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Pension Benefit Guaranty Corporation
From Wikipedia, the free encyclopedia
The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum. Defined benefit pension plans promise to pay a specified monthly benefit at retirement, commonly based on salary and years on the job.
PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments, receives funds from pension plans it takes over, and often recovers a portion of the unfunded pension liability from the plan sponsor's bankruptcy estate. PBGC pays monthly retirement benefits, up to a guaranteed maximum, to about 612,000 retirees in 3,683 terminated (closed) pension plans trusteed by PBGC. [1] Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1.3 million people.
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.
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 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.
Pension plans pay PBGC yearly insurance premiums. For 2008, the premium rate is $9 per participant for multiemployer plans; single-employer plans pay $33 per participant plus $9 for each $1,000 of unfunded vested benefits. The per-participant rates are indexed for inflation.[2]
The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly.[3] For plans that end in 2008, workers who retire at age 65 can receive up to $4,312.50 a month (or $51,750 a year) under PBGC's insurance program for single-employer plans.
Because benefit payments starting at ages other than 65 are adjusted actuarially, the maximum guaranteed benefit is lower for those who retire early or when there is a benefit for a survivor. Likewise, the maximum guaranteed benefit is higher for those who retire after age 65. Additionally, the PBGC will not fully guarantee benefits that were increased within the five-year period prior to a plan's termination or benefits that are not payable over a retiree's lifetime.
For the multiemployer plans, the amount guaranteed is based on years of service. For plans terminating after December 21, 2000, the PBGC insures 100% of the first $11 monthly payment per year of service and 75% 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, and if their plan terminates, they will receive: (100% * $11)*(20 YOS) + [.75 * $(19-11)]*(20 YOS) = $17 * 20 = $340 per month.
Multiemployer plans terminating after 1980 but before December 21, 2000 had a maximum guarantee limit of 100% of the first $5 of the monthly benefit accrual rate and 75 percent of the next $15.
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.[4] Under prior law, PBGC's Board Chairman appointed an "Executive Director" who was not subject to confirmation.
On May 23, 2007, President George W. Bush appointed Charles E. F. Millard as Interim Director pending his confirmation as Director by the U.S. Senate.[5] 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.[6]
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.
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 ). 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 ). 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.
The Pension Protection Act of 2006 represents the most significant pension legislation since ERISA.[7] Some of the provisions of the Act that affect PBGC include:
- The methodology for calculating the "variable-rate" PBGC premium is changed.
- PBGC's guarantee of pension benefits that become payable on a plant shutdown is limited.
- If PBGC takes over a terminated plan, employees' pension benefits are frozen as of the date of the plan sponsor's bankruptcy filing (which may be months or even years before the plan terminates).
- The complicated rules that govern PBGC's pension guarantee for business owners are simplified.
- If 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.[8]
One reason Congress enacted ERISA was "was to prevent the 'great personal tragedy' suffered by employees whose vested benefits are not paid when pension plans are terminated."[9] When a defined benefit plan is properly funded by its sponsor, its pre-existing past-service liability (what the plan promises to pay) is amortized away. Any plan amendments that promise more benefits likewise must be funded. 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 underfunded plans is the 1963 shutdown of Studebaker automobile operations in South Bend, Ind., when 4,500 workers lost 85 percent of their vested benefits.[10] ERISA's provisions help to minimize underfunding in defined benefit plans.
Defined contribution plans -- by contrast and by definition -- are always "fully funded." Therefore, Congress thought that there was no need to protect 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 plans. 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. However, if the fiduciaries are broke when the plan fails, there are no deep pockets to make the employees whole.