Pension tension mounts over cash-balance plans

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Pension tension mounts over cash-balance plans

By Mary Deibel, Scripps Howard News Service

August 11, 2003

If Kathi Cooper hadn't graduated from the University of Texas with top honors in accounting, she might not have known that IBM's decision to convert its traditional pension to a cash-balance plan would shortchange her retirement by $400,000.

"I couldn't believe that cutting our pension payout to benefit younger workers wasn't age discrimination," says Cooper, 53, a 24-year IBM veteran from Bethalto, Ill., who just won a federal court victory for herself and 130,000 coworkers.

Cash-balance plans, adopted to save companies money, are tailored to a mobile work force with portable benefits that accrue evenly over the employee's tenure with each company. Traditional pensions reward longtime employees, with most benefits building up during the last, high-paid years.

IBM will appeal U.S. District Judge Patrick Murphy's ruling that cash-balance plans amount to illegal age discrimination. Separately a federal appeals court in Chicago ruled that Xerox must pay more than $270 million for low-balling cash-balance lump-sum payments to 13,000 former employees.

Both rulings likely will step up pressure on the Bush administration and Congress to act on cash-balance plans.

"Cash-balance plans are the one ray of hope on the traditional-pension horizon," says general counsel Lynn Dudley of the American Benefits Council, the Fortune 500 firms' benefits group.

"The choice employers still have is to freeze their pension plan and walk away from it, and the administration and Congress don't want that."

Cash-balance plans are less costly to run and help boost an employer's bottom line at a time when many companies are killing traditional pension coverage entirely. As of 2002, there were only 30,660 traditional plans, compared with 112,208 in 1985.

Even so, those 30,660 plans manage $1.5 trillion in pension assets that cover 23 million current workers and pay more than $111 billion a year to 21 million retirees.

Those plans face a collective $260 billion shortfall in what employers have promised to pay current and future pensioners because of the three-year bear stock market and historically low interest rates.

Although a rebound by the stock market could help restore the plans' health, employers are scrambling in the interim to cut pension costs, come up with money to fund their plans and win Uncle Sam's approval for cash-balance conversions.

IBM and Xerox were among 400 big companies, starting in the 1980s, that converted to cash-balance plans.

But the Internal Revenue Service, which must sign off on major pension plan changes because of the huge tax write-offs plan sponsors get, suspended cash-balance approvals in 1999 to study whether they amount to age discrimination. The Bush administration proposed finding that cash-balance plans don't inherently discriminate against older workers. More than 300 firms are awaiting conversion approval, pending a final rule.

That final rule will conflict with new court rulings that "question the legality of hundreds of cash-balance and pension-equity plans," warns Mark Ugoretz of the ERISA Industry Committee, a benefits trade group.

Pension Rights Center founder Karen Ferguson, a critic of cash-balance conversion, says the rulings are "crystal clear" that the plans violate current law.

Letting older workers choose between traditional pensions and cash-balance plans can minimize court challenges.

But "lawsuit inoculation is impossible when employees can always say, 'If only I knew then what I know now,' " says Dallas Salisbury, head of the Employee Benefit Research Institute.

Salisbury expects court suits if Congress and the administration don't clarify the law.

Still, some employers are giving older workers a choice:

· Verizon predecessor Bell Atlantic backed off a cash-balance conversion in 2000 when longtime workers revolted against losing their traditional pension. Janice Winston, a 29-year veteran who led the employee campaign, recently got a $400,000 payment on retiring at 50. That's $215,000 more than the cash-balance plan would have paid.

· FedEx workers decide by Aug. 29 if they will keep their traditional pension or go to a cash balance plan that covers all new hires starting June 1. Either choice won't cut benefits accrued by company veterans, who can go online or call a phone hot line to see how they would fare under different scenarios, says FedEx spokeswoman Sandra Munoz.

"Single parents tell us they like the new plan for letting them leave their pension to their children when traditional plans can go only to a surviving spouse," Munoz says. "In any case, we want to do right by our people, whether they're older employees who have counted for years on their pension or younger workers who have different needs and do move on."