Treasury Allows Some Pension Freeze
By Ellen E. Schultz and Theo Francis
The Wall Street Journal
Saturday, February 2, 2008
Under intense pressure from employers, the Treasury issued a
ruling that allows companies to freeze the pensions of older
workers in certain cases without running afoul of laws meant to
protect employees' nest eggs.
In addition to validating some pension rollbacks that could save
companies billions of dollars, the Treasury's action also could
tip the outcome of long-running lawsuits alleging age
discrimination by pension plans at AT&T Corp., Cigna Corp., Dun
& Bradstreet Corp., El Paso Corp., and other major companies.
The stakes are huge: In just the AT&T case, nearly 24,000
current and former workers had opted into a class action as of
December, with potential claims exceeding $2 billion.
The companies declined to comment.
The crux of the issue is whether employers that change from
traditional pensions to so-called cash-balance plans can freeze
the growth of older workers' pensions for months or years
following the change -- a phenomenon called "wearaway" -- even
as younger workers' pensions continue to grow. Many
companies let employees remain in the old plan for a time, but
that only delays the onset of wearaway. The Treasury ruled
that decades-old laws that effectively prohibit companies from
temporarily freezing pension growth don't apply when the freeze
The new rule covers certain plans through 2008, and the Treasury
said it intends to issue a rule extending it beyond Jan. 1,
"The agency charged with enforcing a law to protect older
workers has blown a hole in it," says Laurie McCann, a senior
attorney at the elderly-advocacy group AARP.
The Treasury says it is just interpreting existing law.
Over the past decade, hundreds of employers shifted from
traditional pensions to cash-balance plans. This saves
companies money because instead of calculating benefits by
multiplying years of service and salary, which produces rapid
pension growth in the later years, the company converts the
pension to a cash-out value. This becomes an account that
then grows at a flat annual rate, commonly about 3% of pay.
Many companies low-balled older workers in establishing an
opening account balance, setting it at, say, $80,000 even if the
cash-out value was worth $100,000. The older person's
pension thus was effectively frozen, since it would take years
to grow back to the amount the worker was entitled to at the
time of the changeover.
Thousands of employees sued, arguing that this violated a law
requiring that pension growth occur with a certain steadiness --
for example, it can't fall to zero, then jump. The rules
were intended to prevent abusive pension practices, such as
having a "backloading" formula whereby a person could earn
almost no pension for 19 years, and then have 90% of the pension
benefit kick in at year 20. The problem: employers could
fire people in year 19 to avoid paying them a bigger pension.
Some courts sided with employees in wearaway cases;
wearaway was one of five claims in a suit that International
Business Machines Corp. settled for $320 million in 2003.
(In 2006, IBM won its appeal on the age discrimination claim in
In response to a continuing outcry, Congress banned wearaway in
the 2006 Pension Protection Act, explicitly saying that
companies adopting cash-balance plans after June 2005 must give
everyone the full present value of their pension.
Lawmakers didn't address companies that had already converted
their pensions. But they did open the door for the IRS to
begin reviewing plans dating back to 1999, and in a review of
more than 1,250 cash-balance plans last year the agency found
widespread backloading violations. The agency could have
required companies to pay out billions of dollars more in
pension benefits to current and future retirees.
Employers responded with a volley of lobbying, enlisting more
than two-dozen lawmakers to ask the agency to back off.
Friday's action by the Treasury suggests the campaign was
effective. The Treasury and IRS are now agreeing that
employers aren't violating backloading laws when they give
employees a pension option that delays wearaway but doesn't
Treasury spokesman Andrew DeSouza says the backloading rules
were enacted decades before cash-balance plans were designed,
and that the ruling "provides clarity on how the backloading
rules work in the context of cash-balance plan conversions."
Write to Ellen E. Schultz at
and Theo Francis at