The Pension Benefit Guaranty Corporation (PBGC) is a corporation established under the Employee’s Retirement Income Security Act (ERISA) of 1974 (Eriksson, 2007). The role of PBGC is to provide a safety plan for participants in the private sector by insuring their benefits under a defined benefit plan. PBGC guarantees benefits to its participants in events that their sponsored benefits plan, from employers for instance, becomes insolvent.
The basic benefits covered under PBGC consist of pension on retirement, annuities, and disability payments meant for those who receive such payments before the termination of their cover plans (Smith, 2009). It is crucial to note that PBGC does not cover some supplemental benefits on some deaths. Additionally, if the termination of a benefit plan happens within five years of the amendment, the benefits accruing may only be covered partially (Eriksson, 2007). PBGC collects its funds from premiums collected from sponsored defined benefit plan, recoveries from former plan sponsors, assets from the defined benefit plans, and earnings from assets invested.
PBGC’s key obligation is to protect pension payments from failed pension plans. It ensures that corporate pensions honor their obligations to their participants and that participants feel secure in investing in such benefit plans. It guarantees payments to participants under such schemes and ensures that they get their premiums when due. A common misconception of the roles played by PBGC is that it totally protects pensioners if their employer-sponsored benefit plans fail (Smith, 2009).
While it has an obligated to act as a safety net, PBGC is not a replacement for pension payments that plan participants hope to receive; the maximum levels payable are determined by congress in consideration to the termination date or bankruptcy filing date, and not the date when the participants expect to receive their payments. It only honors early retirement plans for those participants who meet the early retirement criteria at the time it takes over. Additionally, the maximum benefits determined by the congress are not subjected to further adjustments like future costs of living (Eriksson, 2007).
PBGC is mandated to take over the administration of a pension plan, which may be terminated under distress (when termination occurs without sufficient assets), by the plan sponsor. PBGC may also take over or mandate a takeover if it determines that a plan is unable to meet its obligations in paying benefits (Smith, 2009).
With its two pension insurance programs i.e. The Single Insurance programs and the Multiemployer program, PBGC ensures monthly retirement benefits for retirees, existing employees, and participants in the multiemployer programs (Eriksson, 2007). It ensures that its participants receive financial assistance needed after retirement or termination of jobs. The scheme is responsible for the current and future pensions for employees and participants. This ensures financial security for its participants and provides a guarantee for future financial safety.
Premiums charged to pension plans by PBGC vary depending on size and plan type. In theoretical terms, the premiums calculated by PBGC allow it to meet all financial liabilities it expects to incur when it takes over from the premium-paying pension plans (Smith, 2009). The amount of premiums paid is determined in consideration of premium types applied by the pension plans. This includes Flat-rate premiums and Variable-rate premiums. Under the former, premiums payable is determined by multiplying a participant’s count by a predefined dollar amount. This amount is payable by all pension plans. The variable-rate premiums are determined by multiplying the unfunded vested benefit liabilities by 0.9%. This premium applies to single insurance programs only (Eriksson, 2007).
Reference.
Eriksson, E. C. (2007). Pension Protection Act of 2006: Is It Too Late to Save Traditional Pension Plans, The. Suffolk UL Rev., 41, 133.
Smith, L. (Feb 26, 2009). An Overview of the Pension Benefit Guaranty Corporation (PBGC). Work Cited, http://www.investopedia.com/articles/retirement/06/pbgc.asp
