Q: Last week you responded to a reader asking whether they should take their company’s offer of a lump-sum of money in exchange for giving up their pension plan.

You advised not to worry about the health of the company when making their decision because the Pension Benefit Guaranty Corporation (PBGC) protects pensions and would likely continue to pay if the company went bankrupt. But I’ve heard the PBGC does not cover all pensions, all employers, or all pension types.  Even when a pension is covered, there are caps on the amount of the pension that PBGC will pay.  So it’s not quite as safe as the FDIC comparison, right?

A: Yes. You are correct that PBGC doesn’t cover all pensions and pension types; that they have caps and the FDIC comparison I made (even if they’re both government provided insurance protections) is not as clear cut.

So let’s unpack it.

The PBGCis a federal agency created in 1974 to protect pension benefits in the private sector, so they usually don’t insure plans offered by federal, state, or local governments.

PBGC functions as an insurance company, so when a covered pension gets in trouble, PBGC steps in and provides employees and retirees with the same benefit, up to a cap.

This cap is pretty high, the maximum monthly benefit at age 65 is $5,812 close to 70k annually. But beware if your pension is over that, you may lose some benefits.

So why do we see headlines about employees and retirees losing ALL their pensions when a company goes broke?

Because PBGC actually runs two programs:

The more common known to most of us is the single-employer program described above, and the less common multi-employer program which is “a pension plan created through an agreement between two or more employers in similar industries, and a union”. These headlines are usually about unionized industries (auto workers, coal miners.) The two programs differ significantly in the level of benefits guaranteed, with the multi-employer program being significantly lower. Also concerning is that this multiemployer program is expected to run out of money by 2025. The single-employer PBGC program is not.

I still stand by my advice from last week. All studies show most employees will do better long-term if they stay in the pension plan than if they take a lump-sum. Again a disclaimer, you should not listen to me. Before making an irrevocable decision you should consult a financial professional. And do your own homework so you can ask the best questions for your situation.

Source and recommended website www.pbgc.gov

©Copyright Eva Del Rio

Eva Del Rio is creator of HR Box™ – tools for small businesses and startups. Send questions to Eva@evadelrio.com