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Kathi Cooper, a 54-year-old finance worker at IBM, says her basement
is crammed with thousands of letters, e-mails and phone messages from
middle-aged employees around the country—"people inside IBM, people
outside IBM"—cheering the recent settlement in her lawsuit against the
company and its switch to a cash-balance pension plan.
The big-money case isn't over, and neither is the controversy, but
experts say the lawsuit has already strengthened the hand of other
workers facing changes in their pension plans.
In a case watched by businesses and employees across America, Cooper
and her co-workers sued IBM in 1999, arguing that its switch to a
cash-balance plan from a traditional defined benefits plan
discriminates against older workers and decimates their promised
benefits. IBM contends the new plan is lawful, fair and fiscally
sensible.
Traditional plans pay a monthly sum determined by salary and years
of service, which means benefits grow slowly at first, increasing later
in the employee's career.
In cash-balance plans workers earn benefits at an even, steady pace
over the years. That means a 25-year-old stands to earn more under a
cash-balance plan than a 55-year-old because he will have more time to
amass benefits and compound interest. And young, mobile workers can
earn larger sums sooner because they don't have to wait for the
traditional end-of-career spike in benefits.
For older workers who have been in a traditional plan—where benefits
increase dramatically after many years of service—the switch to a
cash-balance plan can slash their retirement benefits by 20 to 40
percent.
"A pension is deferred compensation," says Cooper. "We earned it,
and they can't keep it or put it in the pockets of younger workers."
The federal District Court judge in Cooper's five-year-old Illinois
case had ruled in two earlier decisions that the company's cash-balance
plan, and the way it converted to that plan, violated federal pension
law that prohibits discrimination based on age.
Although IBM plans to appeal those two rulings, it recently agreed
to settle other claims in the suit with a one-time payment of $320
million to the more than 130,000 workers affected by the pension change.
The employees agreed that even if IBM loses both appeals, its
liability in the case would be capped at an additional $1.4 billion,
still a substantial payout.
Many on both sides of the issue say that IBM's partial settlement is
a bracing reminder that unless the change to a cash-balance plan is
done with care, it can be costly. And most agree that middle-aged
workers confronting similar changes are now in a better position to
protect their retirement benefits.
The House of Representatives recently voted 237-162 to prohibit the
government from trying to use regulations to overturn the IBM rulings
against cash-balance pensions. There was a similar House vote a year
ago, but the sponsor of both measures, Rep. Bernard Sanders, I-Vt.,
argued that Congress needed to reiterate its opposition to cash-balance
plans that don't protect older workers.
Since the 1990s, several hundred major companies with millions of
employees have moved away from traditional pensions because
cash-balance plans reduce future pension liabilities so a company's
books look better and its profits rise. Cash-balance plans are so
attractive that companies have been willing to endure bad press,
disgruntled employees and even lawsuits to convert to them.
The suit against IBM has slowed the rush of companies converting to
cash-balance pensions, and recent conversions have been done "in a way
that has been slightly more protective of employees," says Karen
Friedman, policy director for the Pension Rights Center in Washington.
"Lots of companies have changed their practices … recognizing that this
is a controversial and—in our opinion—illegal practice."
James Klein, president of the American Benefits Council, an
employers' group, agrees that the case has slowed conversions.
Companies that are proceeding with the change "are very, very cautious.
It's added to the whole climate of uncertainty surrounding cash-balance
pensions."
Klein also says even a final decision in the IBM case—which analysts
say could take another two years—won't ultimately decide the fate of
cash-balance pensions.
"If the employees are upheld on appeal," he explains, "it would be a
terrible development for business. And even if IBM wins the appeal,
that won't stop other employees from bringing other suits. We need
Congress to weigh in and clarify the situation."
And many experts think that will happen in the next year. "I think
Congress will get involved before this case is resolved," says Mary
Ellen Signorille, an AARP attorney who specializes in pension cases.
"We may see some kind of legislation that legitimizes cash-balance
plans if you have provisions—such as allowing long-term workers to stay
in traditional plans—to protect older workers."
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