Overview:
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The Pension Benefit Guaranty Corporation (PBGC) is a non-profit, federal corporation under the jurisdiction of the Department of Labor. In 2007, the government agency protected retirement incomes of 44 million American workers in 30,330 private-sector defined pension plans. About 1.3 million people will receive their pensions from PBGC even though their companies may no longer be in business. In this way, PBGC essentially guarantees corporate debt. Although the agency was designed to be self-sufficient, funded not through tax payer dollars but by premiums paid by plan sponsors, earnings from invested assets, recoveries from terminated sponsors, and assets collected from terminated plan, many are leery of the $19 billion gap between the agency’s corporate liabilities and the actual assets of PBGC. In 2007, PBGC was ranked the best place to work in the federal government by the Partnership for Public Service and American University’s Institute for the Study of Public Policy Implementation.
History:
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In 1875, the American Express Company created the first U.S. private-sector pension plans. This began a trend that other industries were soon following, including utilities, banking and manufacturing companies. Most of these early pension plans were funded entirely by employers and there was no protection to speak of for the pensioners.
In 1963, Studebaker abruptly terminated its employee pension plan, leaving more than 4,000 auto workers with little or no benefits. Although employees had lost benefits this way before, never before had a company so large denied benefits to so many simultaneously. The Studebaker event sparked American outrage and workers became increasingly concerned about their own retirement packages. Political pressure induced Senator Jacob Javits of New York in 1967 to introduce legislation to protect the worker benefits of private pension plans.
This piece of legislation finally found its desired result in the Employee Retirement Income Security Act of 1974. The act established the PBGC, which began operations on $100,000 borrowed from the National Treasury. PBGC issued its first pension check in 1975 for $140.75.
What it Does:
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Companies often terminate pension plans, due to financial stress or other reasons. PBGC exists to ensure that employee pension plans are protected in the event that their employer does choose to terminate their retirement package. It does this by insuring employer pension plans in much the same way that one insures a car: “just in case.” The “just in case” with pension plans refers to the event of employers shutting down companies or otherwise attempting to terminate pension packages.
However, packages are terminated in several ways. Many companies terminate pension plans without drawing on PBGC insurance. In this case, a company can terminate a pension plan by paying promised benefits to employees, either in one lump sum or as an insurance company annuity.
If however a company needs to terminate pension plans due to financial stress, PBGC pays the promised benefits. In this case, the distressed company must prove that continuing to pay benefits would cause its operations to shut down. In situations of financial distress, PBGC pays benefits and makes strong efforts to later recover funds from the employer.
PBGC is also responsible for protecting workers’ interests by forcibly terminating risky plans. In this case, PBGC can terminate a single-employer plan against the will of the employer if the plan is at risk of not being able to pay current benefits. For multiemployer plans, PBGC provides loans to troubled plans, as opposed to terminating the plan, so that retirees continue to receive benefits.
PBGC guarantees pension benefits at normal retirement age, as well as most early retirement benefits. It also guarantees annuity and disability benefits. However, it does not guarantee health and welfare benefits, vacation pay, severance benefits, or lump-sum death or disability benefits for occasions that occur after the plan ends.
Pension Benefit Guaranty Corporation (Wikipedia)
Where Does the Money Go:
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Workers are the primary stakeholders in the PBGC. Prior to the agency’s inception, workers had no real protection for their retirement plans. Many found themselves too elderly to work but without retirement income after their former employer had shut down either the company or their workers’ pension plans.
Companies whose pension plans are insured by PBGC are also its beneficiaries. PBGC offers companies insurance plans on their pension packages that sometimes end up acting more as a subsidy than as insurance. PBGC insurance begins to look like a subsidy when PBGC picks up the bill for company pension payouts (see “Suggested Reforms”).
Controversies:
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Pension plans as administrative expenses
Following the bankruptcy filings of several large corporations such as US Airways, PBGC has reevaluated bankruptcy protocol for pension plans. Currently, large corporations can file for bankruptcy and ask the court to terminate their pension plans that are insured by the PBGC. When approved, this places a onerous burden on PBGC funds, as these corporations are large employers. To avoid these large costs, PBGC has appealed for pension plans to be considered “administrative expenses” in bankruptcy, which would give the payment of employ pension plans priority over the payment of unsecured creditors. But after several court cases, such as National Labor Relations v Bildisco, the Bankruptcy Code is still conflicts with the protection provided to PBGC under ERISA.
Pension Benefit Guaranty Corporation
(Wikipedia)
Suggested Reforms:
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There is a $19 billion gap between the value of assets held by PBGC and its liabilities, liabilities being all of the pension plans insured by PBGC. The glaring disparity between assets and liabilities has been likened by some scholars to the failed system for insuring savings and loan associations, the implosion of which is popularly known as the S&L crisis. This reality has sparked debate amongst scholars, bureaucrats, and politicians as to the severity of this dilemma, as well as contention over which measure of reform would be most effective in reducing the gap.
Policy prescriptions for correcting the problem of asset-to-liability disparity range broadly. Some scholars and economists call for a system of risk-based premiums to help offset PBGC’s vulnerability. Many others have constructed a more savvy investment portfolio for the agency in the hopes that this will increase its assets, eventually equalizing assets with liabilities.
Yet, as pointed out by Zvi Bodie in “What PBGC Can Learn from the Federal Savings and Loan Insurance Corporation”, PBGC may have more of a fundamental than structural dilemma. According to Bodie, one of the more discrete roles of PBGC has always been to revitalize depressed industries. PBGC essentially achieves this end via subsidy. By assuming part of the industry’s financial responsibility to workers, PBGC subsidizes insured companies by providing pension insurance. And although Bodie doesn’t contest the merits of government assisting distressed industries, his concern is with the unbending rules of the market which allocate resources efficiently through supply and demand. Critics of subsidies note the distortions committed to resource allocation that occur via subsidy programs. And while more discrete than agricultural or timber subsidies, the payouts and cheap pension insurance provided by PBGC have created yet another dangerous subsidy program.
In February of 2008, PBGC announced that it was confronting its asset-to-liability disparity through new investment policy. PBGC Director Charles E.F. Millard declared that it was shifting its assets from bonds to options with longer term horizons and higher payouts. By reallocating almost $15 billion to equities, fixed income, and “alternative investments” that include private equity and private real estate. (Pensions and Investments)
PBGC says goodbye to LDI (by Doug Halonen, Pensions & Investments)
What PBGC Can Learn from the Federal Savings and Loan Insurance Corporation (by Zvi Bodie, Social Science Research Network)
Pension Benefit Guaranty Corporation's New Policy (by Paul Rose, Business Law Prof Blog)
GAO Report to Congress (PDF)
(PDF)
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- Table of Contents
- Overview
- History
- What it Does
- Where Does the Money Go
- Controversies
- Suggested Reforms
- Comments
- Leave a comment
Pension Benefit Guaranty Corporation
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