The Pension Benefit Guaranty Corporation (PBGC) refers to the federal insurance fund. The main role of the PBGC is to pay pension benefits to retirees. Specifically, the PBGC pays benefits to those whose protection from the private sector has ended due to the retirees not being able to meet their financial obligations. The ERISA (Employee Retirement Income Security Act) of 1974 first established the PBGC in an attempt to regulate private pension plans. The PBGC has a director who is in charge of the decision-making process. The President appoints the director of the PBGC, and the Senate must confirm the presidential appointment. The PBGC also has a Board of Directors who govern the internal management.
The PBGC protects the pensions in over 25,000 defined-benefit plans in the private sector, including more than 40 million people protected. In its operation, the PBGC finances itself through insurance premiums, investment incomes, and recoveries and assets from pension plans and companies responsible for trusted plans. Also, the PBGC does not gain any tax revenues. The PBGC follows the regulatory approach to avoid the discouragement of existing defined-benefit plans or the creation of new plans. Thus, the focus for PBGC lies in simplifying employer compliance. The PBGC specifically looks out for small businesses that sponsor the defined-benefit plans.
The PBGC operates two categories of pension insurance programs. The first program is the single-employer program, under which the sponsorship for the pension plan comes from a company or a group of companies under common ownership. The second program is the multi-employer plan, which is the pension plan formed between the employer and a union. However, the PBGC does not cover any defined-contribution plans. A defined contribution plan, most notably the 401(k), is a type of retirement plan where the employee (and sometimes the employer) contributes to a form of investment through a retirement account.
A special feature of the PBGC is that proportionally based on the age of the retiree and the cap on the monthly annuity amount varies. For instance, if there is a retiree who is 65 years old, with a deceased spouse, and who qualifies for the monthly annuity from the PBGC can receive the maximum monthly annuity value of $5,812.50. The PBGC Maximum Monthly Guarantee Tables offer the measure of monthly annuity amount calculation. The employers that cover the PBGC plans also cover the insurance premiums.
The PBGC had solvency problems as the financial situation of the PBGC rather frequently ran into deficits, especially in the early 2000s. As a result, Congress passed the Pension Protection Act of 2006. The Pension Protection Act ensured that the providers of pension plans have fully funded their defined-benefit plans.
See: Pension Benefit Guaranty Corporation website, the summary of the Pension Protection Act of 2006.
[Last updated in March of 2024 by the Wex Definitions Team]