Pension Benefit Guaranty Corporation - Explained
What is the PBGC?
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Table of ContentsWhat is the Pension Benefit Guaranty Corporation (PBGC)?How the Pension Benefit Guaranty Corporation WorksAcademic Research on Pension Benefit Guaranty Corporation (PBGC)
What is the Pension Benefit Guaranty Corporation (PBGC)?
The US Department of Labor oversees an independent federally-chartered agency known as the Pension Benefit Guaranty Corporation. It was set up under the act of ERISA, i.e. Employee Retirement Income Security Act, 1974. It is a government body to make the payment of pension benefits if the firm cannot. The sole purpose of PBGC is to promote the maintenance and continuity of pension benefits plans as defined by the private sector. It ensures that the pension benefits must be paid on time and without any interrupts or delays. It strives to keep the premiums of pension insurance at a minimum.
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How the Pension Benefit Guaranty Corporation Works
Funding from the PBGC is not collected from general income taxes, rather the employers pay insurance premium funds following the insured pension plans, the accumulated interest on premiums, and the pension plans assets that PBGC takes over.With effect from 2018, the Pension Benefit Guaranty Corporation makes the insurance policy of retirement incomes for almost twenty-four thousand pre-defined benefit plans that covers almost forty million workers of the United States. It covers nearly thirty million workers via the single-employer program. It covers an extra ten million workers by the multi-employer program that many unrelated employers pay. Within a single industry, the collective bargaining process sets up and maintains the multiemployer program.PBGC covers basic benefits such as a pension for employees reaching the age of retirement, benefits of early retirement and annuities for plan participants survivors as well as disability benefits in some cases.PBGC guarantees the max pension benefit that is annually adjusted by law. 2017 record shows that the eligible participants who were going to retire at the age of 65 could get 5369 US dollars maximum benefit on a monthly basis. It becomes 64432 US dollars a year. This protection increases for the ones who retire after the age of 65 and decreases for the ones who get early retirement or at the time, PBGC is paying the survivors benefits.According to 2016 record, PBGC made payment of almost eight lac and forty thousand retired employees in above four thousand and seven hundred pension plans. It could not make payment of promised benefits. It was liable to pay present and future pension benefits around one and half million people.The employers have offered private pensions as a benefit to the workers of the United States since the late nineteenth century. Before 1975, there was lesser protection for such funds. The companies declared bankruptcy. They were not able to provide the promised benefits, thus the employees left without recourse. The case of the automaker Studebaker is famous in this regard. In 1963, it ended the employee pension program. As a result, four thousand workers could get no retirement benefits.New York Senator named Jacob Javits, in 1967, requested the federal legislation to provide protection of private pension plans. The United States Congress, in 1974, devised the act of ERISA (Employee Retirement Income Security Act). Gerald Ford was the President of America who signed this law. He set up the Pension Benefit Guaranty Corporation (PBGC) as an agency to guarantee the benefits of retirement for millions of employees.
Academic Research on Pension Benefit Guaranty Corporation (PBGC)
- The value of pension benefit guaranty corporation insurance, Pennacchi, G. G., & Lewis, C. M. (1994). Journal of Money, Credit and Banking, 26(3), 735-753. In this paper, the authors bring into consideration the cost, PBGC incurs on the insurance of workers as per defined plans of the single-employer pension benefit. For the liability of PBGC, they have derived a formula which clearly identifies the 2 important conditions implying on PBGC to bear a loss. 1st, the company providing the pension fund has to bankrupt and 2nd, this plan has to be underfunded. They value the liability of PBGC as a possible put option using the function of modified Bessel, finally, evaluate the statistical comparison.
- What the pension benefit guaranty corporation can learn from the federal savings and loan insurance corporation, Bodie, Z. (1996). Journal of Financial Services Research, 10(1), 83-100. The FSLIC (Federal Savings & Loan Corporation) had to face losses due to many factors, including risk, liabilities and market risk mismatch. Its experience is an example for PBGC to learn. When a sponsor of pension plan makes an investment of pension assets in capitals, the actuarial current value cost to the Pension Benefit Guaranty Corporation (PBGC) of giving insurance for a shortfall becomes higher instead of reducing with the passage of time, even for present fully funded plans.
