A Predictable, Secure
Pension for Life
Defined Benefit Pensions

Prepared by
the Pension Benefit Guaranty Corporation

Congress will reconvene on Dec. 5th for their "lame duck" session.  During that time, there will be a narrow window of opportunity in which they may take up pensions legislation, either as part of a tax bill or as stand-alone legislation.  IEEE-USA has issued an action alert asking U.S. members to call or email your Representative and Senators to support passage of legislation needed to enhance your retirement security.

As part of its ongoing efforts to cultivate a more a secure financial future for its members, IEEE-USA's Retirement Security Grassroots Network supports two main legislative goals for 2001-2002 :

• Improve the portability of health and pension benefits and expand tax-favored savings opportunities for engineers, scientists, and other mobile professionals.

• Encourage the timely disclosure of useful information by employers about changes in pension plans and to use pension plan surpluses to order to reduce any adverse financial effects on long tenured plan participants.

There are a variety of pension plans offered by private sector employers today. This article offers a handy explanation of traditional defined benefit pension plans insured by the Pension Benefit Guaranty Corporation (PBGC): what they are, how they operate, and the rights and options of the workers covered by them.

Predictable, Secure Lifetime Benefits

Trends

Pension Plan Provisions

Federal Insurance For Your Pension

Pension Checklist

Other Useful Publications

Traditional Pension Plans

The first private pension plan in the United States was established in 1875 by the American Express Company and was soon followed by pensions provided by utilities, banking, and manufacturing companies. Almost all of the early pension plans were traditional pension plans — known as defined benefit plans — that paid workers a specific monthly benefit at retirement.

ERISA set strict requirements for private pension plans. The U. S. Department of Labor (DOL) is responsible for seeing that pension plans are properly operated and that their assets are managed in a prudent manner. The Internal Revenue Service (IRS) is responsible for pension plan funding and vesting requirements, and for ensuring compliance with tax laws. ERISA also established the Pension Benefit Guaranty Corporation (PBGC) to insure the pensions of workers covered by private defined benefit pension plans.

A defined benefit plan can be either a single-employer plan or a multiemployer plan. A single- employer plan, which may be collectively bargained, provides benefits for workers of one employer. A multiemployer plan is a collectively bargained pension arrangement involving more than one unrelated employer, usually in a common industry, such as construction, trucking, textiles, and coal mining.

Most private defined benefit plans are insured by PBGC.

Predictable, Secure Lifetime Benefits

Defined benefit pension plans offer workers a number of advantages when compared to other workplace retirement plans. They provide workers with a predictable and secure benefit for life.

• Workers are promised a specific benefit at retirement.
• Workers can know in advance what benefits they will receive.
• The benefits of workers are certain, not subject to the fluctuations of the stock and bond markets.
• Employers, not workers, are responsible for providing the retirement benefits, and the benefits are not dependent upon the amount of salary workers are willing or able to contribute.

Secure Benefits:

• PBGC pays the worker’s pension up to guaranteed limits if the employer cannot afford to pay the benefits or goes out of business. In most cases, the PBGC guarantee covers all of the earned benefit.
• A worker can earn a reasonable retirement benefit under a defined benefit plan, even if the worker has not had an adequate retirement plan or was not covered by a retirement plan earlier in a career.

• A defined benefit plan must offer to pay an annuity, a monthly benefit, for the life of a retired worker, no matter how long the worker lives. If the value of the benefit is $5,000 or less, the plan may pay the benefit in a single payment.
• If a worker is married, a defined benefit plan must also pay an annuity to the worker’s surviving spouse for the spouse’s life, unless the worker and spouse elect otherwise.

Additional Benefit Possibilities:

• Defined benefit plans can provide additional valuable benefits to workers, such as early retirement benefits, extra spousal benefits, disability benefits, or costof- living adjustments.

The Pension Benefit Guaranty Corporation pays the worker’s pension up to guaranteed limits if the employer cannot afford to pay the benefits or goes out of business.

Trends

There have been some major shifts recently in America’s pension system. While the number of workers covered by traditional defined benefit pensions has remained relatively level, there has been significant growth in defined contribution pension plans, especially 401(k) plans. Many employers began offering workers both a defined benefit plan and a 401(k) plan. Other employers offer only 401(k) plans.

A more recent trend, especially among large employers, has been to convert traditional defined benefit plans to “hybrid” pension plans, such as cash balance plans. These hybrid plans are defined benefit plans and are insured by PBGC.

• benefits do not depend on how much a worker is willing or able to contribute;
• the employer bears the investment risk;
• plans must offer an annuity with a survivor benefit; and
• benefits are insured by PBGC.

• workers can know the value of their benefits and tend to understand them better when expressed as a hypothetical individual account;
• younger workers and shorterservice workers, who are often women, can receive higher benefits; and
• workers who do not spend their full careers with one employer have more portable benefits that can be transferred to another plan.

• f requently offer a single, lumpsum payment, which workers often take and spend rather than rolling it over and saving for their retirement; and
• generally do not offer subsidized early retirement benefits, making it harder for workers to retire early.

