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Age bias claim tested in IBM pension conversion case

By Brian Tumulty, GANNETT NEWS SERVICE

June 7, 2003

EAST ST. LOUIS, Ill. - In the next several weeks, a federal judge will rule on whether two pension plan changes IBM made in the 1990s discriminated against Kathi Cooper and 140,000 other U.S. employees.

Cooper, the 52-year-old lead plaintiff, stands to receive an annual pension of $21,475 under the first of the two disputed pension plans, which were instituted in December 1994 and July 1999.

But she would get slightly more, $21,666, if she were a year younger, and $22,221 if she were five years younger — even with no change in the number of years she worked for the company, according to her lawyers.

Getting older doesn't help.

"Essentially, at age 58, that's the last year in which the participant earns an age 65 annuity that actually goes up," lawyer Doug Sprong argued at a December court hearing. "In the next year, age 59, at the end of the year, this individual actually has an age 65 annuity that's worth $7 less than the one she had the year before."

The annuity Sprong speaks of is a traditional pension check a retiree or surviving spouse receives for the rest of his or her life after retirement. Age 65 is still the standard retirement age though it is not mandatory.

IBM's lawyers, in defense of the company's retirement plan, say Cooper's lawyers have made a fatal mistake.

"What the plaintiffs are doing is comparing employees who are different ages," Jeffrey Huvelle said.

"It's a mistake that fails to take into account the time value of money," said Huvelle, explaining that if Cooper waits to retire until the same year as her younger co-workers, she would earn a larger pension than them.

She also would have worked longer.

IBM spokeswoman Kendra Collins said the company won't comment on litigation but said, "We know our conversion to cash balance plans was the right thing to do for our long-term business goals, for ongoing talent strategies, and for the long-term needs of our employees."

The class-action lawsuit is the largest of several cases in federal courts challenging companies' contentions that these new pension plans, which are referred to as cash balance plans, are benign efforts to update retirement plans for a more mobile work force.

Flunking 'the decency test'

Unlike most of the lawsuits that have tackled technical issues, the IBM case is likely to produce a ruling on the larger issue of age discrimination. Federal age discrimination laws cover all employees age 40 or older.

"I'd like to see a judge with some courage to say the king has no clothes," said Norman Stein, a professor of law at the University of Alabama who testified at a recent IRS hearing on this issue on behalf of the Pension Rights Center.

"I think cash balance plans flunk on the decency test, and there's not anything compelling in terms of policy to have the courts bend the rules to accommodate them," he said.

The AARP, formerly the American Association for Retired Persons, also is critical of cash balance plans, which generally accumulate benefits at the same rate no matter how long a worker is employed.

"These suits are most significant for people who are in middle age and may see reductions in their benefits," said David Certner, director of federal affairs for the AARP. "For those who may already have put 10 or 15 years in a plan, you are talking about tens or hundreds of thousands of dollars that are at stake."

The tables have been turned on many middle age workers who have put in half or more of their careers under a traditional pension plan that confers meager benefits in the first few years on a job and skews benefits toward those nearing retirement, Certner said.

Just when midcareer employees are entering the period in which they could earn benefits that are more generous under a traditional plan, the new formula is introduced. It provides enhanced benefits for young employees, but the middle-aged workers don't get them because the benefits are not retroactive.

Cash balance plans operate under the same federal framework as traditional pensions that are paid as a monthly check, usually beginning at 65. But unlike traditional pensions that are offered for life, cash balance plans also offer and often promote the option of retirement benefits paid in one lump sum.

Advocates of cash balance plans say employers have learned from the earlier mistakes and most of the new plans avoid the pitfalls that led to the lawsuits from midcareer employees claiming benefit reductions.

Rita Metras, director of worldwide benefits at Eastman Kodak in Rochester, N.Y., said her company "has been held as a model even by critics of cash balance plans." All 39,000 Kodak employees were given the option of staying in the traditional pension plan at the time of the conversion in February 1999. Since March 1999, all new hires automatically are enrolled in the cash balance plan.

Recent conversions have followed that model. Memphis, Tenn.-based FedEx has given 133,000 of its employees until Aug. 29 to choose whether to opt into a new cash balance plan while all new hires since June 1 are automatically included.

"We are doing what we think is the right thing for our employees by offering them a choice," FedEx spokeswoman Linda Munoz said.

John Scott, director of retirement policy at the American Benefits Council, an employer group, said many companies have moved away from traditional pension plans because employees don't understand or appreciate the value of a benefit they won't receive until age 65.

