Pension Benefit Guaranty Corporation: Overview, definition, and example
What is the Pension Benefit Guaranty Corporation (PBGC)?
The Pension Benefit Guaranty Corporation (PBGC) is a U.S. federal agency that protects the retirement incomes of workers in private-sector defined benefit pension plans. If a covered pension plan is terminated without enough funds to pay promised benefits, the PBGC steps in to pay participants up to certain limits set by law. It operates two insurance programs: one for single-employer plans and one for multiemployer plans.
Why is the Pension Benefit Guaranty Corporation important?
The PBGC is important because it provides a financial safety net for millions of American workers and retirees. Without it, individuals in underfunded or failed pension plans could lose all or part of their promised retirement benefits. For employers, the PBGC also helps promote confidence in the pension system by ensuring continuity and partial recovery of benefits in the event of financial distress. Employers who sponsor defined benefit plans must pay insurance premiums to the PBGC as part of their participation.
Understanding the PBGC through an example
Suppose a manufacturing company with a traditional pension plan goes bankrupt and can no longer fund its plan. If the plan is insured by the PBGC, the agency will take over the plan and pay benefits to retirees and employees up to the legal limit. While the full benefit might not always be covered, the PBGC ensures that participants still receive a substantial portion of their expected retirement income.
Example of how the Pension Benefit Guaranty Corporation may be referenced in a plan document
Here’s how the PBGC may appear in a pension plan agreement or summary:
"This Plan is covered by the pension insurance program of the Pension Benefit Guaranty Corporation (PBGC), which guarantees certain benefits in the event the Plan is terminated without sufficient assets to meet its obligations."
Conclusion
The Pension Benefit Guaranty Corporation plays a vital role in protecting retirement security for workers with defined benefit pension plans. By insuring these plans and stepping in during failures, the PBGC helps maintain trust in the U.S. pension system. Employers and employees alike should understand how PBGC coverage works, including its limits, funding mechanisms, and role in plan termination scenarios.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.