- Guaranteed trouble: the economic effects of the pension benefit guaranty corporation, Brown, J. R. (2008). Journal of Economic Perspectives, 22(1), 177-198. This research focuses on the role of PBGC (Pension Benefit Guaranty Corporation) and the pressures it has to face. The author describes its 3 major mistakes; could not succeed in pricing insurance, thus encouraging risk-taking, could not succeed in promoting appropriate funding of pension benefits and could not succeed in promoting enough information disclosure to the market contributors. The authors suggest ways to reform this corporation by following fundamental economic principles.
- Is Your Pension Safe-A Call for Reform of the Pension Benefit Guaranty Corporation and Protection of Pension Benefits, Wolfe, L. A. (1994). Sw. UL REv., 24, 145. This paper presents detailed analysis of the pension benefits protection and explains your pension is safe under the reforms of Pension Benefit Guaranty Corporation (PBGC) or not.
- Market reaction to firm inclusion on the pension benefit guaranty corporation underfunding list, Godwin, N., & Key, K. (1998). In this research, the authors discuss how the market reacts to a firm that includes its name in the list of Pension Benefit Guaranty Corporation (PBGC).
- The optimal investment policy for the Pension Benefit Guaranty Corporation, Romaniuk, K. (2011). This study presents a theoretical structure for introducing an optimal allocation of assets in a continuous-time. The authors, 1st, analyze the out seller nature of the PBGC and derive portfolio regulations going using the option hedging. Then, the author creates a model feature of an asset-liability manager who is responsible to make available the balance sheet of an institution. The author offers an application with the help of PBGC reports from 1995 to 2009. The results are that its asset allocation is different in the principles of liability hedging.
- Can the Pension Benefit Guaranty Corporation Be Restored to Financial Health?, Ranade, N. K. (2004). Federal Publications, 11. The main source of income offsetting the claims of PBGC is premiums that the sponsors pay for pension plans. It gets no proper funds. Its single-employer program has been placed in the list of high-risk agencies by GAO (Government Accountability Office) due to the risk to its longer financial viability. Main systematic problems are funding requirements, access to the assets of the bankrupt company and premium structure.
- A Guide to the Pension Benefit Guaranty Corporation, Elliott, D. J. (2009). Washington, DC: The Brookings Institution. Retrieved August, 18, 2015. This study contains a complete guide about the regulations, reforms and incentives of the Pension Benefit Guaranty Corporation (PBGC).
- Estimating the funding gap of the Pension Benefit Guaranty Corporation, Estrella, A., Hirtle, B., & Brehm, J. A. (1988). Quarterly Review, (Aut), 45-59. This article makes an approximate calculation of the funding gap of the PBGC (Pension Benefit Guaranty Corporation). Whether it is able to afford all the stated pension benefits or not and to what extent, its cause is practical.
- The Pension Benefit Guaranty Corporation: Financial Condition, Potential Risks, and Policy Options, Holtz-Eakin, D. (2005). CBO Testimony before the US Senate Committee on the Budget, 15. This paper evaluates the performance of PBGC (Pension Benefit Guaranty Corporation), what is its financial condition, what kind of potential risks are involved in its functioning and how far its policy options are effective.
- Using Pension Benefit Guaranty Corporation Tables in the Valuation of Pension Benefits: A Clarification, Ciecka, J. E., Frigo, M. L., & Koretke, C. H. (1994). J. Legal Econ., 4, 85. In this paper, the authors make a clarification of the actual use of tables held by PBGC (Pension Benefit Guaranty Corporation) in the context of its pension benefits valuation.
- The Pension Benefit Guaranty Corporation: What Financial Advisers Should Know., Craig, C. K., & Craig, T. R. (2004). Journal of Financial Service Professionals, 58(2). This paper provides thorough information about the PBGC (Pension Benefit Guaranty Corporation) and the authors give their suggestions on what the financial advisers must know about the pension benefits offered by PBGC.