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IBM case already affecting pension plans August 19, 2003 With
help from a federal judge, Kathi Cooper has thrown a monkey wrench into the
world of corporate pensions. In
late July, Cooper, 53, an internal auditor at International Business
Machines Corp., won a ruling that could make it tougher for companies to
convert traditional pension plans into "cash-balance" retirement
plans. U.S. District Judge G. Patrick Murphy, ruling in IBM v. Cooper,
found that the computer company illegally discriminated against older
workers when it switched to a cash-balance plan in the 1990s. Murphy
has not ruled on damages or indicated what changes he may order IBM to make
in its pension plan. But the decision already is having far-reaching
effects. About
400 companies that converted to cash-balance plans are trying to figure out
whether Murphy's ruling has derailed those plans. Hundreds of other firms
that expected to switch to cash-balance pensions this year are in a holding
pattern. The
ruling also has sparked new congressional resolve for pension regulation,
causing some consumer advocates to crow about the possibility of reforms
that would provide more protection for older workers. Cash-balance
plans gained popularity in the late '90s as a way for companies to reduce
mushrooming pension costs. About
44 million Americans are covered by traditional, or defined-benefit,
corporate pension plans, which promise to pay a retired worker a set amount
monthly for life. Traditional pensions tend to favor older workers,
especially those who remain with one employer for many years, because
benefits accrue much faster during their last years of employment. With
a cash-balance plan, workers have individualized retirement accounts that
are funded by the company. The amount that retired workers receive in
pension benefits is determined by how much money builds up in their
accounts. Unlike traditional pension plans, workers can take the money from
their cash-balance accounts with them when they change jobs, a feature that
makes them more suited to younger workers, who tend to change jobs more
often. By
1999, about one-fifth of the nation's biggest employers had converted their
traditional pensions to cash-balance plans. The Internal Revenue Service
declared a moratorium on approving conversions for tax purposes while it
analyzed allegations that the plans discriminated against older workers. Critics
contend that older workers often suffer when companies switch to
cash-balance plans. Cash-balance conversions sometimes can cause older
workers to stop accruing pension benefits for several years. Younger workers
in the same plan, however, continue to accrue benefits. The
results can be devastating, particularly for those 10 to 15 years from
retirement who are too close to retirement to rebuild their pensions before
they quit working. Court
filings in Cooper's case indicated that IBM expected to save $500 million a
year by converting to a cash-balance plan. Cooper said she and other older
IBM workers could not afford to have that savings come out of their pockets.
Until the penalty phase of the trial is complete, Cooper will not disclose
how much the cash-balance conversion cost her. But the loss was significant,
she said. Companies
that sponsor cash-balance plans contend that slower pension accruals for
older workers, though not allowed under the Employee Retirement Income
Security Act, or ERISA, the federal law governing defined-benefit plans, are
acceptable with cash-balance plans because these plans are a hybrid of
traditional pensions and defined-contribution pensions, such as 401(k)
plans. Murphy
disagreed, ruling that, if companies wanted to maintain the tax and
balance-sheet benefits of a traditional pension plan, the plan must conform
to all the requirements of the defined-benefit law. IBM
said it would appeal Murphy's ruling. Copyright ©
2002 Global Action on Aging
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