A PREDICTABLE,

SECURE PENSION 

FOR LIFE

Defined Benefit Pensions
1

C O N T E N T S

Traditional Pension Plans 2

Predictable, Secure Lifetime Benefits 4

Trends 6

Pension Plan Provisions 9

Federal Insurance For Your Pension 16

Pension Checklist 20

There are a variety of pension

plans offered by private sector

employers today. This publication offers a handy explanation

of traditional defined benefit

pension plans insured by PBGC:

what they are, how they operate,

and the rights and options of the

workers covered by them.
2 3

Until 1974, there was little or

no protection for pensions.

Because of shocking instances

of workers losing their retirement benefits (most notably in

1963 when 4,000 Studebaker

auto workers lost some or all

of their promised benefits),

Congress in 1974 took action 

to prevent such tragedies 

by enacting the Employee

Retirement Income Security

Act (ERISA).

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. 

Defined benefit pension plans

may state the promised benefit

as an exact dollar amount (for

example, $100 per month

at retirement) or may specify a

formula for calculating the

benefit (for example, $10 per

month for every year of service

with the company, or a percent

of a worker’s salary times

years of service). Generally, a

company funds the pension

plan and plan assets are invested, usually by a professional

money manager. Importantly,

most private defined benefit

plans are insured by PBGC. 

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.

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 re t i re m e n t .

Most private defined

benefit plans are insured

by PBGC.
4 5

Predictable Benefits:

• 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 aff o rd

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 re a s o nable re t i rement benefit under 

a defined benefit plan, even 

if the worker has not had an

adequate re t i rement plan or

was not covered by a re t i rement plan earlier in a care e r.

Lifetime Benefits:

• 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.

P redictable, Secure Lifetime Benefits 

Defined benefit pension plans offer workers a number of advantages when compared to other workplace re t i rement plans. They

p rovide workers with a predictable and secure benefit for life.

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. 
6 7

Workers in 401(k) plans have

individual accounts, which are

funded with worker contributions and include a matching

or other contribution by 

the employer. The ultimate

benefit depends primarily

upon the amounts contributed

and the returns on the investments chosen by the workers.

PBGC does not insure defined

contribution plans.

A m o re 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.

The retirement benefit in a 

cash balance plan is generally

described in terms of a hypothetical account balance that

looks like the account balance

in a 401(k) plan. In this hypothetical account, a worker

accumulates pay credits 

(usually a percentage of pay)

and interest credits (usually a

percentage of the total account

balance). The interest credit is

frequently based on the interest rate on a U.S. Treasury

security. The pay and interest

credits, specified in the plan,

resemble the actual contributions and earnings to a worker’s account under a 401(k)

plan. Because cash balance

plans are hybrid defined 

benefit plans, they offer a predictable benefit at retirement.

Tre n d s

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.

Cash balance plans contain

many of the important advantages of traditional defined 

benefit plans: 

• 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.

Cash balance plans also have

features that traditional

defined benefit plans do not:

• 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.
8 9

benefits are based on workers’

average pay at the end of their

careers when their earnings

usually are greatest, to a career

average cash balance plan,

where benefits are based on

workers’ average pay for their

entire career.

In these cases, longer- s e r v i c e

workers generally will re c e i v e

less under a cash balance plan

than they would have re c e i v e d

under a traditional defined benefit plan unless the employer

p rovides transition protections. 

However, cash balance plans

also: 

• f requently offer a single, lumpsum payment, which workers

often take and spend rather

than rolling it over and saving

for their re t i rement; and

• generally do not offer subsidized early retirement 

benefits, making it harder 

for workers to retire early.

Many cash balance plans are

conversions from traditional

defined benefit plans.

Conversions generally involve

a change from a traditional

final average pay plan, where

A year of service ordinarily is a

12-month period during which

the worker has performed at

least 1,000 hours of service.

Hours of service are generally

defined as: hours for which the

worker is paid or is entitled 

to be paid, including pay for

vacation and sick leave; and

hours for which the worker is

awarded back pay.

Accruing Benefits

G e n e r a l l y, workers begin to earn

( a c c rue) 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

a c c rued benefits if they leave

their job b e f o re becoming vested. 

Vesting

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,

h o w e v e r, could specify a shorter period of service. Wo r k e r s

have no vested rights until this

Pension Plan Pro v i s i o n s

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.
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.

When workers leave a job in

which they earned the right to a

pension, their employer must

p rovide them information about

their benefits. Workers should

verify the information before

they leave. To be sure they

receive future benefits when

due, workers who change jobs

should keep all the information

The longer someone

works under the same

defined benefit pension

plan, the larger the

retirement benefit.

Predictable, Secure Lifetime Benefits

1 0 1 1

they receive about their pension

plans and their benefits.

Especially helpful are the plan’s

name, nine-digit Employer

Identification Number (EIN)

and three-digit Plan Number

(PN), the name and address of

the plan administrator or other

plan re p resentative, and copies

of individual benefit statements.

Most important, former workers

should keep the plan administrator advised about any change

of address or marital status. 

Calculating Benefits

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.

