Pension Benefit Guaranty Corporation

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Pension Benefit Guaranty Corporation (United States)
US-PensionBenefitGuarantyCorp-Logo.svg
Agency overview
Formed September 2, 1974[1]
Headquarters 1200 K Street, NW
Washington, D.C.
38°54′08″N 77°01′44″W / 38.902188°N 77.028751°W / 38.902188; -77.028751Coordinates: 38°54′08″N 77°01′44″W / 38.902188°N 77.028751°W / 38.902188; -77.028751
Employees 800 (2010)
Annual budget $445 million (2009)
Agency executive Joshua Gotbaum, Director
Website www.pbgc.gov

The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, the PBGC insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at age 65 ($54,000 a year as of 2011).[2] The benefits payable to insured retirees who start their benefits at ages other than 65, or who elect survivor coverage, are adjusted to be equivalent in value.

During fiscal year 2010, the PBGC paid $5.6 billion in benefits to participants of failed pension plans. That year, 147 pension plans failed, and the PBGC's deficit increased 4.5 percent to $23 billion. The PBGC has a total of $102.5 billion in obligations and $79.5 billion in assets.[3]

Revenues and expenditures[edit]

The PBGC is not funded by general tax revenues. Its funds come from four sources:

  • Insurance premiums paid by sponsors of defined benefit pension plans;
  • Assets held by the pension plans it takes over;
  • Recoveries of unfunded pension liabilities from plan sponsors' bankruptcy estates;[4] and
  • Investment income.

PBGC pays monthly retirement benefits to approximately 631,000 retirees of 3,800 terminated defined benefit pension plans. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, the PBGC is responsible for the current and future pensions of about 1.3 million people.[5]

The PBGC regularly updates its investment strategy. In 2004, it chose to invest heavily in bonds.[6] Under new leadership, the agency in 2008 shifted a substantial portion of its assets into stocks.[7] Because of the market decline, PBGC's equity investments lost 23% during the year ending September 30, 2008.[8]

Pension insurance programs[edit]

The single-employer program protects 34.0 million workers and retirees in 28,800 pension plans. The multiemployer program protects 9.9 million workers and retirees in 1,540 pension plans. Multiemployer plans are set up by collectively bargained agreements involving more than one unrelated employer, generally in one industry.

Plan terminations[edit]

An employer can voluntarily ask to close its single-employer pension plan in either a standard or distress termination. In a standard termination, the plan must have enough money to pay all accrued benefits, whether vested or not, before the plan can end. After workers receive promised benefits, in the form of a lump sum payment or an insurance company annuity, PBGC's guarantee ends. In a distress termination, where the plan does not have enough money to pay all benefits, the employer must prove severe financial distress - for instance the likelihood that continuing the plan would force the company to shut down. PBGC will pay guaranteed benefits, usually covering a large part of total earned benefits, and make strong efforts to recover funds from the employer.

In addition, PBGC may seek to terminate a single-employer plan without the employer's consent to protect the interests of workers, the plan or PBGC's insurance fund. PBGC must act to terminate a plan that cannot pay current benefits.

For multiemployer pension plans that are unable to pay guaranteed benefits when due, PBGC will provide financial assistance to the plan, usually a loan, so that retirees continue receiving their benefits.

Terminations are covered under Title IV of ERISA.

Premium rates[edit]

Pension plans that are qualified under the U.S. tax code pay yearly insurance premiums to the PBGC based on the number of participants in the plan and the funded status of the plan.

