Ruling Paves Way For Changes to Pensions
Appeals Court's Reversal Of Discrimination Finding To Aid
By Ellen E. Schultz and Theo Francis
The Wall Street Journal
Tuesday, August 8, 2006
A federal appeals court reversed a lower court's finding
that International Business Machines Corp.'s pension plan
discriminated against older workers.
The ruling, which involved IBM's move to change from a
traditional pension to a cash-balance pension plan, may spur
more companies to make the switch, employers say, and may
have implications for some of the roughly 400 companies with
a total of more than 1,200 cash-balance plans among them.
"A number of companies have held back" in converting
defined-benefits plans to cash-balance plans because of
concerns raised by the IBM case decision, says James Klein,
president of the American Benefits Council, a
Washington-based group that lobbies on pension issues and
supports cash-balance plans. He said the ruling, combined
with last week's congressional pension reform that deemed
cash-balance plans aren't age-discriminatory, "will give a
green light for companies to make the conversion."
"We think it affirms the fair and legal decision that we
made in 1999" to convert the plan, said J. Randall "Randy"
MacDonald, IBM's senior vice president for human relations.
The computer maker had settled other aspects of the lawsuit
for $320 million and had agreed to pay additional benefits
of $1.4 billion to 140,000 current and former workers if it
lost its appeal on the age-discrimination claim.
The plaintiffs, who are current and former IBM employees,
intend to ask the full appeals court to reconsider the
ruling, saying it ignored key legal distinctions between
pension plans and defined-contribution savings plans. The
decision "disregards the statutory provisions expressly
enacted by Congress to protect older workers from age
discrimination," said a spokesman for the plaintiffs.
Pension advocates, older employees and the AARP have been
distressed by the conversion to cash-balance plans because
the move typically reduces the pensions of older workers
significantly. In a traditional pension, benefits are
calculated by multiplying years of service by average
salary, producing a pension that grows steeply in one's
later years on the job. When companies change to a cash
balance pension plan, the former pensions are essentially
frozen, and the value of their cash-out value is converted
to an "account." This hypothetical account grows each year
with credits, based on pay, plus interest.
When older workers are shifted from a traditional pension to
a cash-balance plan, they lose the steep buildup of pension
benefits and can end up with pensions that are 20% to 50%
lower. Most companies that adopted the cash-balance formula
had large older work forces. What's more, some companies
also froze the cash-balance credit for older workers, so
that after the switch they didn't earn anything under the
new cash-balance plan either for a period of months or
years, while younger workers began to build up benefits
right away. Both of these outcomes led to charges of age
While it is legal to reduce or eliminate a pension going
forward, it is illegal under pension law to provide a
pension accrual that declines with age. Employers with cash
balance plans don't dispute that this happens, but maintain
that because the pension is intended to look more like a
"defined-contribution" plan, such as a 401(k), the age
discrimination rule shouldn't apply.
Writing for the Seventh U.S. Circuit Court of Appeals in
Chicago, Judge Frank Easterbrook accepted IBM's position
that because its pension plan resembles a
defined-contribution plan, it shouldn't be deemed
discriminatory. The judge noted that because workers of all
ages in the IBM plan received an annual 5% pay credit, the
plan couldn't be said to be discriminatory. That younger
workers had many more years to earn interest, and thus would
end up with larger pensions, he said, wasn't illegal.
"One need only look at IBM's formula to rule out a
violation. It is age-neutral," Judge Easterbrook wrote.
Norman Stein, a University of Alabama law professor
specializing in pension law who also has served as a
consultant for employees suing over cash-balance plans, says
the ruling essentially ignores the law, which treats
defined-benefit and defined-contribution plans very
differently, even if they can resemble each other
IBM's pension saga started in 1999 when it changed its
pension formula. The ensuing employee backlash led the
Internal Revenue Service to stop approving the plans and to
calls for legislation to protect older workers when their
pensions are changed.
Employees filed suit in 1999; a federal court in Illinois
ruled against IBM in 2003, finding that the company had
discriminated against older workers.
--William M. Bulkeley
contributed to this article.
Write to Ellen
E. Schultz at
firstname.lastname@example.org and Theo Francis at