Pension Benefit Guaranty Corporation (PBGC)

The Pension Benefit Guaranty Corporation (PBGC) is a government body established by Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) to ensure payment of pension plan benefits when the plans are terminated. The PBGC is headed by an executive director who reports to a board of directors. The board of directors consists of the secretaries of labor, commerce, and the treasury and is chaired by the secretary of labor. The PBGC states that its mission is to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum.

The PBGC acts as an insurer and guarantor of private pension plans with two main insurance funds, one covering pension plans sponsored by single employers and the other covering multiemployer pension plans. In 2005, the single-employer insurance program covered 34.6 million workers and retirees in 29,651 pension plans. The multiemployer program covered 9.8 million workers and retirees in 1,587 pension plans.

Employers that sponsor pension plans pay the PBGC insurance premiums at a rate that is set by Congress. The PBGC also receives the assets of the plan when it takes over a pension plan. Pension plans [Page 1582]paid the PBGC yearly insurance premiums of $2.60 per worker or retiree in multiemployer plans and $19 per worker or retiree (plus $9 for each $1,000 of unfunded vested benefits) in single-employer plans in 2005.

The PBGC takes over a pension plan when an employer voluntarily closes its plan. This could occur as a standard termination, in which case the plan must have enough money to pay all benefits before the plan can end, or it could be a distress termination, where the plan does not have enough money to pay all benefits and the employer must prove financial distress. Here, the PBGC pays plan participants the guaranteed benefits. The PBGC can also seek to close a singleemployer plan without the employer's consent when the employer deems that such an action will protect the interests of workers, the plan, or the PBGC's insurance fund. The PBGC guarantees pension benefits to a maximum level that is set by law and adjusted annually. The maximum pension benefit guaranteed for plans terminated in 2005 was set at $45,613.68 a year.

While the PBGC exists to ensure the promised benefit of terminated plans, it is operating at a substantial deficit and faces a looming crisis. Until 2002, the PBGC had a $7.7 billion surplus. In 2003, it ran an $11.2 billion deficit and has an $85 billion exposure to companies with a junk bond rating (i.e., bonds rated below investment grade, which typically offer a higher return) that are at higher risk of default on their pension obligations. The PBGC also estimated a $400 billion gap between assets and liabilities in the private definedbenefit pension system in the United States in 2003.