After Court Ruling, Employers Urged To Stay Calm On Cash Balance Plans

Employee benefit and pension specialists are urging employers to remain calm following a July 31 decision by a federal district court judge who found that IBMs conversion from a “traditional” defined benefit pension plan to a cash balance plan was unlawful age discrimination under the Employee Retirement Income Security Act. (See NU, Aug. 11, 2003.)

The case, Cooper v. The IBM Personal Pension Plan, has been certified as a class action covering about 130,000 employees and retirees. Next up is the issue of damages, and the thorny question of how to compensate the plaintiffs, given the substantial stock market losses recently suffered by many cash balance plans.

According to Judge G. Patrick Murphy of the Federal District Court for the Southern District of Illinois, such a conversion is age-biased because older employees collect lower benefits than their younger co-workers under a cash balance plan, as the interest, dividends and other earnings have less time to accumulate.

Under a traditional defined benefit plan, the employer guarantees a specified benefit at retirement. In a cash balance plan, each employee has a hypothetical account to which contributions and interest payments are credited, with the employer assuming the investment risk that contributions and earnings will be sufficient to pay a specific dollar amount upon retirement. (It differs from a defined contribution plan, where the employee assumes the investment risk.)

Actuaries and benefit consultants agree that employers should not take any immediate action respecting their pension plans until the appeal process in the IBM case has run its course.

“It was one judge going off on his own,” says Fred Rumack, national director of tax and legal services for Buck Consultants Inc. in New York. “There was forum shopping for a court that has a reputation for being pro-plaintiff.”

Bill Arnone, partner in the human capital practice at New York-based Ernst & Young, says the decision should surprise no one. “When you have a federal judge and ERISA, anything can happen.”

But the IBM case did serve an important purpose, according to Arnone. “This case lets employers know that there is a new era in which federal courts are likely to get involved in pension plans.”

Arnone continues, “When ERISA was passed in 1974, there was only one type of pension plan [defined benefit]. Congress hasnt refreshed the law since then, so the courts are stepping in.”

Adrien LaBombarde, a principal and actuary for Milliman USA in Houston, Texas, suggests that the judge ruled the way he did because he wants to send the issue of whether cash balance plans are age-biased “to the Supremes.” If the IBM case does go to the U.S. Supreme Court, LaBombarde seems confident it will be decided differently.

“For now, it is a victory for the plaintiff employees and retirees, but if you are a plaintiff, its not the kind of victory you want,” he notes. “There are no sound arguments [in the judges written opinion], no citation of precedents, little discussion and not much evidence of a basis for the decision. Plaintiffs hearts must yearn to see even a footnote of legal authority, but there is none.”

Also, parts of the decision are based on definitional and grammatical niceties involving the terms “accrual” and “accrued benefits,” in LaBombardes view.

Another problem with the decision in the IBM case is that it conflicts with the stance of the federal government and specifically the Internal Revenue Service, which permit cash balance plans and have not found them to be discriminatory, says Ari Jacobs, East Coast head of actuarial services for Chicago-based Hewitt Associates. “The government has recognized that these [cash balance] plans are an important component of the retirement system,” he adds.

“The IRS has proposed new regulations on cash balance plans,” notes Ernst & Youngs Arnone. “And they [the regs] do not find these types of plans to be age-biased and do not agree with the IBM decision.”

“Employers have no clear guidance now,” he adds. “One thing employers can do is to run both plans [defined benefit and cash balance] simultaneously and give retiring employees the one with the highest benefits, but that is costly and burdensome for employers.”

“This case is a plea to Congress to reclaim its proper role in regulating pension plans,” Arnone says.

In a statement to the press, Armonk, N.Y.-based IBM says it will appeal the decision. “To call such a [cash balance] plan age discriminatory makes no sense and ignores the fundamental principle of the time value of money. Under the courts interpretation of the law, every cash balance plan in the country is illegal,” the statement notes.

Eric Lofgren, global director of the benefit consulting group of Watson Wyatt Worldwide, IBMs Washington, D.C.-based pension consultant, says in a statement that the ruling is “the sad result of a tort system that allows plaintiffs to jurisdiction shop, where a high percentage of class-action suits are concentrated in a few plaintiff-friendly jurisdictions.”

Lofgren says Watson Wyatt “has every expectation that IBM will win its inevitable appeal conclusively.”

Millimans LaBombarde thinks it will be “years” until the final resolution of the question of whether cash balance plans are age-biased. “It will probably go to the Supreme Court,” he predicts.

LaBombarde also notes that in 2000, a federal district court in Indiana, in Eaton v. Onan Corporation, found no age bias in a cash balance plan.

Buck Consultants Rumack is urging employers not to panic about the IBM decision and to adopt a “wait and see” approach. Even in the unlikely event that the age bias finding is upheld, there will probably be legislation passed to the contrary, he notes. But Rumack adds that he is confident the decision will be reversed–or at least modified–on appeal.

“Employers should not make any changes in their pension plans at this point based on the IBM case,” Hewitts Jacobs says.

Gary Mogel is an assistant editor of NUs Property & Casualty edition.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 18, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.