Retire Smart: Why Federal Insurance for Pensions Needs Shoring Up
Sunday, June 19, 2011

By Mark Miller
Tribune Media Services

The number of private sector workers who have traditional pensions is shrinking - and those who do have pensions are worried. Headlines about underfunded public sector plans have fueled the concerns, along with general worry about the economy and the health of employers.

But if you are lucky enough to have a private sector job with a defined benefit (DB) pension plan, it's important to know that it probably is backed up by the Pension Benefit Guaranty Corporation (PBGC), a little-known federally sponsored agency that steps in when companies go belly up. The PBGC takes over pension plans and their obligations; while some higher-income workers take a haircut on benefits in those situations, most workers get 100 percent of promised benefits.

By law, the PBGC is funded entirely through insurance premiums paid by plan sponsors. But the agency has been chronically underfunded due to a mismatch between the premiums charged and the risks it manages. Premium levels are set by Congress, and PBGC has no control over the type of risk it insures.

In 2010, the PBGC paid out nearly $6 billion in benefits to more than 800,000 beneficiaries; it's also responsible for future payments to another 700,000 workers who haven't retired yet. Plan sponsors currently pay a flat-rate annual premium of $35 per plan participant, plus another $9 for each $1,000 in underfunding. That figure varies considerably among plan sponsors, but averages out to a total annual premium of $65 per year for each employee.

The PBGC reported a gap of $23 billion between assets on hand and its long-term obligations to pension recipients for the federal fiscal year 2010. The agency has plenty of money to meet its near-term obligations, but worries about PBGC arise whenever very large plans run into trouble. For example, if the federal government hadn't bailed out General Motors and Chrysler, PBGC's assumption of the companies' pension obligations would have roughly doubled the agency's funding gap.

The Obama Administration's 2012 budget proposal calls for a $16 billion boost in premiums over 10 years - but also seeks permission for PBGC to set premiums without congressional approval, via a process similar to the one used by the Federal Deposit Insurance Corp. PBGC also proposes developing a new approach to risk-based pricing for weaker pension plans.

That approach was endorsed by the President's National Commission on Fiscal Responsibility and Reform, which identified the PBGC's long-term imbalance as a threat to the federal government's financial health and expressed concern that a government bailout of the fund might be needed at some point.

The commission noted that PBGC premiums are "much lower than what a private financial institution would charge for insuring the same risk." PBGC Director Joshua Gotbaum puts it this way: "Other than those who pay premiums, there is no one who thinks the rates are high enough to cover our obligations."

PBGC's proposal faces opposition from plan sponsor groups that want Congress to remain in control of premium levels and oppose rate hikes. They argue that DB pensions are already a disappearing breed in the private sector, and that higher rates could encourage even more plan sponsors to shift away from pensions and toward defined contribution benefit plans, such as 401(k)s.

Gotbaum points out that PBGC premiums represent a tiny fraction of total employer compensation expense, and that increases just aren't a significant factor in plan sponsor commitment to DB programs one way or the other. PBGC data shows that premiums account for just one cent of the $28 in average total private sector hourly labor costs last year. "Even if we doubled premiums, the idea that this would put plans out of business is malarky," Gotbaum says.

Wondering if your pension is covered by the PBGC? Although the agency covers most DB plans, it doesn't cover those offered by small businesses, professional services groups (such as doctors and lawyers), religious organizations or government agencies.

The easiest way to determine if you're in a covered plan is to ask your employer or plan administrator for a copy of its Summary Plan Description. This document will tell you whether your plan is covered by the PBGC. You can contact the PBGC at 1-800-400-7242, or Online FAQs and contact information can be found at

Mark Miller is the author of "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living" (John Wiley & Sons/Bloomberg Press, June 2010). Subscribe to Mark's free weekly eNewsletter at Contact him with questions and comments at:

This was printed in the June 19, 11 - July 2, 11 Edition


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