Pension Agency’s Complex Function

The federal agency that insures defined-benefit pension plans -- the types that pay monthly benefits for life -- is in deep trouble.

The Pension Benefit Guaranty Corp. announced last week that it had underestimated its net deficit by a significant margin and now believes its debts exceed assets by a record-breaking $11.2 billion.

That revelation touched off a partisan debate in Congress about pension reform, with Democrats complaining that the Bush administration was allowing companies to unload their pension problems on a federal agency, threatening its solvency and raising the specter of a taxpayer bailout. Republicans countered that the Democrats had held up their efforts at fixing the PBGC’s shortcomings.

A look at the agency and its woes.

Question: What is the PBGC?

Answer: It’s a federal insurance agency that was created in 1974 by the Employee Retirement Income Security Act, or ERISA, which is the primary federal law regulating all types of pension plans.

Funded by premiums paid by companies with defined-benefit pensions, the PBGC steps in to pay monthly retirement benefits to workers when a company or a covered plan fails and is unable to make good on its pension promises. The agency currently pays retirement benefits to about 459,000 retirees in failed plans. An additional 475,000 individuals are covered by the PBGC, but have not yet retired.

Q: What are the limits on PBGC coverage?

A: There are several:

* Maximum monthly benefits. PBGC benefits are capped at set thresholds, which are adjusted each year. However, the maximum benefit that applies to any given retiree depends on the year that the retiree’s pension plan was terminated, not on the date that the individual retired.

In other words, an individual who applies for retirement benefits in 2004 for a plan that was terminated in 1990 would be subject to the 1990 maximum benefit payout of $1,909.09 per month ($22,909.08 per year) rather than the 2004 maximum of $3,698.86 per month ($44,386.32 per year).

* Early-retirement restrictions. Those who retire before age 65 get reduced benefits. A 62-year-old who applied for early-retirement benefits under a plan that terminated in 2003 would get a maximum of $2,895.17 per month. If this 62-year-old’s plan was terminated in 1995, the maximum benefit amount would be $2,033.35 per month.

* Enhancement rules. If a plan was created or “enhanced” within five years of being terminated, workers’ benefits may not be fully guaranteed. Generally, new plans and benefit enhancements vest under PBGC rules at a rate of 20% per year. In other words, a plan that’s four years old would be 80% vested, giving participants the right to 80% of what was promised by the plan up to the PBGC limits. A plan that had been in place just two years would be 40% vested.

Q: Does the PBGC cover all terminated plans?

A: No. There are two types of plan terminations -- standard and distressed. Plans that are fully funded can choose to terminate by buying annuities -- or paying participants in a lump sum -- the full amount that they’re owed. The PBGC’s involvement in this standard termination is mainly oversight. Only if the plan was unable to find a former employee to notify them about the termination, would the company turn that employee’s name (and a lump sum amount to cover the employee’s benefits) over to the PBGC.

The type of plan that the PBGC generally covers is one that terminates in distress -- plans that do not have sufficient assets to pay the benefits owed.

Q: How do retirees apply for benefits with the PBGC?

A: They go to the agency’s website at www.pbgc.gov or call its toll-free number at (800) 400-7242 and fill out a claim form. It takes between six and eight weeks to receive retirement benefits, said Gary Pastorius, a PBGC spokesman.

But be warned, the benefit that retirees initially receive is often an estimate, which could be adjusted up or down, based on the agency’s review of the terminated plan’s documents. The final determination of benefits currently takes about 2.8 years from the date the plan is taken over, Pastorius said. If, in the meantime, the PBGC has paid too little, it will make up the shortfall with a lump sum payment that includes interest, he said. If the agency has overpaid, it will dock the retiree’s future benefit checks by up to 10% of the benefit until the overpayment is recovered.

Q: What do I do if I think the benefit estimate is wrong?

A: Prior to receipt of a formal benefits determination letter, your rights are limited, which is a sore point for many retirees who complain that the PBGC review is far too slow. (In 2002, it took roughly 3.6 years to get a determination letter. In 1997, the average wait was six years.) The agency says its rules allow the PBGC to consider any information that you have -- if you think the agency is calculating your benefit based on the wrong age or income level, for instance -- that would indicate the benefit calculation was inaccurate. But it is not compelled to do so.

Once you receive a final determination letter, you may appeal. The appeals process requires that you send a letter within 45 days of the date noted on the letter. You must also clearly specify that you are appealing the benefit; why you believe the PBGC number is wrong; and include any factors that you believe relevant to the appeal.

You’ll also need to include the plan name, your Social Security number and contact information.

Q: Is there a way to get help in determining if the PBGC is paying the right amount?

A: Yes. There are 10 Pension Counseling projects nationwide, which are funded by the Administration on Aging. These programs can help retirees evaluate whether they’re getting the right amount from their pension and even help participants find a defined-benefit plan that they may have lost track of. To find the nearest pension counseling project, go to the Administration on Aging website at www.aoa.gov.