A Victory on Pension at IBM
— Malik Miah
A VICTORY WAS won for older workers at the end of September when the monopoly IBM agreed to pay $300 million to thousands of older current and former employees to partially settle litigation over its pension plan. The company and plaintiffs agreed to cap further damages an additional $1.4 billion. The settlement is of great importance to airline and other workers facing changes to their pension plans.
IBM is a global company raking in big profits, unlike the airlines that are in or tumbling toward bankruptcy. If IBM could get away with such blatant discrimination against older workers by voiding a promise made to them at retirement, then any company could arbitrarily change its retirement plan at a whim.
“The roots of IBM’s dispute,” wrote The Wall Street Journal after the settlement, “lie in the 1990s, when hundreds of employers converted their traditional pensions to cash- balance plans (which) slashed the pensions of millions of workers in their 60s by changing the way their pensions are calculated.”
In 1999, IBM changed its traditional defined benefit plan to a cash-balance pension plan. A traditional pension plan multiplies years of service by average salary, producing a benefit that escalates rapidly in value in later years. (It is a little different for union contracts, in most cases, where a set multiplier is used times the number of years of service.)
When a company changes to a cash-balance plan, it freezes the pension, which subsequently grows only by small annual increments based on a worker’s pay. As a result, older workers see their retirement income decline by 20% to 50%. (Union workers see cash-balances put in deferred-tax funds that don’t guarantee an annuity at retirement.)
After the company announced the change, the enraged employees pressured the Equal Employment Opportunity Commission (EEOC) to organize hearings. Later a memorandum by the Internal Revenue Service (IRS) refused to approve a cash- balance conversion, leaving it up to the courts and Congress.
Pension law also pushed back against IBM. It states that the “accrual rate” of a healthy plan can’t decline with age. The only exception is when a company files for a “distressed termination” as many steel companies did a few years ago.
A quasi-government agency, the Pension Benefit Guaranty Corporation (PBGC), has the legal right to take over the corporations’ pension assets and make up a portion of the underfunded fund. The workers lose a chuck of their guaranteed pensions. (Workers face that at United Airlines today.) The accrual rate rule only applies to fully funded pension plans.
The settlement involved one of the three class-action suits the lower court issued against IBM earlier in the year. The remaining suits are being appealed by IBM to the Seventh Circuit Court of Appeals. Congress could also enact new laws, declaring that changes in pension plans that discriminate against older workers don’t constitute age discrimination. The IRS could weigh in too.
IBM Seeks Damage Limits
Although the IBM workers who sued the company were non-union, their suit benefits all older workers. It sends a message to employers that arbitrary decisions to reduce costs and shift more resources to upper management and large shareholders, at the expense of employees who do the work, are not so simple.
Big business supports cash-balance plans because they allow companies to end their ties to former employees. Traditional plans generally allow annual annuities that the company continues to administer after retirement.
IBM faced a payout of $6.5 billion if a higher court upheld the lower court’s verdict. The plaintiffs (facing a long legal process) decided it was better to settle and pursue the broader issues that were not settled: Can a company convert a traditional plan as easily as IBM did? Are such conversions a form of age discrimination and thus illegal?
The settlement provided a conversion formula for current and recently retired older employees to receive much of what they earned under the previous pension plan. At the same time, “The settlement leaves unresolved the two claims in the class-action lawsuit that pertain to cash-balance pensions. IBM intends to appeal those claims. One remaining claim is at the very heart of the case whether cash-balance pension plans by definition discriminate against older workers,” reported The New York Times.
Douglas Sprang, one of the attorneys for the class action suit, said, “We ‘re confident the class will win any appeal, because under both the conversion formula and the cash-balance formula, older workers received less than their younger counterparts for no reason other than age.”
To put this behind the company, IBM executives have indicated that if the company loses the appeals, it agrees to pay up to $780 million as a remedy if the plan is ruled discriminatory, and $620 million if the transition to the new plan is also ruled discriminatory.
There are roughly 300 to 400 other companies with cash-balance plans. It is not illegal to do so but the issue of impact on older workers remains unresolved. Is it discrimination when an older workers loses 20 to 50% of a promised pension? The IBM conversion formula is a partial victory; but no court has yet ruled that the conversion is discrimination.
Currently there are discussions in Congress about new legislation, supported by big business, declaring that cash-balance plans aren’t inherently age discrimination. If passed, the new law would insulate other companies from similar class-action lawsuits.
Ultimately, the loud voice of the public, union and non-union employees will be key to pressure the courts, their legislators and the White House to protect hard-earned pensions.
While the direction is clearly away from defined-benefit plans, because Wall Street and big business oppose them and favor cash contribution plans that allow employers to wash their hands of former employees, the political fallout could be great enough to limit the blows to older workers.
Age discrimination is such a hot potato today precisely because “baby boomers” are beginning to retire and the typical American is living longer. The pension issue, along with Social Security, other savings accounts, and health care that are all needed to survive, is why any small legal victory is so important to us all.
ATC 113, November-December 2004