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The PBGC Safety Net: A Closer Look

Government Affairs

That the Pension Benefit Guaranty Corporation (PBGC) provides a financial safety net for millions of retirees and plan participants. But what are those threads made of? The Congressional Research Service (CRS) offers an answer.

In “Pension Benefit Guaranty Corporation (PBGC): A Primer,” the CRS examines many facets of the agency, including the function that means the most to the people it ultimately exists to serve — paying benefits.

“Within limits set by Congress, PBGC guarantees any retirement benefit that was nonforfeitable (vested) on the date of plan termination other than benefits that vest solely on account of the termination, and any death, survivor, or disability benefit that was owed or was in payment status at the date of plan termination,” says the CRS. Benefits that are payable in monthly installments and that begin before the plan’s normal age of retirement are guaranteed, as long as other conditions of guarantee are not met. PBGC guarantees are phased in over five years, beginning when a “triggering event,” such as a plant shutting down, takes place.

The PBGC only guarantees “basic benefits” for single-employer plan participants — “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 report says.

PBGC guarantees are different for multiemployer plans. Rather than insuring against plan termination as it does for single-employer plans, for their multiemployer plan counterparts the PBGC insures against insolvency. That occurs, says the CRS, when a multiemployer plans’ “available resources are not sufficient to pay the plan benefits for the plan year in question, or when the sponsor of a plan in reorganization reasonably determines, taking into account the plan’s recent and anticipated financial experience, that the plan’s available resources will not be sufficient to pay benefits that come due in the next plan year.”

The PBGC provides loans to such plans, and may do so year after year. Loans must be repaid, of course, and PBGC loans are supposed to be, like any other. That’s “supposed to be.” The PBGC indicates, the CRS says, that its loans to multiemployer plans are “rarely repaid.” Plans that recover from insolvency must repay the loans “on reasonable terms,” but according to the CRS, just one — one — has repaid any of the financial aid the PBGC provided it.

“When an underfunded plan terminates, the benefits PBGC will pay depend on the statutory limit on guaranteed benefits, the amount of the terminated plan’s assets, and recoveries by PBGC from the employer that sponsored the terminated plan,” says the report, noting that ERISA sets a maximum amount that the PBGC can guarantee for an individual. The ceiling varies by plan type — for single-employer plans it is adjusted annually, and for multiemployer plans it is adjusted annually, and for multiemployer plans benefits are determined by multiplying a flat dollar rate be years of service.

Dollars and Cents

The single-employer program, the CRS says, paid approximately 825,000 participants monthly benefits in fiscal year (FY) 2015. The average monthly payments were as follows:

 

Recipient Average Monthly Amount
Participant                       $536
Retiree                       $606
Beneficiary                       $307
Lump-sum                   $2,054

 

For plans that terminate this year, the annual maximum benefits are as follows:

 

Type of Plan Benefits Begin at Age 60 Benefits Begin at Age 65 Benefits Begin at Age 70
Straight Life Annuity $43,742 $67,295 $111,710
Joint and 50% Survivor Annuity, Assuming Both Spouses Are the Same Age $39,368 $60,566 $100,539

 

The CRS suggests that the crystal ball is a bit murky for the multiemployer plan program. It notes that the PBGC estimated that in 2015, 79% of the participants in plans that received PBGC help received their full benefits, but only 49% of such participants are likely to in the future. It adds that the average benefit for those covered by plans that have not terminated and do not receive PBGC help are nearly twice as large as for those covered by plans that have terminated.