Ruling clouds pension plan conversions - HR News - cash balance pension plans

HR Magazine, Sept, 2003 by Steve Bates

A federal judge has ruled that IBM Corp. discriminated against older workers when it changed its pension plan in the 1990s, raising questions about the legality of all conversions to cash balance pension plans.

A spokesman for IBM in Armonk, N.Y., said the corporation will appeal the July 31 decision by U.S. District Judge G. Patrick Murphy in the Southern District of Illinois. Murphy said that IBM knew that its changes would boost expected retirement benefits of younger workers at the expense of older employees, even though IBM allowed people older than 40 with at least 10 years of service to remain in the old plan if they wished.

The ruling has the potential to affect other pending lawsuits over conversions to cash balance pension plans and could cause employers to hesitate before converting traditional plans to cash balance plans, said experts and organizations following the case.

Under cash balance pension plans, employees earn benefits evenly throughout their careers. In traditional defined benefit plans, benefits are distributed according to length of service and final pay. When companies convert to cash balance plans, they save money and favor younger workers, Younger workers like cash balance plans because they are portable. About one-third of large U.S. corporations are believed to have cash balance plans

However, companies that have converted traditional pensions to cash balance plans or have altered the benefit formulas, as IBM did, have run into controversy. Several large corporations, including AT&T, Cigna and Xerox, also have been taken to court over such changes.

The Washington, D.C.-based Pension Rights Center, a consumer group, welcomed the IBM ruling as "a resounding victory" for employees, retirees and their families. "The court recognized what we've known all along," said Karen Ferguson, the center's director, in a statement. "Cash balance plans discriminate against older employees and do not fit within the framework of the law."

However, the Washington-based American Benefits Council, a trade organization, blasted the decision and warned of its potential repercussions. "Conversions to cash balance plans are currently the one good thing going on in the defined benefit pension plan system because they demonstrate a commitment by employers to remain within the defined benefit world," said council President James A. Klein in a statement. "A decision like this sends one more negative signal to employers that 'no good deed goes unpunished' since it penalizes employers trying to provide their workers with a pension that is funded by the employer and guaranteed by the government, as opposed to requiring workers to rely solely on employee-funded retirement alternatives," added Klein.

A statement from IBM officials condemned the ruling and insisted that "IBM's plan always provides older employees with benefits of equal value or greater value than the benefits earned by younger employees. To call such a plan age discriminatory makes no sense."

Added J. Randall MacDonald, senior vice president of human resources at IBM, "This ruling affects not just IBM's pension plan but the pension plans of more than 400 major U.S. companies. This is a situation where a few have spoiled it for millions of U.S. workers."

In defending the suit, IBM argued that cash balance plans should be treated like 401(k) plans in determining whether the rate of pension accrual is fair. But Judge Murphy found that IBM's plan violates the federal Employee Retirement Income Security Act (ERISA). He added that IBM could have terminated its defined benefit plan and moved to a defined contribution plan without breaking the law.

Norman Stein, a pension law expert and a professor at the University of Alabama School of Law, said that "there's enough uncertainty now" that any employer considering converting to a cash balance plan should wait for clearer messages from the legal system as this and other cases work through the courts.

For several years, said Stein numerous lawyers and scholars have been saying that "you can look at the statute and see that these plans are not lawful." Many employers, said Stein, "thought there was safety in numbers." In the wake of the IBM ruling, he said, "it would not be a bad time" for Congress to establish rules for cash balance plans that would clarify what employers can and cannot do.

Dallas Salisbury, president of the Washington-based Employee Benefit Research Institute, noted that the IBM decision did not address how the corporation would compensate pension holders for damages. The uncertainty about the legality of cash balance plans and how remedies would be handled "undoubtedly would cause an employer who has a cash balance plan to be wringing their hands," said Salisbury.

In addition, employers am waiting for the Internal Revenue Service to issue regulations on cash balance plans.