The Bipartisan Budget Act, which was signed by President Obama at the end of 2013, set PBGC premiums as follows for single-employer pension plans:[9]

Flat-rate premium

  • $49 per participant for plan years starting in 2014
  • $57 per participant for plan years starting in 2015
  • $64 per participant for plan years starting in 2016
  • Indexed to the National Average Wage for plan years starting in 2017 and after

Variable-rate premium

  • $14 per $1,000 of unfunded vested benefits for plan years starting in 2014
  • At least $24 per $1,000 of unfunded vested benefits for plan years starting in 2015
  • At least $29 per $1,000 of unfunded vested benefits for plan years starting in 2016
  • Indexed to the National Average Wage for plan years starting in 2017 and after

Maximum guaranteed benefit[edit]

The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly. For plans that end in 2011, workers who retire at age 65 can receive up to $4,653.41 per month (or $55,840.92 per year) under PBGC's insurance program for single-employer plans.[10]

Benefit payments starting at ages other than 65 are adjusted actuarially, which means the maximum guaranteed benefit is lower for those who retire early or when there is a benefit for a survivor, and higher for those who retire after age 65. Additionally, the PBGC will not fully guarantee benefit improvements that were adopted within the five-year period prior to a plan's termination or benefits that are not payable over a retiree's lifetime.

Other limitations also apply to supplemental benefits in excess of normal retirement benefits, benefit increases within the last five years before a plan's termination, and benefits earned after a plan sponsor's bankruptcy.[11]

For the multiemployer plans, the amount guaranteed is based on years of service. For plans that terminate after December 21, 2000, the PBGC insures 100 percent of the first $11 monthly payment per year of service and 75 percent of the next $33 monthly payment per year of service. For example, if a participant works 20 years in a plan that promises $19 per month per year of service, the PBGC guarantee would be $340 per month.[12]

Multiemployer plans that terminated after 1980 but before December 21, 2000, had a maximum guarantee limit of 100 percent of the first $5 of the monthly benefit accrual rate and 75 percent of the next $15.

Leadership[edit]

PBGC is headed by a Director, who reports to a board of directors consisting of the Secretaries of Labor, Commerce and Treasury, with the Secretary of Labor as chairman.

Under the Pension Protection Act of 2006, the Director of the PBGC is appointed by the President and confirmed by the Senate. Under prior law, PBGC's Board Chairman appointed an "Executive Director" who was not subject to confirmation.

Charles E. F. Millard became the first Senate-confirmed Director on December 14, 2007.[13][14] Prior to coming to PBGC, Millard was managing director at Broadway Partners, LLC. He previously held leadership positions at Lehman Brothers, the New York City Economic Development Corporation, and Prudential Securities. In addition, Millard served two terms on the New York City Council.[15]

Joshua Gotbaum was appointed as the current Director on July 2, 2010 through a recess appointment.[16] Gotbaum served in both the Carter and Clinton administrations in a variety of financial service positions and led the bankruptcy reorganization of Hawaiian Airlines.

Pensions and bankruptcy[edit]

Several large legacy airlines have filed for bankruptcy reorganization in an attempt to renegotiate terms of pension liabilities. These debtors have asked the bankruptcy court to approve the termination of their old defined benefit plans insured by the PBGC. The PBGC has attempted to resist these requests.

The PBGC would like required contributions (a.k.a. minimum contributions) to insured defined benefit pension plans to be considered "administrative expenses" in bankruptcy, thereby obtaining priority treatment ahead of the unsecured creditors. The PBGC has generally lost on this argument, sometimes resulting in a benefit to general unsecured creditors.

In National Labor Relations Bd. v. Bildisco, 465 U.S. 513 (1984), the U.S. Supreme Court ruled that Bankruptcy Code section 365(a) "includes within it collective-bargaining agreements subject to the National Labor Relations Act, and that the Bankruptcy Court may approve rejection of such contracts by the debtor-in-possession upon an appropriate showing." The ruling came in spite of arguments that the employer should not use bankruptcy to breach contractual promises to make pension payments resulting from collective bargaining.

General bankruptcy principles hold that executory contracts are avoidable in practice, because neither party has fulfilled its part of the bargain and thus breach by either party only gives rise to expectation damages. Damages awards after commencement of a bankruptcy filing results in claims that take after more senior creditors. They are relegated to the status of general creditors because while breach would occur after filing of the bankruptcy petition, the contract was entered into before the filing. If a creditor is a general unsecured creditor and there is not enough money, they usually are not paid; so as a matter of practical economics, if the downturn in a company's fortunes which resulted in bankruptcy makes the performance of an executory contract less valuable than its breach, the rational company would breach. There would be no negative monetary consequences of such breach because there would be no money left for the other contract party to take because in practice general unsecured creditors are left with nothing.

