Pension Termination

BACKGROUND: The Pension Benefit Guaranty Corporation (PBGC) was created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect the pensions of participants in private defined benefit pension plans. PBGC protects participants when employers cease sponsorship of pension plans or when an employer can no longer stay in business and fund its pensions. In such events, known as plan termination, all benefit accruals and regular pension plan contribution obligations cease.

TYPES OF TERMINATION: Specifically, PBGC was created to protect the retirement security of participants whose pension plans terminate without sufficient assets to pay all promised benefits. Cessation of a plan under these circumstances is a distress termination. Activities under a pension plan such as benefit accruals and vesting cease; PBGC steps in and uses its own assets to insure that participants do not lose all their benefits as occurred prior to 1974.

Benefit payments actually earned are guaranteed up to a monthly limit that is set by law. For pension plans terminating in 1999, the maximum guaranteed amount is $3,051.14 per month ($36,613.68 yearly) for a participant retiring at age 65. This maximum monthly payment must be reduced for any benefit that is paid or payable to a participant before age 65, or is paid to a participant in a form other than an annuity for the participant's life alone, such as a form that provides for survivor's benefits. In PBGC's multiemployer program, pension plans normally are not terminated. If a multiemployer plan becomes insolvent, it receives financial assistance from PBGC to enable the plan to pay participants their guaranteed benefits.

Some 465,000 workers and retirees of 2,510 underfunded plans that have been terminated in PBGC's 23-year history depend on PBGC for their retirement income.

ERISA also provides protection for participants whose pension plans terminate with sufficient assets to pay for all benefits. Cessation of a plan under these circumstances is a standard termination. In this event, all activities under the plan cease, all benefits become fully vested, the benefits are distributed under ERISA guidelines, and PBGC's insurance responsibility ends. There have been about 154,000 standard terminations since PBGC's creation.

DISTRESS TERMINATION: A company in financial distress may voluntarily terminate a pension plan if:

• the plan administrator has issued a Notice of Intent to Terminate to affected parties, including PBGC, at least 60 days and no more than 90 days in advance of the proposed termination date;

• the plan administrator has issued a subsequent termination notice to PBGC, which includes data concerning the number of participants and the plan's assets and liabilities; and

• PBGC has determined that the plan sponsor and each of its corporate affiliates have satisfied at least one of the following financial distress tests--though not necessarily the same test:

The law provides that PBGC may terminate a pension plan, even if a company has not filed to terminate the plan on its own initiative if:

• the plan has not met the minimum funding requirements;

• the plan cannot pay current benefits when due;

• a lump sum payment has been made to a participant who is a substantial owner of the sponsoring company; or

• the loss to PBGC is expected to increase unreasonably if the plan is not terminated.

PBGC must terminate a plan if assets are unavailable to pay benefits currently due.

STANDARD TERMINATION: A plan may terminate only if plan assets are sufficient to satisfy all plan benefits earned as of the termination date and if the following steps have been taken:

• the plan administrator has issued a Notice of Intent to Terminate to affected parties other than PBGC at least 60 days, and no more than 90 days, before the proposed termination date; it also must inform plan participants that PBGC's guarantee of their benefits will cease upon distribution of plan assets;

• the plan administrator has informed plan participants and PBGC of the identity of the private insurer from whom an annuity is being purchased or the names of insurers from whom purchases are anticipated no later than 45 days before the distribution of plan assets;

• the plan administrator has sent each plan participant a notice that includes the benefit earned by the participant and data used to calculate the value of the benefit;

• the plan administrator has submitted a termination notice to PBGC, which includes certified data on the plan's assets and liabilities as of the proposed date of distribution; and

• the plan administrator distributes plan assets in satisfaction of all benefit liabilities under the plan.

• Plans that distribute benefits in plan years beginning on or after January 1, 1996, must provide PBGC with the names of any missing participants and either money to pay their benefits or the name of the insurer holding their annuities. Before sending money to PBGC, the plan administrator must conduct a diligent search, including use of a commercial locator service.

If there are insufficient assets to meet all benefit liabilities or the proper procedures were not followed, PBGC may issue a Notice of Noncompliance that nullifies the proposed termination.

Annuity insurer selections are fiduciary decisions and must comply with fiduciary provisions of Title I of ERISA, which is enforced by the Department of Labor.

rev 1/99