'Pension Benefit Guaranty Corporation (PBGC)' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Pension Benefit Guaranty Corporation is also referred to many times by its government given acronym the PBGC. This federal agency arose as a result of the ERISA Employee Retirement Income Security Act of 1974. Its mission is to safeguard the benefits of pensions provided by private sector benefit plans that are defined. These plans commonly promise to pay out a fixed amount per month when retirement begins.
Should a plan end in the event of plan termination, and there not be enough money to pay out all of the promised benefits, then the insurance program of the Pension Benefit Guaranty Corporation will pay out the pension plan-provided benefit to the limits which the law establishes. This means that the majority of plan participants will actually still get the full benefit which they had already earned and been promised before termination of the plan occurred.
Some people have wondered where the money for the PBGC comes from so that they can cover failed plan benefits this way. The answer is that those firms whose plans the Pension Benefit Guaranty Corporation protects are required to pay insurance premiums for the insurance. PBGC similarly has investments as well as seized assets that they assume when they become trustee of a terminated pension plan. They also have assets from recoveries of firms which used to manage the plans. They do not derive any of this benefit-covering money from the general tax base. Even if a given employer does not pay its insurance premiums properly into the fund, the defined benefits pension plan will still be insured.
Employers may close out these defined benefit plans in what the PBGC calls a standard termination. They are only allowed to do this once they have demonstrated that the plan is sufficiently capitalized to pay out all owed benefits to the plan participants. To do this, the plan will be required to do one of two things. They might buy an annuity off of an insurance company. This annuity will pay out the promised lifelong benefits upon retirement of the participants.
Alternatively, they may provide one time single large payments that amount to the full benefit value amount. The PBGC provided guarantee of the plan will then cease to exist once the employer either buys this annuity or provides the beneficiaries of the plan with the one time, single payment.
Should the plan lack the money needed to cover all promised pension benefits to the participants of the plan while the employing firm finds itself in financial trouble, then the employers are able to request a distress termination from the PBGC fund. The plan will only be terminated under these scenarios when the employing firm proves to either a bankruptcy court or the PBGC itself that they will not be able to continue operating the firm if the plan does not become terminated. Once such an application request is approved, the PBGC typically becomes trustee and administrator of the plan. They would then pay out the promised plan benefits to the extent allowed by law.
The law similarly allows the Pension Benefit Guaranty Corporation to act alone in order to close out a pension plan where necessary to safeguard the participants’ interests or that of the insurance program of the PBGC itself. As a standard procedural example, they will terminate any plan that is sure to be incapable of paying out the promised benefits when they become due.
The PBGC covers the overwhelming majority of defined benefit plans which private sector businesses provide. The lion’s share pledge to pay out a set benefit (typically in a once per month distribution) upon commencement of the beneficiaries’ retirement. Some pledge to deliver a single-value lump sum payment for their benefit. It is important to know that the PBGC will never insure any defined contribution plans that do not pledge to deliver a guaranteed benefit amount.
PBGC insures defined benefit plans offered by private-sector employers. Most promise to pay a specified benefit, usually a monthly amount, at retirement. Others, including cash-balance plans, may state the promised benefit as a single value. PBGC does not insure defined contribution plans, which are retirement plans that do not promise specific benefit amounts, such as profit-sharing or 401(k) plans.
PBGC does not commonly insure any plans that lawyers and doctors offer if they have under 25 active participants. They also do not cover the plans provided by local, state, or Federal governments. Finally, church group pension plans will not be covered.