US Airways has so far resisted in court in making those required minimum contributions to their legacy pensions.

In Bildisco the Court also ruled that under the Bankruptcy Code as written at that time, an employer in Chapter 11 bankruptcy "does not commit an unfair labor practice when, after the filing of a bankruptcy petition but before court-approved rejection of the collective-bargaining agreement, it unilaterally modifies or terminates one or more provisions of the agreement." After the Bildisco decision, Congress amended the Bankruptcy Code by adding a subsection (f) to section 1113 (effective for cases that commenced on or after July 10, 1984):

"(f) No provision of this title shall be construed to permit a trustee to unilaterally terminate or alter any provisions of a collective bargaining agreement prior to compliance with the provisions of this section."

According to commentator Nicholas Brannick, "Despite the appearance of protection for the PBGC's interest in the event of termination, the Bankruptcy Code frequently strips the PBGC of the protection provided under ERISA. Under ERISA, termination liability may arise on the date of termination, but the lien that protects the PBGC's interest in that liability must be perfected [to be protected in bankruptcy]". Nicholas Brannick, Note: At the Crossroads of Three Codes: How Employers Are Using ERISA, the Tax Code, and Bankruptcy to Evade Their Pension Obligations, 65 Ohio St. L.J. 1577, 1606 (2004). The retention of title as a security interest, the creation of lien, or any other direct or indirect mode of disposing of or parting with property or an interest in property is a "transfer" for purposes of the U.S. Bankruptcy Code (see 11 U.S.C. § 101(54)). Some transfers may be avoidable by the bankruptcy trustee under various Code provisions. Further, under ordinary principles of bankruptcy law, a lien or other security interest that is unperfected (i.e., a lien that is not valid against parties other than the debtor) at the time of case commencement is generally unenforceable against a bankruptcy trustee. Once the bankruptcy case has commenced, the law generally stays any act to attempt to perfect a lien that was not perfected prior to case commencement (see 11 U.S.C. § 362(a)(4)). Thus, the PBGC with a lien that has not yet been perfected at the time of case commencement may find itself in the same position as the general unsecured creditors.

Annual Pension Insurance Data Book[edit]

The PBGC has published the Pension Insurance Data Book since 1996 to present detailed statistics on PBGC's programs,[17] operations, and benefits on single-employer and multi-employer plans. The data book is broken into four main sections; Figures, Single Employer plans, Multiemployer plans, and a research article. The figures section displays all statistics at a glance. Obvious trends are the precipitous decline in the enrollment of employees in defined benefit (DB plans)over the past 20 years and the spike in PBGC deficit during times of recession/defaults. The single employer section gives all data and statics on single employer programs.

  • Section S-3 through S-19 are the claims tables. The show all of the claim brought by single employer DB plans to PBGC.
  • Section S-20 through S-29 are the payment table. These table show how much PBGC is paying out every year in insurance protection.
  • Section S-30 through S-38 are the insured tables. These table show how many participants are insured under the PBGC.
  • Section S-40 through S-44 Premium tables. These table show how much premiums the insured pension plans are paying.
  • Section S-45 though S-52 Show the underfunded Plans, overfunded Plans, and the funding ratios by NAIC business code, state, and participant count.

The multi-employer section, the M sections, follow a similar organization.

The article usually is a research paper or an extended explanation of operations at the PBGC.

Pension Protection Act of 2006[edit]

The Pension Protection Act of 2006 represents the most significant pension legislation since ERISA.[18] Some of the provisions of the Act that affect the PBGC include:

  • The method for calculating the "variable-rate" PBGC premium is changed.
  • If the PBGC takes over a terminated plan, the guarantee of employees' pension benefits is frozen as of the date of the plan sponsor's bankruptcy filing, which may be months or years before the plan terminates.
  • The PBGC's guarantee of pension benefits that become payable on a plant shutdown is limited if the shutdown occurred within five years of the bankruptcy filing.
  • The complicated rules that govern the PBGC's pension guarantee for business owners are simplified.
  • If the PBGC takes over a terminated plan, the plan sponsor is required to pay a "termination premium" of $1,250 per participant per year for three years.