"I think cash balance works pretty well for a more mobile work force," Scott said.

New rules may not clarify

At the Bush administration's urging, the Treasury Department is attempting to establish formal regulations for cash balance plans that will tackle the age-discrimination issue. Those final rules are expected this summer.

But don't hold your breath. They've been pending since Ronald Reagan was president.

In 1986, Congress enacted a landmark tax bill to simplify the Internal Revenue Service Code, wiping out many deductions and phasing in a top income tax rate of 28 percent. A new section was added to the Internal Revenue Code and to the 1974 Employee Retirement Income Security Act regarding age discrimination in pension plans.

Congress ordered the Treasury Department to issue final age discrimination regulations by Feb. 1, 1988, but proposed rules — issued as guidance to employers — were not put out until a month later and still have not been made final.

It's unclear whether 21st century regulations might save IBM, AT&T, Cigna insurance, Georgia-Pacific paper, Xerox and other corporations from court rulings that could undo all or some of the pension changes in the past decade. In 1999, the IRS stopped providing letters saying employers' pension plan changes appeared to be legal, which has made companies more hesitant to change them.

Georgia-Pacific, which lost an appellate court ruling and now is fighting a proposed settlement, could end up paying $200 million including penalties and interest to employees from its retirement plan, according to lawyer Eva Cantorella, who represented workers. The Xerox lawsuit the Chicago-based 7th U.S. Circuit Court of Appeals heard recently could cost that pension plan an additional $250 million to $300 million.

No assessment of IBM's potential liability is available. IBM's lawyers have warned the judge handling the case of its financial repercussions while the company publicly has downplayed any potential financial effects. Page 88 of IBM's latest annual report says, "Such loss should not have a material effect on the company businesses, financial condition or results from operations."

If IBM does lose, the immediate effect would be a change in the formula used to calculate lump sum payments or monthly checks to retirees or people who leave their jobs. The payments would be made over time and would come from the retirement plan, not directly from the corporation.

At worst, IBM's retirement plan might become underfunded and the company would have some time to make additional payments, according to Steve Katz, a lawyer for the IBM employees.

The controversy over cash balance pensions may not be resolved until the U.S. Supreme Court decides to hear one of the cases.

U.S. District Judge G. Patrick Murphy says his ruling in the IBM case may land in the high court.

"Neither side will take a loss in this case," he said in a recent interview. "Any significant civil case here will be appealed because there's so much money involved."

Lawyers who specialize in these cases say the real impetus for a high court review would be a conflict in appellate court decisions that would make certain practices illegal in some states but legal in others. Another possibility would be if an appeals court issued a split decision the justices might want to consider.

Generosity questioned

The IBM employees' case asks the federal court to toss out a 1994 pension credit formula that covers 61,000 IBM employees because it discriminates against workers as they get older. In addition, the lawsuit asks the judge to strike down the 1999 cash balance plan covering another 80,000 employees.

During three days of hearings in December and January, IBM's lawyers never addressed the issue of whether employees were better off with the new pension plans or if their benefits had been reduced. Instead, they focused on the fact that the retirement benefits remained generous by many standards.

Cooper thinks that comparing IBM's new retirement benefits to newer high-tech companies misses the point.

A widow and long-time IBM employee who works out of her home in Illinois, Cooper initiated the lawsuit in 1999, shortly after IBM converted to what it calls an "always cash balance" pension formula. She also opposed IBM's 1994 conversion to its so-called "pension credit formula" but couldn't find a lawyer to represent her then.

"IBM put me in the cash balance," Cooper said. "Then we all screamed, and they gave us a choice. But I refused to make a choice because they had reduced my pension either way."

Because of the outcry over its pension plan changes, IBM decided to allow 65,000 employees age 40 and older who worked 10 years or more with the company to opt out of the cash balance plan and stay with the 1994 plan.

Despite the fancy names given to the two plans, the company was reducing benefits with complex formulas too difficult for most employees to understand, Cooper said.

One of Cooper's lawyers, Sprong, also has filed cash balance pension lawsuits against the Bank of Boston and Xerox. He won the first in the 2nd U.S. Circuit Court of Appeals in New York and the latter in the same district court where the IBM case is being decided but before a different judge.

In the IBM case, Murphy has said the employees' side requires an interpretation of the law mandating that retirement benefits always use an annuity payable at age 65 as the benchmark. IBM's argument calls on the court to take into account the changing value of money over time.