing plans (as with Walter Energy's partially-funded plan), and income provided by investments of PBGC assets.
PBGC consists of two forms of pension insurance programs: single-employer and multi-employer plans. According to the PBGC website, the single-employer program currently insures more than 22,000 pension plans that are specific to individual employers, providing around 30 million workers with coverage. The multi-employer plan is tailored for unions or multiple employers within the same general industry and backs up around 1,400 pension plans, covering upwards of 10 million workers.
Those in failed single employer plans receive direct payments from PBGC once they assume responsibility, but PBGC payments to failing multi-employer plans are still funneled through the existing plan.
Just because PBGC assumes your payments does not mean that you will receive the exact amount that you were promised. Your guarantee extends to basic pension benefits earned before the plan terminated or bankruptcy is declared. Aside from the legal limitations on benefit payments, the benefit amount that PBGC pays is defined by the plan provisions, your age, the form of the benefit (annuity format or lump sum payment) and the assets and amounts that PBGC is able to recover. Perks such as severance/vacation pay and health and welfare benefits are not guaranteed.
If PBGC takes over your plan, you will be asked to complete an information form and they will determine your proper benefit level. If you are already receiving a pension, that pension will be paid without interruption, but the amount may change later depending on PBGC's determination of your benefits. Future retirees should contact PBGC to request an estimate of benefits and then start the application process three months before you want to begin drawing your benefits. Any questions or concerns about the amount can be dealt with during the interim period.
Further details are available in the FAQ section of the PBGC website. Educate yourself about how PBGC works in case you ever need it, but hope that you never have to rely on their services.
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