No insurance for defined contribution plans[edit]

One reason Congress enacted ERISA was "to prevent the 'great personal tragedy' suffered by employees whose vested benefits are not paid when pension plans are terminated."[19] When a defined benefit plan is properly funded by its sponsor, its assets should be approximately equal to its liability, and any shortfall (including benefit improvements) should be amortized in a relatively short period of time. Before ERISA, employers and willing unions could agree to increase benefits with little thought to how to pay for them. A classic case of the unfortunate consequences of an underfunded pension plan is the 1963 shutdown of Studebaker automobile operations in South Bend, Indiana, in which 4,500 workers lost 85% of their vested benefits.[19] One of ERISA's stated intentions was to minimize underfunding in defined benefit plans.

Defined contribution plans — by contrast and by definition — are always "fully funded." Thus Congress saw no need to provide insurance protection for participants in defined contribution plans. The Enron scandal in 2001 demonstrated one potential problem with defined contribution plans: the company had strongly encouraged its workers to invest their 401(k) plans in their employer itself, violating primary investment guidelines about diversification. When Enron went bankrupt, many workers lost not just their jobs but also most of the value of their retirement savings. Congress inserted trust law fiduciary liability upon employers who did not prudently diversify plan assets to avoid the chance of large losses inside Section 404 of ERISA, but it is unclear whether such fiduciary liability applies to trustees of plans in which participants direct the investment of their own accounts.

See also[edit]

Notes[edit]

  1. ^ "President Ford Signing ERISA of 1974", PBGC Website February 25, 2011.
  2. ^ ""PBGC Announces Maximum Insurance Benefit for 2011", PBGC Public Affairs, October 19, 2010.
  3. ^ "Insurer reports wider annual deficit", The Washington Post, November 16, 2010.
  4. ^ When the PBGC takes over an insolvent pension plan, it becomes a general creditor of the plan sponsor.
  5. ^ "2007 Annual Report" (PDF). Pension Benefit Guaranty Corporation. p. 9. Retrieved 2008-08-13. 
  6. ^ "PBGC Announces New Investment Policy". Pension Benefit Guaranty Corporation. January 29, 2004. Retrieved 2009-08-31. 
  7. ^ "PBGC Announces New Investment Policy". Pension Benefit Guaranty Corporation. February 18, 2008. Retrieved December 1, 2011. 
  8. ^ Kranish, Michael (2009-03-30). "Pension Insurer Shifted to Stocks". Boston Globe. 
  9. ^ http://www.towerswatson.com/en-US/Insights/Newsletters/Americas/insider/2014/bipartisan-budget-act-raises-pbgc-premiums
  10. ^ "Maximum monthly guarantee tables". Pension Benefit Guaranty Corporation. Retrieved 2012-06-28. 
  11. ^ "What PBGC Guarantees". Pension Benefit Guaranty Corporation. Retrieved 2012-08-05. 
  12. ^ [100% × $11 + 75% × ($19 - $11)] × 20 = $17 × 20 = $340.
  13. ^ "Director". Pension Benefit Guaranty Corporation. Retrieved 2007-12-16. 
  14. ^ Jerry Geisel (2007-12-14). "Senate confirms Millard as PBGC chief". Business Insurance. Retrieved 2007-12-16. 
  15. ^ "Personnel Announcement". The White House. 2007-05-03. Retrieved 2007-12-16. 
  16. ^ "Director". White House. Retrieved 2010-07-27. 
  17. ^ Trends and statistics on plans , Practitioners, February 25, 2011.
  18. ^ "Fact Sheet: The Pension Protection Act of 2006: Ensuring Greater Retirement Security for American Workers". The White House. 2006-08-17. Retrieved 2007-12-16. 
  19. ^ a b Nachman Corp. v. Pension Benefit Guaranty Corporation 446 U.S. 359 (1980).

Further reading[edit]

External links[edit]