Pension Benefit Guaranty Corporation (PBGC) is an agency of the United States (US) government that was formed to protect pension benefits of employees in the private sector. Its charter is to continue paying retirees whose pensions might otherwise have been lost because of underfunded pension plans or bankruptcy. PBGC does not use any tax dollars, but uses funds supplied by sources such as insurance premiums, investment income, and assets from any pension plans that Pension Benefit Guaranty Corporation assumes.
Companies have been offering employees pension funds in the US since 1875. The spur that led to the formation of PBGC occurred in 1963. In 1963, Studebaker, a car manufacturer in the US, announced the closing of its South Bend, Indiana plant, leaving behind an underfunded pension plan. This led to legislative action, resulting in the passage of the Employee Retirement Income Security Act of 1974 (ERISA). Pension Benefit Guaranty Corporation was created by law through ERISA.
Pension Benefit Guaranty Corporation's duty is to protect defined benefit pension plans in the private sector. As defined by the US Department of Labor, a defined benefit pension plan offers a retiree a specific monthly dollar amount. This figure is calculated using a formula that involves considerations such as how much money the person was making before retirement and the number of years the person worked at the company. The amount of money the person was making might be defined as an average salary over a given period of time.
An employer has options about how to address terminating the company’s pension benefits. If the company can arrange a lump-sum payment to its employees according to its pension benefit rules or can buy an annuity that will cover payments for its qualified employees’ lifetimes, the employer can end the pension plan in a standard termination. PBGC’s involvement stops when the company arranges the lump sum or annuity. In a situation where the company does not have access to funds to supply the pension fund, the company must go bankrupt or demonstrate to Pension Benefit Guaranty Corporation that the company must terminate the pension plan in order to continue operating before PBGC will take over the pension plan. This is called a distress termination.
Sometimes, Pension Benefit Guaranty Corporation terminates a pension plan without a company filing for assistance. This may happen when the company does not have enough funds to pay current pension payments or the company does not have the minimum funding requirements for its pension plan. In addition, Pension Benefit Guaranty Corporation may terminate a pension fund if by allowing the company to continue to operate, the pension fund will have an especially negative financial impact on PBGC.