In these cases, longer-service workers generally will receive less under a cash balance plan than they would have received under a traditional defined benefit plan unless the employer provides transition protections.

Pension Plan Provisions

Generally, a defined benefit pension plan requires workers to meet age and service requirements before they can participate in the plan. Workers cannot be excluded from participating because they are too old, even if they are hired within a few years of the normal retirement age specified in the plan. Usually, plans allow workers to participate if they are at least 21 years old and have completed one year of service with the company.

Accruing Benefits

Generally, workers begin to earn (accrue) re t i rement benefits as soon as they become a participant in a defined benefit pension plan. However, they do not obtain a permanent right to the benefits (become vested) until they have worked a minimum period of time, as specified in the plan. Workers may lose their accrued benefits if they leave their job before becoming vested.

Being vested in a benefit means that a worker has completed sufficient years of service and is entitled to receive benefits accrued under the plan, whether or not the worker continues working for the company until re t i rement. Pension plans have one of two vesting schedules: cliff or graded vesting. Under cliff vesting, workers must be fully vested after no m o re than five years of service with the employer. The plan, however, could specify a shorter period of service. Workers have no vested rights until this service is completed. Under graded vesting, the worker must be at least 20 percent vested after three years of service and receive an additional 20 p e rcent vesting for each of the next four years, with full vesting coming no later than at the end of seven years of service.

Defined benefit pension plans use a formula to figure the benefit amount earned. Usually, it involves salary and years of service (for example, a certain p e rcentage of the worker’s final or average salary multiplied by the number of years of service) or a flat benefit amount per year of service. The actual dollar amount will depend on such factors as:

• age at retirement;
• earnings (in plans that use salary to compute benefits); and
• years of service under the plan.

The longer someone works under the same defined benefit pension plan, the larger the retirement benefit.

Some plans are integrated with Social Security benefits. In these plans, the amount of pension benefits earned is reduced because of Social Security coverage.

Also, electing survivor benefits or early retirement may reduce the monthly benefit amount.

The longer someone works under the same defined benefit pension plan, the larger the retirement benefit.

Workers can start receiving pension benefits when they reach the normal retirement age set by their pension plan. The normal re t i rement age generally is no later than age 65. Workers should check their pension plans for the normal retirementage and become familiar with the other provisions of their plans. Many pension plans allow workers to take early retirement upon completing a certain number of years of service and or reaching a given age. But if workers decide to retire early, they may receive a lower monthly benefit than they would at normal retirement age, because the benefit will be paid over a longer period of time.

Pension plans may pay benefits either as an annuity (equal payments monthly or at other regular intervals) or as a onetime payment (lump sum). If the total value of the benefit is $5,000 or less, the plan may pay the benefit in a single sum without the worker’s consent. If the benefit is worth more than $5,000, the plan must provide the benefit as a monthly payment unless the worker (and the spouse, if the worker is married) consent to another benefit form.

Defined benefit pension plans normally provide survivor benefits if a worker dies either before or after retirement benefits begin. This means that if the worker is partially or fully vested, the spouse will automatically receive survivor benefits if the worker dies — unless the worker and spouse have specifically declined the survivor option in writing.

If a worker dies before retirement, the plan does not have to pay the benefits to the spouse until the earliest date that the deceased worker could have begun receiving retirement benefit payments. For example, if a worker dies at age 50, and the plan says that the earliest a worker can receive benefits is at age 55, the spouse might have to wait five years to receive benefits.

Generally, pensions cannot be attached for debts owed. However, in the event of a divorce or separation, a judgement, decree, or order made in accordance with a state domestic relations law can direct the pension plan to pay a share of a worker’s pension directly to a spouse, former spouse, child or other dependent. For this to occur, the order must be a Qualified Domestic Relations Order (QDRO) — that is, it must meet legal requirements concerning the information it contains and the benefits involved.

Defined benefit plans usually are funded entirely by the employer. Employers generally contribute enough annually to cover the normal cost of the plan — an amount that is at least the value of the benefits that participants in the plan earned that year. In addition, employers may have to make additional contributions for various reasons, such as to make up for any investment losses by the pension fund.

Pension Plan Administration

The person who administers the pension plan is known as the plan administrator. The plan administrator’s responsibilities include keeping the workers fully informed of their rights and benefits, making pension payments to retirees and beneficiaries, paying insurance premiums to PBGC, and making reports to plan participants and to DOL, IRS and PBGC as required by law.

Under the law, the plan administrator must give workers the following information:

This document includes information on how the plan operates, when participants are eligible to receive their pensions, how participants can calculate the amount of their benefits, and how to file for their pensions. This information must be given to workers within 90 days after they become participants in the plan. The plan administrator must also notify participants about changes in the plan and, every five years, provide workers with an updated version of the summary plan description if the plan has been modified.

Summary Annual Report.

This report contains information on the financial activities of a pension plan and must be p rovided to workers annually.

Generally, participants in plans that are less than 90 percent funded must receive an easy-to-understand notice reporting the funding level of their pension plan, indicating how much of their pensions are currently covered by the plan assets. The notice also explains what benefits in the plan would be covered by PBGC’s insurance in the event the plan terminates.

Individual Benefit Statement.

