The Employee Retirement Income Security Act created the Pension Benefit Guaranty Corporation (PBGC) to ensure that retirees would receive the benefits promised them from defined-benefit plans, even if their employer went bankrupt. The failure of some large, highly underfunded pension plans sponsored by bankrupt companies has jeopardized the PBGC’s financial status and prompted changes to strengthen it. In response to growing PBGC liabilities, reforms enacted in 1994 and 2006 mandated that the financing gap of underfunded plans be closed more quickly, requiring larger contributions from these plans than those paid by better-funded plans. The reforms also raised insurance premiums for plans that were most at risk, strengthened the agency’s enforcement powers, required employers to disclose more details about underfunded plans, and placed new limits on benefit increases and accruals, lump-sum payouts, and PBGC benefit guarantees in certain underfunded plans.
Further improvements in the PBGC are necessary. First, strengthening both funding rules and enforcement will ensure the continued viability of the PBGC and will prevent cutbacks and restrictions in PBGC benefit guarantees. In addition, the PBGC needs to ensure adequate disclosure to plan participants about plan health and the effect on benefit payments in the event of a PBGC takeover.
PENSION BENEFIT GUARANTY CORPORATION: Policy
Policymakers must maintain adequate funding rules for defined-benefit pension plans.
Information and disclosure
Employers should be required to keep plan participants informed adequately and in a timely manner about the state of plan funding.Distressed pension plans (as defined in the Employee Retirement Income Security Act) that are subject to ERISA funding standards and PBGC insurance should be required to provide annual disclosures to participants and beneficiaries. The required disclosures should state that if a plan terminates, there are circumstances that may cause participants to receive retirement benefits that are less than their accrued, vested benefits. Such disclosures, when required, should accompany periodic benefit statements furnished to individual participants, and in such years when periodic benefit statements are not furnished, the disclosures should accompany the plan’s annual report.
When an employer files for bankruptcy or otherwise seeks refuge from paying accrued pension rights, plan participants should receive their guaranteed benefits from the Pension Benefit Guaranty Corporation without delay or interruption.
The Department of Labor must stringently enforce fiduciary rules to ensure that pensions are handled prudently and in the best interest of plan participants and beneficiaries.