Issues Left Unresolved on Pensions

The Supreme Court’s decision yesterday not to hear arguments that I.B.M. illegally discriminated on the basis of age when it changed its traditional pension plan in the 1990s saves I.B.M. a significant amount of money. But it resolves almost nothing for the many other companies that made similar changes to their own pension plans.

I.B.M. and the current and former workers who filed the lawsuit had previously reached a settlement in which the plaintiffs would receive $320 million to settle certain legal questions. But had the workers also won on the central question of age discrimination, I.B.M. would have had to pay them an additional $1 billion. 

But experts said they did not expect a stampede of companies to start changing their pension plans in light of I.B.M.’s success. 

“It’s not as clear as it would have been three or four years ago that a green light would mean a rush of traffic through the intersection,” said Mark Iwry, a former Treasury official in charge of pension policy. 

Too much has changed in the pension industry for that, said Mr. Iwry, now a senior fellow at the Brookings Institution, a research organization in Washington. In the seven years since the pension dispute first erupted at I.B.M., companies have gone from showing healthy pension surpluses to suffering painful pension shortfalls. Companies have also heard from investors, regulators and employees angry about pension accounting maneuvers and demanding greater clarity. 

The Financial Accounting Standards Board, increasingly concerned about flaws in the pension standards, is now in the process of writing new rules aimed at ending some of the gimmickry and showing much more clearly whether companies can really afford the benefits they have promised their workers. 

Along with these changes, Mr. Iwry said he was also seeing a broad shift in attitude among the thousands of companies that offer their workers traditional pensions. In the past, he said, such companies were generally loath to shut their pension plans, and they did so only when their survival hung in the balance. 

“But that taboo has to some degree been broken,” he said. Today, even healthy companies are sometimes freezing their pension plans, he said. They are making their decisions on the basis of what their competitors are doing, and “unfortunately traditional pensions over all are in decline,” he said. 

I.B.M. itself makes a good example. In January 2006, it announced plans to freeze the pension plan that gave rise to the lawsuit, citing the need to keep its compensation costs on par with the rest of its industry. When a company freezes a pension plan, its workers keep the benefits they have earned until that date, but they no longer build bigger benefits with each new year of service. When the freeze goes into effect, in 2008, workers at I.B.M. will get 401(k) benefits instead. The company has not reported any difficulty recruiting new workers as a result.

Typically, the people who most value a pension plans are not new hires, but the workers nearing retirement. This is why changes in pension plans so often draw complaints about age discrimination. 

The type of pension plan at the heart of the I.B.M. lawsuit is known as a cash balance plan. The plans became widespread in the 1990s when many pension plans were showing surplus assets. The cash balance design gave companies a way to reduce their pension liability to older employees, who in traditional plans earned the biggest part of their benefits in their later years. In the new design, liabilities grow at a steady rate over the years, but often do not reach the heights of the defined-benefit plans they have replaced. 

Moreover, many companies with cash balance plans found that when they reduced their pension liability, the accounting rules gave them a boost to their bottom line.

Such pensions have given rise to lawsuits at a number of companies, but the I.B.M. case was the most closely watched because of the company’s size, the large amount of money at stake, and the initial victory the employees had won at the federal trial court level, in 2003. 

In that trial, the federal judge not only found I.B.M.’s pension changes illegal, but he reasoned that cash balance plans inherently discriminated on the basis of age — no matter which company put them in place.

This opinion, which angered many employers, was overturned by an appellate panel in Chicago that said that terms of the plan were “age neutral.” The I.B.M. plaintiffs had hoped to persuade the Supreme Court to reverse that decision.
“For I.B.M., for I.B.M.’s employees and for I.B.M.’s retirees, this sort of closes a book and produces certainty,” said Dallas L. Salisbury, president of the Employee Benefit Research Institute, a nonpartisan research center in Washington. 

But Mr. Salisbury said the I.B.M. case offered no one-size-fits-all answers. He pointed to a number of other lawsuits involving cash balance pension plans in other parts of the country, and said the plaintiffs in those cases were often disputing other issues or using different legal arguments and strategies.
In the Second Circuit, which covers New York State, Connecticut and Vermont, several lawsuits are still pending at the trial court level. Some courts have issued rulings that favor the employers, while some seem to favor the employees. 

“Others will have to wait and see what happens with court cases that haven’t been decided yet, or even to see if someone still sues them,” Mr. Salisbury said. 

For companies wondering whether they should set up cash balance pension plans, the Pension Protection Act — the far-reaching package of pension law amendments signed by President Bush last summer — offers some legal certainty. The act states that companies that convert to cash balance plans after June 30, 2005, cannot be held liable for age discrimination as long as they pass certain basic tests. The tests are intended to protect older workers from the benefit erosion that occurs when employers freeze more senior workers’ pension accruals for a period of time as the new plan goes into effect. This erosion is known among pension specialists as “wearaway.”

After the Pension Protection Act became law, the Internal Revenue Service began writing the regulations needed to administer it. The I.R.S. also announced in December that it was ending its longstanding moratorium on approvals of pension conversions to the cash-balance format. The I.R.S. normally helps companies make sure any changes in their pension plans are legal. 

In 1999, amid Congressional hearings and suits on cash balance pensions, the I.R.S. stopped issuing those letters when companies adopted the cash balance design. That has compounded the uncertainty for the roughly 1,200 companies that adopted such plans from 1999 to 2005.