What Is Pension Insurance and How Does It Work?

Pension insurance serves as a crucial safety net for many private-sector retirement plans, offering a layer of financial security for American workers and retirees. This system helps protect the promised retirement benefits should a private pension plan encounter severe financial difficulties or terminate without sufficient assets. Its primary purpose is to ensure that individuals can still receive a portion of their earned retirement income, even if their former employer’s pension plan can no longer fulfill its obligations. This protection is designed to mitigate the financial impact of plan failures on retirees and their families.

The Pension Benefit Guaranty Corporation

The primary entity responsible for pension insurance in the United States is the Pension Benefit Guaranty Corporation (PBGC), a U.S. government agency established by the Employee Retirement Income Security Act of 1974 (ERISA). Its fundamental mission includes encouraging the continuation of private defined benefit pension plans, providing timely and uninterrupted payment of pension benefits, and maintaining pension insurance premiums at the lowest necessary level. The PBGC protects the retirement security of approximately 31 million Americans across more than 24,300 private-sector pension plans.

The PBGC’s insurance program covers most private-sector defined benefit pension plans, which are traditional pensions promising a specific monthly benefit at retirement. These plans fall into two main categories: single-employer plans, sponsored by individual companies, and multiemployer plans, which are collectively bargained plans involving multiple employers, often within the same industry. It is important to distinguish these from other common retirement savings vehicles, such as 401(k)s, Individual Retirement Accounts (IRAs), profit-sharing plans, and money purchase plans, which are defined contribution plans and are not insured by the PBGC. Additionally, the PBGC does not cover pension plans for federal, state, or local government employees, military pensions, plans from religious institutions, or those from small professional practices with fewer than 26 employees. The PBGC primarily funds its operations through insurance premiums collected from covered plan sponsors, investment income from its assets, and recoveries from failed pension plans, rather than general tax revenues.

Insured Pension Benefits and Coverage Limits

The PBGC insures basic pension benefits, which typically include a lifetime annuity beginning at normal retirement age, most early retirement benefits, and disability benefits. It also covers annuity benefits for survivors of plan participants. The amount the PBGC guarantees is subject to legal limits set by federal law, which can vary based on factors such as the year the plan terminates and the participant’s age when they begin receiving benefits. For example, for a single-employer plan that terminates in 2025, the maximum monthly guarantee for a participant retiring at age 65 as a straight-life annuity is $7,431.82.

These maximum guarantees are adjusted for individuals who begin receiving benefits at ages other than 65; younger retirees generally receive a lower maximum monthly amount, while those who defer retirement past 65 may receive a higher one. If a pension includes benefits for a surviving spouse or other beneficiary, the maximum guarantee may also be lower. The guarantee limits for multiemployer plans are generally lower and more complex than those for single-employer plans. The PBGC does not insure certain supplemental benefits, benefit increases from plan amendments made within five years before termination, or health and welfare benefits. Only benefits that are fully vested under the plan are eligible for PBGC insurance.

PBGC Protection in Action

When a private-sector defined benefit pension plan faces financial distress or terminates with insufficient funds, the PBGC steps in to protect participants. The PBGC monitors troubled plans and assumes responsibility for them if they can no longer meet their obligations. For single-employer plans, the PBGC becomes the trustee, taking over the plan’s assets and liabilities, and then directly pays the insured benefits to participants.

For multiemployer plans that become insolvent, the PBGC provides financial assistance, often in the form of loans, to help these plans continue paying guaranteed benefits. Unlike single-employer plans, the PBGC does not become the trustee of multiemployer plans but rather supports them financially to ensure benefit continuity. Once the PBGC assumes responsibility for a plan, it reviews the plan’s records to determine each participant’s eligible benefit amount, subject to the legal limits. Benefit payments are then initiated, through electronic direct deposit or by check.

While the PBGC works to ensure participants receive their earned benefits, the amount paid may be less than what was originally promised by the plan due to statutory guarantee limits. Participants can receive a lump sum payment only if the value of their benefit is below a certain threshold, which for plans terminating in 2024 or later is $7,000; these lump sums can be rolled over tax-free into other qualified retirement accounts.