Plan Termination

In Detail

Plan termination is the permanent discontinuation of a pension plan. There are two types: standard termination and distress termination. In a standard termination, the sponsor has enough assets to pay all promised benefits, typically by purchasing annuity contracts from an insurance company for each participant. In a distress termination, the sponsor cannot afford to pay all benefits and must demonstrate financial hardship (such as bankruptcy) to the PBGC, which then takes over the plan and pays benefits up to guaranteed limits.

The PBGC can also initiate an involuntary termination if it determines a plan poses an unreasonable risk to the insurance program. Plan termination has significant consequences for participants. In a standard termination, benefits are preserved but participants lose the flexibility of the pension fund (the annuity issuer's financial strength replaces the plan's). In a distress termination, benefits may be reduced to PBGC guarantee levels, which can mean significant cuts for higher-paid employees.

Since the early 2000s, many large corporate plans have been terminated or frozen, including plans sponsored by major airlines, steel companies, and manufacturers. Each termination shifts more retirement risk to workers and the federal insurance system.