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Tuesday, July 17, 2012

Pension Benefit Guaranty Corporation (PBGC) and Defined Benefit Pension Plan Funding Issues

John J. Topoleski
Analyst in Income Security

The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency established in 1974 by the Employee Retirement Income Security Act (ERISA; P.L. 93-406). It was created to protect the pensions of participants and beneficiaries covered by private sector, defined benefit (DB) plans. These pension plans provide a specified monthly benefit at retirement, usually either a percentage of salary or a flat dollar amount multiplied by years of service. Defined contribution plans, such as §401(k) plans, are not insured. The PBGC is chaired by the Secretary of Labor, with the Secretaries of the Treasury and Commerce serving as board members.

The PBGC runs two distinct insurance programs for single-employer and multiemployer plans. Multiemployer plans are collectively bargained plans to which more than one company makes contributions. PBGC maintains separate reserve funds for each program. In FY2011, the PBGC insured about 27,066 DB pension plans covering 44.2 million people. The PBGC paid or owed benefits to 1.5 million people and took in 152 newly terminated pension plans. A firm must be in financial distress to end an underfunded plan. Most workers in single-employer plans taken over by PBGC receive the full benefit earned at the time of termination, but the ceiling on multiemployer plan benefits that could be guaranteed has left almost all of these retirees without full benefit protection.

In general, defined benefit pension plans are required to have sufficient funds from which to pay current and expected future benefits. Each year, plan sponsors are required to contribute the value of benefits earned by participants in that year and a portion of any prior years’ underfunding, which is the amount by which the value of current and future benefits exceeds current plan assets. Changes by Congress to pension funding requirements and the economic recession that began in December 2007 and ended in June 2009 have caused required contributions to pension plans to increase in recent years. To improve pension plan funding, Congress passed the Pension Protection Act of 2006 (PPA, P.L. 109-280), which resulted in increases in the amount of required contributions to pension plans by plan sponsors. Two other factors have caused increases in required contributions: (1) investment losses experienced by pension plans in the 2008 stock market downturn, which lowered the value of plan assets, and (2) lower interest rates as a result of Federal Reserve actions to try to influence economic activity, which increased the value of future pension plan benefit obligations. In addition, the recession negatively affected company profits, which made required contributions to pensions more difficult to make.

In the 111th Congress, H.R. 3962, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (P.L. 111-192), provided defined benefit pension plans sponsors the opportunity to spread over a greater number of years than specified under then current law contributions to offset the losses which resulted from the stockmarket downturn in 2008. In the 112th Congress, the Senate approved an amendment offered by Senate Majority Leader Harry Reid to S. 1813, Moving Ahead for Progress in the 21st Century (MAP-21), which contains provisions that would address the use of excess defined benefit pension plan assets and the interest rates that defined benefit plans use to value plan liabilities. Senate Majority Leader Harry Reid has proposed (1) using the pension-related provisions in S. 1813, as passed by the Senate on March 14, 2012, and (2) increasing the premiums that pension plan sponsors pay to PBGC as an offset for a one-year extension of current student loan interest rates.

Date of Report: July 11, 2012
Number of Pages: 13
Order Number: R42599
Price: $29.95

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