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It May Be Time to Plumb Your Pension's Depths

By MARY WILLIAMS WALSH

NY Times, December 15, 2002

Tim Parker for The New York

Times Kathi Cooper, who works out of her home in Bethalto, Ill., is the lead plaintiff in a lawsuit challenging I.B.M.'s pension conversion.

AT least 23 million Americans work for companies that offer traditional pension plans — the kind that provide a fixed monthly income based on length of service. For many of them, the pension regulations proposed last week by the Bush administration pose a threat to their future retirement. The new rules would make it easier for cost-conscious companies to switch to another type of pension plan that would shrink their pension liabilities, reducing some employees' benefits.

"The switch to a cash-balance plan is tantamount to a pension pay cut for older workers unless they get adequate transition protection," said J. Mark Iwry, former benefits tax counsel at the Treasury Department during the Clinton administration.

Nothing about pension accounting is easy or straightforward, and the prospect of curling up with a thick pension plan document laden with charts is, well, repellent. But the amounts at stake are so vast that it may be well worth the trouble of parsing the plan, and learning your options, if you are among the people notified in the coming months that your employer is changing its pension.

The proposed regulations do not affect everyone. They do not apply to employees whose companies offer only 401(k) plans, sometimes called defined-contribution plans. In a 401(k), employees contribute from their pay; employers often match a percentage of that contribution.

The regulations refer only to traditional pensions, known as defined-benefit plans, which have a contractual obligation to pay workers a set monthly stipend from retirement until death.

Nor will the proposed regulations affect retirees who are already receiving pension checks; pension benefits cannot be reduced once they have been earned. And younger employees have little to fear from the proposed regulations. Most at risk are middle-aged and older workers who have been at their jobs for many years. In traditional pensions, workers build the biggest part of their benefits near the end of their careers.

But even for employees who are in their 40's or older, the proposed pension rules do not necessarily mean a loss of retirement benefits. In recent years, some companies fearful of age-discrimination suits have changed their pension plans in relatively gentle ways, offering provisions that cushion older workers from the harshest effects.

"These may not have made employees whole, but they helped," said David Certner, director of federal affairs at AARP.

The tricky part for employees will be to cut through the professional jargon and euphemisms that companies often use to describe pension conversions, and to figure out whether their employer's conversion is one of the gentler ones. The new regulations offer little practical help with that.

AT issue are conversions of defined-benefit plans to cash-balance plans. These are hybrids that are funded by the company and insured by the government, the way defined-benefit plans are, but that build a balance that can be rolled over into another tax-deferred account when employees change jobs, in the style of defined-contribution plans like 401(k)'s. In the cash-balance plan, employers contribute to each account based on a set percentage of pay for all participants, and each employee's holdings usually accrue the same rate of interest.

Hundreds of companies made conversions to these plans in relative obscurity in the 1980's and 1990's — until 1999, when older workers at I.B.M. realized midway through a conversion that the company was stripping them of anticipated retirement benefits often worth hundreds of thousands of dollars each. The issue remains tied up in court.

The I.B.M. workers rallied. Congressional hearings and age-discrimination suits followed. Amid the outcry, the Internal Revenue Service, which as part of the Treasury Department regulates corporate pension plans, stopped approving conversions while it studied the legal issues. The moratorium did not stop all companies from converting pensions, but the uncertain legal environment made them move much more cautiously, and to sometimes offer sweeteners.

First, the proposed regulations make clear the position of the Treasury Department that cash-balance pension conversions are not inherently discriminatory by age. And because there are several ways to design a pension conversion, the regulations lay out conditions that employers must meet to make their changes legally bulletproof.

"Many would say that the proposed regulation has set the bar too low," Mr. Iwry said. However, he added, the regulations might reflect, among other things, possible concern within the Treasury Department about whether it has enough authority under current law to provide additional protection for older workers during conversions.

"The regulation can be viewed as a first step," he said. "Congress could do more to give additional protection to older workers without stopping cash-balance plans."

It will still be very difficult for employees to figure out whether their company's plan clears the bar. Some of the most important elements of a pension conversion also pose the most vexing accounting issues.

A good example is the "opening account balance" that a company may assign to each older employee during the conversion, to credit him for the traditional pension benefits he has built up under the old plan. (Some plans, however, may not assign opening balances.) To calculate the opening balance, companies transform a stream of future monthly payments into a single lump-sum present value. Students of finance know that all the future monthly payments cannot just be totaled; they must be telescoped forward in time, using an interest rate.

But which rate? The company, or its consultant, decides. And a company eager to save money will want to choose a higher rate, because doing so will make each employee's opening account balance smaller. (In pension accounting, as in other financial transactions, the higher the interest rate, the lower the present value.)

The proposed regulations offer considerable latitude in selecting an interest rate. "For the purpose of determining your initial cash balance, these regulations just say to use `a reasonable rate,' " said Norman Stein, a pension expert and visiting professor at the University of Maine Law School. "There's going to be a lot of discussion of what's `reasonable,' I can guarantee you."

Mr. Stein noted that the Internal Revenue Code previously imposed a stricter standard, requiring companies to use the 30-year Treasury bond rate in calculations that compare lump sums with streams of payments over time. Unless Treasury officials are persuaded in the coming 90-day comment period to amend this aspect of the regulations, he said, "employees are going to have to be vigilant in looking at their opening account balance and how it was determined."

Unless you are a bond trader or an actuary, you probably cannot do this on your own. Employees who have already traveled this road say it may be worth consulting an actuary or specialized accountant.

"We've had employees who have had to purchase time from an actuary, which is about $500 an hour," said Kathi Cooper, 52, an I.B.M. accountant and the lead plaintiff in a pending suit against that company's pension conversion. She calculated that I.B.M.'s pension changes would cost her $400,000.

"It's easy for people like me to figure this out, because I graduated magna cum laude, University of Texas, in accounting," Ms. Cooper added. "If the Treasury really wants to help American employees today, they've got to make regulations that will force employers to disclose this stuff in eighth-grade language. There are millions and millions of employees out there that don't have a clue what's going to happen to them."

MS. COOPER also has advice for employees who cannot afford to hire an actuary: go to the Internet and start learning about how pension conversions work, and how your company's conversion measures up against industry norms.

A good starting place for employees is the Web site cashpensions.com, which was created by I.B.M. employees and explains certain technical issues. It also offers sample letters to regulators and elected representatives, asking for more protections for workers, and provides news on pending pension litigation and links to other sites with benefits calculators.

Some employees of other large companies that have converted pensions have started their own Web sites, some of which contain bulletin boards where colleagues and workers from other companies can post pension questions. Ms. Cooper helped start ibmpension@yahoogroups.com.

What if you don't like what you find?

Speak up, Mr. Iwry advised. "Tell the company your concerns about how the conversion would affect you, and ask for information about the potential impact," he said. The company probably will not abandon the conversion, he said, but it may improve the terms for longer-tenure employees. Companies want the savings and flexibility that conversions offer, but do not want to make employees bitter, draw adverse publicity or set a unionization drive in motion.

"There's a lot you can do," Ms. Cooper said, adding that many companies have procedures for employees who want to get the appropriate executive's ear.

"Try the open door, or the executive round table, where you can come forward and talk to the executive," she said. "Don't yell at the executive. Talk to the executive. And say, `If you're going to do this, would you consider grandfathering anyone over 50?' Be proactive."

"When I first filed suit against I.B.M., of course I was afraid," she added. "But I was more afraid of retiring and eating cat food. That was my impetus."