Payment of Benefits

Workers can start receiving pension benefits when they re a c h

the normal re t i rement age set by

their pension plan. The normal

re t i rement age generally is no

later than age 65. Wo r k e r s

should check their pension

plans for the normal re t i re m e n t

age and become familiar with

the other provisions of their

plans. Many pension plans

allow workers to take early

re t i rement upon completing 

a certain number of years of 

service and/or reaching a given
1 2 1 3

age. But if workers decide to

re t i re early, they may receive a

lower monthly benefit than they

would at normal re t i rement 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 pro v i d e

the benefit as a monthly payment unless the worker (and the

spouse, if the worker is married)

consent to another benefit form. 

Survivor Benefits

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.

If the worker dies after re t i r i n g ,

the surviving spouse will

receive at least 50 percent of the

benefits the re t i ree had been

receiving if the worker was

receiving benefits that included

a survivor benefit. The benefits

will continue until the spouse

dies. Because this type of annuity takes into account the combined life expectancy of the

worker and the

spouse, and often is paid

out over a longer period of

time, the worker’s monthly

pension payment is usually less

than it would have been if the

worker and the spouse had

declined the survivor benefit.

G e n e r a l l y, pensions cannot be

attached for debts owed.

H o w e v e r, in the event of a

d i v o rce or separation, a judgement, decree, or order made in

a c c o rdance with a state domestic

relations law can direct the pension plan to pay a share of a

w o r k e r’s pension directly to a

spouse, former spouse, child 

or other dependent. For this to

o c c u r, the order must be a

Qualified Domestic Relations

O rder (QDRO) — that is, it must

meet legal re q u i rements concerning the information it contains and the benefits involved.

Pension Plan Funding

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,

Predictable, Secure Lifetime Benefits
1 4 1 5

employers may have to make

additional contributions for

various reasons, such as to

make up for any investment

losses by the pension fund.

If an employer fails to make

the legally required contributions, the employer can be

assessed penalty taxes for each

year the deficiency exists. If an

employer is experiencing temporary financial hardships, the

IRS may permit the employer

to pay the contribution in

future years under a funding

waiver arrangement. Workers

must be notified each time an

employer requests a funding

waiver or fails to make minimum funding contributions. To

protect plan benefits, in certain

cases the plan may file for a

lien (legal claim) against

employer assets for unpaid

contributions, or the employer

may have to post security for a

portion of the underfunding.

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: 

Summary Plan Description.

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.

Notice to Participants.

G e n e r a l l y, participants in plans

that are less than 90 perc e n t

funded must receive an easyto-understand notice re p o r t i n g

the funding level of their pension plan, indicating how much

of their pensions are curre n t l y

c o v e red by the plan assets. 

The notice also explains what

benefits in the plan would be

c o v e red 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-tounderstand report on 

the funding level of their

pension plan.
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.

1 6 1 7

PBGC receives no funds 

from general tax revenues.

Operations are financed largely

by premiums paid by insured

pension plans (pension insurance stays in force even if 

premiums are not paid) and

investment returns.

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 unemployment insurance plans, plans

that are not tax-qualified 

and plans not funded with

employer contributions. 

Two Insurance Programs

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 pro g r a m ,

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 re t i re .

Pension Plan Termination

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.

Federal Insurance For Your Pension

PBGC is the federal agency that insures the pensions of American

workers covered by private defined benefit pension plans.
1 8 1 9

A distress termination involves

a plan that does not have

enough money to pay all 

pension benefits accrued by

workers. A plan can end in a

distress termination only if 

the employer meets one of 

the following distress criteria:

• Chapter 7 bankruptcy 

liquidation.

• Chapter 11 bankruptcy re o rganization. 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.

Insurance Coverage

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. 

Historically, most participants 

in plans taken over by PBGC

receive all of the benefits 

they are due. Where there are

reductions, they normally

occur among higher-salaried

workers whose benefits exceed

PBGC’s guarantee or in cases

where benefits have been

increased within five years of

plan termination.

Under the multiemployer program, PBGC insures a portion

of the pension earned times the

worker’s years of service.
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. 521E, 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. 

Prepared by Communications and Public Affairs Department, 

Pension Benefit Guaranty Corporation

2 0

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.

• The name of my defined benefit pension plan is:

• The plan’s EIN (Employer Identification Number) is:

• The plan’s PN (Plan Number) is:

• The name of the plan administrator is:

• I can contact my plan administrator at:

• I became/will be vested in the plan on (date):

• Under the plan, I can take early retirement, 

with reduced benefits, at age:

• I can retire with full benefits at the normal 

retirement age, which is:

• I will reach normal retirement age on (date):

• My plan allows me to receive my benefits (in a lump sum

and/or as an annuity in monthly installments for life, 

depending on the benefit value):

• My Social Security benefit (will/will not)

be deducted from my pension benefit.

• Both my spouse and I (have/have not) declined

in writing the joint-and-survivor option that would allow my

spouse to continue receiving a portion of my benefit if I die first.

• Both my spouse and I (have/have not) declined

in writing the preretirement survivor annuity option that would

provide a benefit to my spouse in the event I die before I retire. 

• I have learned from my plan administrator which of my benefits are covered by PBGC insurance if my plan is terminated

and taken over by PBGC:
PENSION BENEFIT

GUARANTY CORPORATION

1200 K Street, NW

Washington, DC 20005-4026

http://www.pbgc.gov 

PBGC Publication 1007

January 2000