Cash Balance Pensions Debated

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Cash Balance Pensions Debated

By Tami Luhby

Newsday Inc., April 10, 2003

Washington - Don't let companies adopt cash balance pensions without protections for older workers, pleaded labor advocates and employees at an Internal Revenue Service and Treasury Department hearing yesterday. These pension plans slash the benefits of those nearing retirement, while saving the companies millions of dollars in pension costs, they argued.

The Treasury Department has breathed new life into cash balance pensions conversions - which had been popular in the 1990s before being halted by the Clinton Administration in 1999 after a flurry of employee protests - by proposing in December that such plans don't discriminate on the basis of age. Officials listened to more than five hours of testimony from both plan opponents and supporters at yesterday's hearing in Washington, which continues today.

A decision, however, is not expected for several months. It remains to be seen whether the Bush administration will side with employers - who say they can't afford to maintain costly traditional pensions in tough economic times - or with workers, who have mounted a vocal campaign to block the proposal.

At issue is the fate of older workers when a company converts its plan. Traditional pensions tend to favor these employees because their benefits are usually based on tenure and salary in their last years of service, when they tend to receive the highest pay. Cash balance pensions, on the other hand, spread out pension accruals over workers' tenure with the firm and can be transferred to their next employer, which make them attractive to younger workers.

For Lazzaro Cuttrone of Bridgewater, N.J., who worked for AT&T for 31 years, the conversion meant he's only collecting $23,000 in retirement instead of the $47,000 projected before AT&T switched its plan.

"Why should we older workers, who earned our pensions and benefits with our many years of dedicated service, now be penalized and denied what was promised to us for most of our working lives?" Cuttrone said, echoing other workers who testified yesterday.

Employer advocates, however, say studies show almost 80 percent of all pension participants do better under cash balance plans when employer costs remain the same, in part because these plans distribute benefits more equally among workers with varying tenures. Also, nearly all employers protect older workers, said Eric Lofgren, global director of benefits consulting group at Watson Wyatt, an actuarial and consulting firm based in Washington D.C.. Many, like IBM, give workers nearing retirement a choice between the traditional plan or the cash balance plan.

But labor supporters want that protection mandated. In an attempt to bridge the gap, several Democratic representatives introduced legislation on Tuesday that would require companies to give employees age 40 and older, or with 10 years of tenure, such a choice. It would also prohibit the "wearaway" of benefits, which occurs when older workers earn no new benefits while waiting for their cash balance pensions to equal the value of their traditional plan.

"If you move forward with the regulations as written, I am sure that you will incur significant legal opposition," said Rep. George Miller (D-Calif.), a bill sponsor. "Either you will force Congress to overrule the regulations or participants will sue the Treasury Department, the EEOC [Equal Employment Opportunity Commission] and employers to invalidate the regulations."