Company bankruptcies raise immediate concerns for employees and retirees about their pension benefits. The fear of losing retirement income you’ve spent decades earning is understandable. However, the American pension system includes protections that preserve most benefits even when employers fail financially.
Understanding what happens to your pension in a bankruptcy depends on the type of pension you have, whether it’s insured, and how well-funded it was before the company’s troubles began. For most private sector workers with traditional pensions, federal insurance provides a safety net that protects substantial benefits.
This guide explains how pension protections work, what the Pension Benefit Guaranty Corporation covers, and steps you can take to protect your retirement security.
Table of Contents
- What Is the Pension Benefit Guaranty Corporation?
- Which Pension Plans Are Protected?
- What Are the PBGC Guarantee Limits?
- What Happens During an Employer Bankruptcy?
- How Are Multiemployer Plans Different?
- What If Your Plan Isn’t Covered?
- Warning Signs Your Pension May Be at Risk
- How to Protect Your Pension
- Frequently Asked Questions
What Is the Pension Benefit Guaranty Corporation?
The Pension Benefit Guaranty Corporation (PBGC) is a federal agency that insures private sector defined benefit pension plans. Created by the Employee Retirement Income Security Act (ERISA) in 1974, PBGC protects the retirement incomes of about 31 million American workers and retirees in covered pension plans.
PBGC operates similarly to the FDIC for bank deposits. Private employers pay insurance premiums to PBGC, and in return, PBGC guarantees that participants will receive pension benefits up to certain limits if their plan fails. PBGC doesn’t receive taxpayer money; it’s funded by insurance premiums, assets from failed plans, and investment returns.
The chart above outlines which types of plans PBGC covers and the maximum benefit guarantee. Understanding whether your plan falls under PBGC protection is essential for assessing your pension security.
Which Pension Plans Are Protected?
PBGC covers most private sector defined benefit pension plans. This includes traditional pensions that promise a specific monthly benefit based on your salary and years of service.
Plans Covered by PBGC
- Single-employer defined benefit plans (most corporate pensions)
- Multiemployer plans (union pension plans covering multiple employers)
- Cash balance plans (hybrid plans that are technically defined benefit)
Plans NOT Covered by PBGC
- 401(k) plans and other defined contribution plans (these are already individual accounts)
- Federal, state, and local government pension plans
- Most church pension plans
- Plans of professional service employers with 25 or fewer participants
What Are the PBGC Guarantee Limits?
PBGC guarantees your pension benefits up to a maximum amount that changes annually. For 2024, the maximum guaranteed benefit at age 65 is approximately $81,000 per year, or $6,750 per month.
Factors Affecting Your Guarantee
- Age at retirement: The guarantee is reduced if you retire before age 65. For example, at age 55, the maximum is about $36,450 per year.
- Benefit form: The maximum assumes a single life annuity. Joint and survivor benefits have lower maximums.
- Recent benefit increases: Benefit increases within 5 years of plan termination may not be fully guaranteed.
- Plan-specific rules: Certain shutdown benefits or early retirement subsidies may not be guaranteed.
What Happens During an Employer Bankruptcy?
When an employer files for bankruptcy, the pension plan doesn’t automatically end. Many companies reorganize and continue operating their pension plans. However, in some cases, the plan is terminated and PBGC takes over.
Standard Termination
If a company can afford to pay all promised benefits, it may conduct a standard termination. In this case, participants receive their full benefits, either through annuity purchases from insurance companies or lump sum payments.
Distress Termination
When a company cannot afford to pay all promised benefits, it may request PBGC approval for a distress termination. PBGC takes over the plan as trustee, uses plan assets to pay benefits, and covers shortfalls up to the guarantee limits.
PBGC Termination
In some cases, PBGC initiates termination to protect participants when a plan cannot pay current benefits or when waiting would increase losses. This often happens during bankruptcy proceedings.
How Are Multiemployer Plans Different?
Multiemployer plans, also known as union pension plans, cover workers from multiple employers in the same industry. These plans have different PBGC rules and lower guarantee limits than single-employer plans.
The multiemployer guarantee is significantly lower—about $12,870 per year for someone with 30 years of service. Additionally, PBGC assistance typically comes as a loan to the plan rather than a takeover. Many multiemployer plans facing financial difficulties have implemented benefit reductions under special rules.
What If Your Plan Isn’t Covered?
If you have a 401(k) or other defined contribution plan, PBGC coverage isn’t relevant because you own the assets in your account directly. If your employer goes bankrupt, your 401(k) balance remains yours, though company stock in the plan could lose value.
Government employees with public pensions aren’t covered by PBGC, but government plans have their own protections through the taxing authority of the government entity. While some public plans are underfunded, outright failure is rare because governments can raise revenues.
Warning Signs Your Pension May Be at Risk
- Funded ratio below 80%: Your annual funding notice shows how well-funded your plan is. Lower ratios indicate potential problems.
- Missed contributions: If your employer is late on pension contributions, it’s a warning sign.
- Company financial troubles: Declining revenues, layoffs, and credit downgrades often precede pension difficulties.
- Industry decline: Whole industries (steel, airlines) have seen widespread pension failures.
- Frozen plan: When employers stop accruing new benefits, it may indicate financial stress.
How to Protect Your Pension
- Read your funding notice: Every year, your plan must send you a funding notice. Review it for the plan’s funded percentage and contribution history.
- Keep documentation: Save all benefit statements, plan documents, and correspondence. You may need these to verify your benefits if PBGC takes over.
- Diversify retirement savings: Don’t rely solely on your pension. Build 401(k), IRA, and other savings to supplement pension income.
- Understand your rights: Know what happens to your vested benefits if you leave before retirement or if the plan terminates.
- Consider timing: If you’re close to a benefit milestone and your employer is struggling, understand how plan termination might affect that benefit.
Final Thoughts
While employer bankruptcy is frightening, most pension participants receive substantial protection. The PBGC system, though imperfect, ensures that decades of earned benefits don’t vanish overnight. Understanding your plan’s protections, monitoring its health, and diversifying your retirement savings provides the best defense against pension uncertainty.
Frequently Asked Questions
What if my benefit exceeds the PBGC guarantee limit?
If your promised benefit exceeds the PBGC maximum, you may lose the excess. High earners with large pensions face the most risk from plan failure. This is why diversifying retirement savings beyond your pension is especially important for well-compensated employees.
Can I still get a lump sum if PBGC takes over my plan?
Generally, no. When PBGC takes over a plan, it typically pays benefits as annuities rather than lump sums. If you want a lump sum option, you would need to elect it before the plan terminates, if the plan offers that option.
How do I contact PBGC about my pension?
You can reach PBGC at 1-800-400-7242 or visit pbgc.gov. If PBGC has taken over your plan, they’ll contact you with information about your benefits and how to file for payments.
What happened with major airline and steel company pensions?
Several airlines and steel companies terminated underfunded pensions in the 2000s. PBGC took over these plans and paid guaranteed benefits, but some participants with benefits above the guarantee limits received reduced payments. These cases highlighted both the value and limitations of PBGC protection.
Is the PBGC itself financially sound?
PBGC’s single-employer program is well-funded. The multiemployer program faced significant deficits but received a major boost from the American Rescue Plan Act of 2021. While PBGC’s long-term finances depend on future claims, the agency can increase premiums and has federal backing if needed.