NU Online News Service, Aug. 1, 2003, 7:03 p.m. EDT – A federal judge in East St. Louis, Ill., says the pension credit formula and cash balance formula that IBM Corp., Armonk, N.Y., used to reform its defined benefit pension plan in 1995 and 1999 have discriminated against older employees.
U.S. District Judge G. Patrick Murphy issued an order that rejected all of the motions IBM submitted in an effort to defend itself against a class-action suit filed on behalf of affected employees.
Murphy granted the requests of the plaintiffs in the case, Kathi Cooper et al. vs. The IBM Personal Pension Plan et al., for a summary judgment declaring that IBM’s cash balance formula has discriminated against older employees by violating Sections 204(b)(1)(G) and 204(b)(1)(H) of the Employee Retirement Income Security Act.
Subsection (G) prohibits employers from decreasing the amount of an employee’s accrued benefit on account of the employee’s age, and Subsection (H) prohibits decreasing the rate of an employee’s benefit accrual on account of the employee’s age.
The judge also ruled that “there is a triable issue of fact” regarding the plaintiffs claims that IBM may have partially terminated its defined benefit pension plan when it converted the plan into a cash-balance plan in 1999.
The judge has asked the plaintiffs and defendants to give him advice about what kind of relief the IBM plan members should get.
IBM reacted to the ruling by issuing a statement announcing that it will appeal the decision and blasting Murphy’s reasoning.
“IBM disagrees with the district court’s ruling and believes that it will prevail on appeal,” the company says. “IBM’s pension plan does not discriminate on the basis of age.”
IBM revamped its traditional defined benefit pension plan in 1995 by using a “pension credit formula” to create a pension equity plan.
The pension equity plan awarded employees “base points,” which were determined by each employee’s age in the year worked. Employees also earned extra points based on whether their five-year average earnings were above the Social Security compensation level. IBM then used a five-step formula to determine monthly retirement benefits. The formula included a “benefit conversion factor” that increased with an employee’s age, according to court documents.
In 1999, IBM switched to a cash-balance formula.
Every month, the pension account of each member of the cash-balance plan accumulates “pay credits” at a rate of 5% of the employee’s salary and “interest credits” at a rate 1 percentage point higher than the rate on 1-year Treasury securities, according to court documents.
The plaintiffs complain that the pension credit formula discriminated against older employees because it explicitly depended on an employee’s age.
The cash-balance formula is also discriminatory, because older employees have less time until normal retirement age to accumulate interest credits, the plaintiffs argue. The plaintiffs note that, because older employees have less time to accumulate interest credits, they end up with smaller annual pension payouts at retirement.