Pension Benefit Guaranty Corporation

Definition

The Pension Benefit Guaranty Corporation (PBGC) is a U.S. government agency that protects the retirement incomes of workers in private-sector defined benefit pension plans. When a pension plan fails, PBGC steps in to provide benefits to retirees, ensuring they receive at least a portion of their promised retirement income.

5 Must Know Facts For Your Next Test

1. PBGC was established by the Employee Retirement Income Security Act (ERISA) in 1974 to protect pension benefits for American workers.
2. PBGC covers both single-employer and multi-employer pension plans, but its insurance coverage varies between the two types.
3. If a pension plan is terminated and underfunded, PBGC assumes responsibility for paying the benefits up to certain limits established by law.
4. The agency is funded by premiums paid by pension plans and does not receive taxpayer funding for its operations.
5. In cases where PBGC takes over a pension plan, retirees may receive reduced benefits compared to what the plan originally promised due to funding limitations.

Review Questions

• How does the Pension Benefit Guaranty Corporation interact with defined benefit plans and protect employee retirement income?
  • The Pension Benefit Guaranty Corporation plays a crucial role in safeguarding the retirement incomes of employees enrolled in defined benefit plans. If a company’s pension plan fails, PBGC steps in to ensure that retirees receive their benefits, though usually at a reduced amount. This mechanism provides peace of mind for workers relying on these pensions as part of their retirement security.
• Discuss the implications of PBGC's role in the context of the Employee Retirement Income Security Act (ERISA) and its impact on pension plan funding.
  • PBGC's establishment through ERISA emphasizes the importance of protecting employee benefits in private-sector pensions. As an insurer of pension plans, PBGC encourages companies to adequately fund their plans, knowing that underfunded plans can lead to PBGC intervention. This oversight helps maintain stability in the pension system and reassures employees about their retirement security.
• Evaluate how PBGC's financial health affects retirees and the broader pension landscape in light of recent trends in pension plan terminations.
  • The financial health of PBGC is critical for retirees relying on it to provide promised benefits from failed pension plans. Recent trends show an increase in pension plan terminations, often leading to higher liabilities for PBGC. If PBGC's financial status weakens due to increased claims, it could result in lower payouts for retirees and heightened concerns about the viability of pension benefits across the private sector, influencing future policy decisions and retirement planning strategies.

Related terms

Defined Benefit Plan:

A retirement plan where an employer promises a specified monthly benefit upon retirement, based on salary and years of service.

Pension Plan: A formal program set up by an employer to provide retirement benefits to employees, which may be defined contribution or defined benefit plans.

ERISA: The Employee Retirement Income Security Act, a federal law that sets minimum standards for pension plans in private industry, including reporting and disclosure requirements.