This statement, which participants may request annually and when they leave for another job, shows the benefits a participant has accrued under the plan and tells whether the participant has a vested right to receive them.

If any of the required information is not provided, workers should contact the

Division of Technical Assistance and Inquiries,
Pension and Welfare Benefits Administration (PWBA),
U. S. Department of Labor,
200 Constitution Avenue NW, N-5625,
Washington, D. C. 20210.

Generally, participants in plans that are less than 90 percent funded must receive an easy-to-understand report on the funding level of their pension plan.

Federal Insurance For Your Pension

PBGC is the federal agency that insures the pensions of American workers covered by private defined benefit pension plans.

Today, PBGC insures the pensions of about 42 million workers in more than 44,000 private defined benefit plans. PBGC does not insure defined benefit plans sponsored by federal, state, and local governments. Nor does it insure some church and fraternal organization plans, professional service employer plans (such as plans for lawyers and doctors) with fewer than 25 active participants, plans maintained outside the U. S. primarily for non- resident aliens, worker compensation and unemploy ment insurance plans, plans that are not tax- qualified and plans not funded with employer contributions.

PBGC operates two insurance p rograms: one covers singleemployer pension plans and the other covers multiemployer pension plans. The single- employer p rogram is by far the larg e r, covering almost 42,000 pension plans. There are about 2, 000 multiemployer pension plans.

Under the multiemployer program, PBGC provides financial assistance through loans to plans that are insolvent — unable to pay benefits (at least equal to PBGC’s guaranteed benefit limit) when due. Under its single- employer program , PBGC takes over and becomes t rustee of an insolvent plan when the sponsoring company can no longer support the plan.

When this happens, PBGC begins to pay pension benefits to the plan participants a l ready receiving benefits and to others when they retire.

Employers voluntarily establish and maintain pension plans. They may terminate defined contribution plans at any time. But they may terminate defined benefit plans insured by PBGC only in two ways: standard termination or distress termination. In addition, PBGC may terminate a plan in certain circumstances, such as when a plan does not have sufficient assets to pay benefits when they come due.

In a standard termination, an employer may end a plan only if there is enough money to pay all pension benefits accrued by workers as of the termination date. The plan administrator will pay the promised benefits by purchasing annuities from a private insurance company or making lump-sum payments to participants. Once a plan ends in a standard termination, PBGC’s insurance responsibility ends.

• Chapter 7 bankruptcy liquidation.
• Chapter 11 bankruptcy reorganization.
• The employer must demonstrate to the court that liquidation would necessarily follow if the pension plan were not terminated.
• A determination by PBGC that the employer is in such poor financial condition that unless the plan terminates the employer cannot pay its debts when due and cannot continue in business.
• A determination by PBGC that, due solely to a decline in the employer’s workforce, pension costs have become unreasonably burdensome.

In a distress termination, PBGC will step in and take over the plan as trustee, and use its insurance funds to make sure the guaranteed benefits are paid to the plan participants when due.

If PBGC becomes trustee of a pension plan, it will notify all plan participants of this action. As trustee, PBGC will keep the records of plan participants and their benefits, pay benefits to retirees, and begin benefit payments to new retirees.

Under the single-employer program, PBGC insures pension benefits provided by the pension plan up to certain limits set by law. These are benefits beginning at normal retirement age, certain early retirement and disability benefits, as well as certain benefits for survivors of deceased plan participants. PBGC does not guarantee certain types of benefits, such as health and life insurance benefits, severance and vacation pay, death benefits, and some early retirement benefits.

The maximum benefit PBGC can pay is set by law each year under provisions of ERISA. The maximum guarantee is reduced if a worker begins receiving benefit payments before age 65 or if the pension includes a survivor benefit.

Under the multiemployer program, PBGC insures a portion of the pension earned times the worker’s years of service.

Pension Checklist

If you are covered by a private defined benefit pension plan, here is a checklist for important information about your plan and your benefits that you should keep current.

For More Information

• IEEE-USA Retirement Security Grassroots Network
• AARP's Retirement Income Policy Agenda (PDF file)
• Employee Benefit Research Institute
• IEEE-USA's Engineering Employment Benefits Committee
• Pension and Welfare Benefits Administration (Dept. of Labor)
• Savings Coalition of America

Other Useful Publications

The PBGC publication Your Guaranteed Pension provides additional details about the single-employer insurance program. To obtain a copy, please write to

Your Guaranteed Pension,
No. 587G,
Pueblo, CO 81009.

Your Guaranteed Pension, as well as other pension information, is also available on PBGC’s homepage at www.pbgc.gov on the Internet.

Another publication that provides useful information about pension plans is What You Should Know About Your Pension Rights, which is available from the

Pension and Welfare Benefits Administration,
U. S. Department of Labor,
200 Constitution Avenue N. W., Room N- 5619,
Washington, D. C. 20210.

Other information is available on DOL’s homepage at www.dol.gov/dol/pwba on the Internet.

This article was prepared by Communications and Public Affairs Department, Pension Benefit Guaranty Corporation http://www.pbgc.gov , PBGC Publication 1007, January 2000

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Last Updated:  28 November 2000