By Pension and Benefits Editorial Staff
The Pension Benefit Guaranty Corporation (PBGC) has released a study that finds that, when a plan fails, 84 percent of vested participants receive their full employer pension, while 16 percent see reductions. The average cutback is 24 percent for those who do receive a reduced pension. The study, PBGC’s Single-Employer Guarantee Outcomes, updates and supports the findings of a 2008 study, while broadening the original study’s scope and methodology.
Benefit guarantees for single-employer plans. The PBGC guarantees benefits for single-employer plan participants, but the guarantee is subject to limitations set by law and regulation. The PBGC previously studied the outcome of these limitations on participant guaranteed benefits for the single-employer program in 2008. The PBGC explains that this study updates the information on single-employer guarantee outcomes to reflect additional program experience.
The PBGC states that three limitations — the accrued-at-normal limitation, the maximum insurance limitation, and the phase-in limitation — accounted for almost all of the participant benefit reductions. For participants with a reduction in vested benefits, these three major limitations reduced the value of benefits by an average of 23 percent compared with 24 percent for all limitations studied.
The maximum insurance limitation continues to be the limitation that has caused the largest losses in benefit value for participants affected by a benefit limitation, according to the PBGC. This limitation applies to individuals with the largest benefits or those who retired early and were still relatively young when the plan was terminated. Participants who lost more than one-quarter of their benefit value represented less than 4 percent of all vested participants. More than three-quarters of the reduced benefit value they experienced was due to the maximum insurance limitation. For participants whose benefit value was reduced by more than half (under 1 percent of participants), 95 percent of the loss was due to the maximum insurance limitation.
The PBGC finds that the limitation that affects the most participants is the phase-in limitation. More than 10 percent of vested participants had their benefits reduced due to the phase-in limitation. Only those plans that provided a supplemental benefit or increase benefits through plan amendments had participants whose benefits were reduced by the accrued-at-normal or phase-in limitation.
According to the PBGC, 59 percent of the plans in this study had at least one participant whose benefits were reduced by one or more primary limitation provisions. While the average reduction for participants affected by a limitation of benefits was 24 percent, retirees affected by a limitation experienced an average reduction in value of 19 percent. The PBGC further noted that 89 percent of reductions in the value of plan benefits were concentrated in just ten plans.
About the study. The PBGC states that the study reviewed participant outcomes in 500 plans trusteed by the PBGC in the single-employer guarantee program between 1988 and 2012. In total, these plans covered 1,142,700 participants, more than half of the participants in plans the PBGC has trusteed over its history. The study expands the previous 2008 study of 525,000 participants in 125 plans trusteed by the PBGC from 1990 to 2005. This study’s findings are broadly comparable with the findings in the 2008 study, despite broadening the study’s scope and methodology.
SOURCE: PBGC’s Single-Employer Guarantee Outcomes, May 2019.
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