Definition§
The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation created under the Employee Retirement Income Security Act (ERISA) of 1974. The PBGC’s primary role is to protect the retirement incomes of workers in private-sector defined benefit pension plans. The PBGC steps in when a pension plan is terminated and cannot meet its obligations, guaranteeing payments up to a statutory limit. It operates independently from the general tax revenues, funding its operations through insurance premiums paid by pension plans, earnings from investments, and funds received from pension plans it takes over.
Examples§
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US Airways Pension Plan (2003): The PBGC took over the pilots’ pension plan after US Airways filed for bankruptcy, ensuring that retired pilots continued to receive their pension benefits.
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Bethlehem Steel Corporation: In 2002, the PBGC assumed responsibility for Bethlehem Steel’s underfunded pension plans, affecting over 95,000 retirees and beneficiaries.
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Lehman Brothers (2008): After the financial collapse of Lehman Brothers, the PBGC took over the severely underfunded pension plan to ensure the continued provision of benefits to its numerous employees.
Frequently Asked Questions§
1. What is the purpose of the PBGC?§
Answer: The PBGC ensures that pension benefits are protected and paid out even if a pension fund fails, essentially acting as a safety net for retirees in private-sector defined benefit pension plans.
2. How is PBGC funded?§
Answer: PBGC is funded through insurance premiums collected from pension plans it protects, returns on investments, and assets from pension plans it takes over. It does not operate using general tax revenues.
3. What types of pension plans does PBGC cover?§
Answer: PBGC covers private-sector defined benefit plans that promise clearly defined retirement benefits. The covered plans must benefit more than 25 employees.
4. Can the PBGC place liens on corporate assets?§
Answer: Yes, the PBGC can place liens on corporate assets for certain unfunded pension liabilities, thereby securing claims for asset recoveries.
5. How are retirement benefits calculated if PBGC takes over a pension plan?§
Answer: When PBGC takes over a pension plan, benefits are calculated based on plan provisions, subject to the statutory maximum limits set by the PBGC.
Related Terms§
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Employee Retirement Income Security Act (ERISA): A federal law enacted in 1974 that sets minimum standards for pension plans in private industry, ensuring that employees receive their pension benefits.
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Defined Benefit Plan: A type of pension plan where the retirement benefits are determined by a formula based on earnings and years of service.
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Underfunded Pension Plan: A pension plan that does not have sufficient assets to meet its present and future obligations to beneficiaries.
Online References§
- PBGC Official Website
- ERISA and PBGC Overview - U.S. Department of Labor
- ERISA at A Glance - Cornell Law School
Suggested Books for Further Studies§
- “Pension and Employee Benefits: ERISA Law and Regulation” by Sean M. Anderson, et al.
- “Pensions in the American Economy” by Laurence J. Kotlikoff and Daniel E. Smith.
- “Fundamentals of Private Pensions” by Dan M. McGill, Kyle N. Brown, et al.
Fundamentals of Pension Benefit Guaranty Corporation (PBGC): Insurance Basics Quiz§
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