Since 1974, when Congress created PBGC to guarantee payment of defined benefit pensions, some 465,000 workers and retirees in 2,510 terminated pension plans have come to rely on PBGC for their retirement income.
Under PBGC's single-employer program, PBGC takes responsibility for paying benefits to current and future retirees when a pension plan runs out of money, when a company liquidates and has an underfunded plan, when PBGC must end (terminate) a plan to protect participants and the insurance fund, or when a sponsoring company demonstrates it cannot continue funding a pension plan and stay in business. When a pension plan terminates, all additional benefit accruals, vesting, and other regular plan obligations cease.
Under the separate multiemployer program, if a PBGC-insured multiemployer plan is unable to pay guaranteed benefits when due, PBGC will provide the plan with financial assistance, in the form of a loan, so the plan can continue to pay participants their guaranteed benefits.
BENEFITS PAID: PBGC pays benefits according to the provisions of each individual pension plan up to the limits set by law. Most participants of plans taken over by PBGC receive the full benefit they would have received under the plan. But, some have found their benefit exceeds PBGC's limits and they do not receive all of their benefit. For example, those who retire early with supplements to their benefits and highly compensated individuals may find that some of their pension amount exceeds PBGC's guarantee. Participants who retire before their plan terminates generally will continue to receive the same form of benefit they had chosen. Those not yet retired will receive a single-life annuity if they are not married, or a joint-and-survivor annuity if they are married, unless both the participant and the spouse specifically waive this benefit.
To assure that there is no interruption in retiree benefit payments after PBGC takes responsibility for a plan, participants receive estimated benefit payments while their plan is examined, a detailed process that takes time. Payments of estimated benefits may result in overpayments or underpayments. In general, PBGC reimburses participants for underpayments with interest in a single payment when PBGC has completed calculations. PBGC recoups overpayments by reducing future monthly payments, usually by no more than 10 percent of the monthly benefit amount, due under the insurance program. The participant may also repay the overpayment in a lump-sum. If both overpayments and underpayments have been made, special rules apply.
Normally, benefits are paid in the form of an annuity on a monthly basis. However, if the monthly benefit is $50 or less, payments generally will be made on a yearly basis. If the full value of the benefit is $5,000 or less, participants will receive a lump-sum distribution. If, in this case, the benefit is at least $25 a month, the participant may elect to receive it as an annuity.
PBGC paid $824 million in benefits to retirees of terminated pension plans in fiscal 1997.
COVERAGE: PBGC guarantees basic benefits including normal and certain early retirement, disability, and survivor benefits. Generally, for participants who are not retired at plan termination, normal and early retirement benefits are guaranteed if all the conditions of the plan for receipt of those benefits are met as of the date the plan terminated. PBGC will begin payments when the participant becomes eligible to receive the benefits. For plans terminated on or after August 23, 1984, PBGC also provides preretirement survivor coverage, which pays a benefit to the surviving spouse of a participant who dies before retirement. PBGC provides this coverage free of charge after plan termination.
Some types of benefits are not guaranteed. These include health and welfare benefits, severance benefits, lump-sum death benefits and disability benefits when death or disability occurs after plan termination.
GUARANTEE LIMITS: There is a statutory limit on the amount of a plan's benefit that PBGC can guarantee. Under the single-employer program, the limit is adjusted annually based on changes in the Social Security contribution and benefit base and is permanently established for each pension plan based on the date the plan terminates. For plans with a 1999 termination date, the maximum guarantee is $36,613.68 yearly ($3,051.14 monthly) for a single-life annuity beginning at age 65. The limitation is adjusted downward for retirees younger than age 65. For example, the maximum guarantee for a participant who retires at age 62 is $28,924.80 yearly ($2,410.40 monthly) for a single-life annuity. At age 55, the maximum guarantee is $16,476.12 yearly ($1,373.01 monthly).
For those already retired, the age used to determine the maximum guarantee is the participant's age as of the date of plan termination. For those not yet retired, the maximum guarantee is based on their age when they do retire. There is also an adjustment to reflect a survivor benefit. In the case of a joint-and-survivor annuity, the adjustment reflects the cost of the additional surviving spouse benefit including the difference in ages of the retiree and the spouse. For example, a 65-year-old retiree with a 60-year-old spouse, whose maximum monthly guarantee as a single annuitant would have been $3,051.14, would instead be $2,608.72. Upon the retiree's death, PBGC pays the surviving spouse a reduced monthly amount (usually about 50 percent of the retiree's benefit under the insurance program) for the remainder of the survivor's life.
PBGC does not guarantee benefit payments that exceed the amount of a participant's accrued plan benefit payable at normal retirement age.
If a participant left the company sponsoring the plan before the date of termination, the amount of the participant's benefit generally is determined by the plan provisions in effect at the time the participant left the company.
Benefit increases and new benefits within five years of plan termination may only be partially covered by PBGC's guarantee. PBGC guarantees the larger of 20 percent or $20 per month of the new benefit or benefit increase for each whole year since its adoption date or effective date, whichever is later. Benefit increases occurring within one year of plan termination are not guaranteed.
Under the multiemployer program, PBGC guarantees a portion of the pension earned up to $16.25 per month times the years of credited service. This guarantee has been unchanged since it was first established in 1980. Legislation was proposed by President Clinton in 1996 and is again pending before the Congress to increase the guarantee to account for inflation since 1980.
ADDITIONAL BENEFITS: Under the single-employer program, there are circumstances where participants or beneficiaries can receive more than guaranteed benefits, such as when a plan has sufficient assets to pay nonguaranteed benefits. In addition, PBGC has certain claims against the employer of a terminated plan for the underfunding. For plans terminating on or after December 18, 1987, a portion of the amount PBGC collects on these claims may provide additional benefits for some participants or beneficiaries.
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