Across the United States, the pension rights of some 7 million workers taking part in 1,200 benefit plans have been on uncertain legal ground for more than a year, and clarity still may not come for another two years, at least. IBM Corporation, however, is about to push the issue to a higher level in the federal courts, seeking final answers in a case being followed avidly by the entire pension community.
At the center of this dispute is a type of pension plan that hundreds of companies have put in place to try to deal with a more mobile workforce - so-called cash balance plans or, as they are sometimes referred to, hybrid pension plans. That´s because they contain some of the features of a defined benefit plan with those of a defined contribution plan - one in which benefits at retirement are not fixed but vary mainly according to amounts contributed into a worker´s individual account. Most of those plans were adopted as conversions from the traditional defined benefit plans, but they still qualify as defined benefit plans under federal law.
The origin of these newer plans stems from the shifting attitudes and expectations of American workers, a rising number of whom have no intention of staying with one employer for a career yet want their retirement benefits to move with them to other companies. In addition, more workers - many women, for example - have found that their lives require them to move in and out of the workforce.
By pension industry estimates, more than 400 major companies now have variations of cash balance plans, providing benefits for more than one out of every four workers still in a defined benefit plan. Those plans are said to hold more than 40 percent of all defined benefit assets.
Despite widespread adoption of the new plans, some in the industry have begun to fear their total demise - if employers ultimately lose the broad legal fight that is highlighted by IBM´s coming appeal in a case titled Cooper, et al., v. IBM Corporation.
For Older Workers, the Rules Changed Abruptly
Kathi Cooper, a 21-year IBM employee who left the company four years ago, is the lead plaintiff in a class-action lawsuit that IBM shortly will appeal to the 7th US Circuit Court of Appeals, based in Chicago. The appeal poses a major test of age discrimination law as it applies to pension benefits and seeks new guidance on the meaning of a provision in the Employee Retirement Income Security Act of 1974 (ERISA). That provision bars employers from reducing the rate at which an employee´s pension benefit builds up, when that employee reaches a specified age.
ERISA challenges to cash balance plans have come in a cross-country legal assault by older workers. Their challenges, in general, have not fared well in the federal courts, except in one case - the litigation against IBM. And that one defeat has been enough to create turmoil and anxiety that has mushroomed, well beyond IBM.
IBM will be seeking reversal of two earlier decisions in its case. One found that IBM discriminated against its older workers when it adopted a cash balance plan in 1999. The second made the earlier ruling retroactive, thus requiring added benefits for older workers affected in the years between 1999 and this year. The result: a conflict with decisions by other federal judges in similar cases.
IBM Saves $500 Million But Draws a Lawsuit
At IBM, pension benefits before 1995 were controlled by a defined benefit plan, providing a specified retirement benefit for each employee based on a percentage of a worker´s salary for each year of employment. IBM made one round of changes in 1995, and those, too, were challenged as discriminatory based on age. The 1995 changes, however, are no longer in issue in court: IBM and its workers settled those claims in September with a one-time $320 million payment.
IBM´s ongoing challenge is to the two lower-court rulings on its 1999 changes, which created the cash balance plan, or hybrid plan. That plan set up a "personal pension account" for each worker, with the company allotting two kinds of credits each month: one credit equal to 5 percent of the employee´s salary, the other at 1 percentage point above the return on one-year Treasury securities.
If a worker leaves IBM, he or she gets the benefits - as a lump sum payment, a life annuity, or as a deferred payment or annuity. Accountants, the lower-court judge noted, had figured that this approach would save the company annually about $500 million by the year 2009, due to reductions of up to 47 percent in future benefits earned by older employees´ accounts.
It was that reduction in the rate of benefits that IBM´s older workers challenged and the judge found to be discriminatory. Money contributed monthly via the credits tied to the Treasury rate will be worth more to a younger employee than the same amount of money going into an older worker´s account - if the comparison is based upon what an annuity will be worth starting at age 65. The monthly contribution to the younger worker will have more years to accrue interest before normal retirement age, the workers complained.
Chief US District Judge G. Patrick Murphy agreed, finding an ERISA violation. As to the key phrase, "rate of benefit accrual," the judge ruled that "the best interpretation is that it . . . refers to an employee´s age 65 annual benefit and the rate at which that age 65 annual benefit accrues." He rejected IBM´s argument that there is no discrimination, because workers - older and younger alike - receive the same credits tied to Treasury rates each month, and the difference in their ultimate benefit simply arises from "the time value of money," the buildup of value the longer the money earns a credit.
IBM´s cause - which has become the cause of pension sponsors generally - may not end at the Circuit Court in Chicago. The issue seems likely to wind up in the Supreme Court, especially if the split that has already shown up at the District Court level also occurs among the Circuit Courts of Appeals. There also could be legislation.
The Treasury has urged Congress to act. It told the lawmakers last February that the split among federal judges "has created uncertainty about the basic legality of these plans. Removing that uncertainty is critical to preserving the vitality of the defined benefit system, which provides retirement income security for millions of American workers and their families."
About the Author
Lyle Denniston is a veteran Supreme Court reporter, having covered the highest court for 46 years. He thus has covered one out of every four Justices ever to sit on the Court. Denniston writes for Workforce Insights on www.veritude.com. Most recently with The Boston Globe, Denniston is now reporting on the Court for SCOTUSblog, a Web site devoted to news and information about the Court, and for the NPR Boston affiliate, WBUR.
