The Cash-Balance Battle Grinds On

By Michelle Rafter

Nov. 1, 2004

Give round one to Kathi Cooper. She’s the IBM employee whose lawsuit over the computer giant’s conversion to a cash-balance plan helped transform the plans from one of the most popular kinds of corporate pensions into one of the most controversial, and contentious.

    In late September, IBM agreed to a partial settlement of the class-action suit, saying it would take a $320 million charge against third-quarter earnings to end all but two claims. IBM also agreed to a $1.4 billion cap for any additional liabilities it might be held responsible for, bringing to $1.7 billion the total liability the company could face in the matter.

    But the fight is not over. IBM is still contesting claims at the heart of Cooper’s 1999 suit that the formula it used to convert to a cash-balance plan discriminated against older workers in violation of federal pension laws. In July 2003, a U.S. District Court judge ruled in favor of Cooper and 140,000 IBM employees. IBM is appealing that ruling to the 7th U.S. Circuit Court of Appeals. A verdict could be more than two years away.

    The immediate impact of the IBM settlement on other cash-balance lawsuits appears minimal, but an appellate court ruling could have long-term repercussions for the industry, pension experts and others say.

    Approximately 40 percent of assets in single-employer, non-union defined-benefit plans in the United States are held by cash-balance or similar plans, according to Mercer Human Resource Consulting, which advises companies on pension matters. Since lawsuits such as Cooper’s that challenge the validity of cash-balance plans began appearing in the late 1990s, many companies have frozen their contributions or moved to defined-contribution plans. Some have chosen to stop funding pensions altogether.

    If an appeals court in the IBM case lets the lower court’s ruling stand, it could have a further chilling effect, says Ethan Kra, chief retirement actuary with Mercer Human Resource Consulting in New York. “It would be devastating, and would lead to massive plan termination,” Kra says.

    That’s not true, says Cooper, 54, a 25-year IBM veteran who’s become an active pension reformer since filing her suit, traveling to Washington, D.C., to lobby for fair treatment for older workers and retirees. “They’ve said the entire pension scheme of America could be affected, that everyone will go bankrupt. That’s the phoniest spin they created.”

    Meanwhile, other cash-balance suits are ongoing. AT&T spokesman Andy Backover wouldn’t comment on a pending suit brought by managers in 1998 over the company’s conversion to a cash-balance plan. Similarly, CIGNA retirees sued in 2001 over the company’s conversion to a cash-balance plan, claiming age discrimination. The suit is pending, and a company spokesman wouldn’t comment. Stephen Bruce, an attorney for plaintiffs in the CIGNA suit, says that while an appellate court ruling on IBM’s case wouldn’t set a precedent for the CIGNA matter, it could still have an impact. “They’d listen to what was decided,” Bruce says.

    Even before IBM’s case is resolved, federal lawmakers are expected to pick up next year where they left off earlier this year in drafting new pension guidelines. “I would be shocked if we get through next year without legislation,” Kra says.

Workforce Management, November 2004, p. 24Subscribe Now!

Michelle Rafter is a Workforce contributing editor.

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