April 9, 2003

 

Testimony

 

Linda Guyer, President

CWA Local 1701/Alliance @ IBM

Communications Workers of America

 

Good Morning.  My name is Linda Guyer.  I have been employed by IBM for 22 years. I have worked in several parts of the corporation during my career, most recently in the Software Division in Endicott, New York.

 

I am here today representing the more than 600,000 members of my union – the Communications Workers of America and, in particular, the 5,000 members of the Alliance @ IBM, which is affiliated with CWA.  Unlike the vast majority of CWA members, our local organization has not yet achieved our goal of collective bargaining status with our employer.   So unlike the average union member, this status gives the members of the Alliance @ IBM a particularly keen interest in the regulations being discussed here today.

 

I would like to make four points today.

 

  1. The regulations, as proposed, will do nothing to protect employees of any company from the kind of pension changes which, in 1999, cut retirement benefits for IBM employees by as much as 50%.

 

  1. These regulations will allow employers to eliminate future pension benefit accruals for many older workers, just as they begin to approach retirement age, when the rate of benefit accrual is greatest. 
  2. With these regulations, the Treasury will legitimize practices which appear to many to be discriminatory and which have neither been addressed by the courts nor by the EEOC.

 

  1. And last, these detrimental effects will occur in spite of the fact that Congress has not yet acted to define the public will in the area of hybrid pension design.  The proposed regulations will preempt and circumscribe the arena for such congressional action.

 

I’d like to go into some detail on each of these topics.

 

1.     Cutting retirement benefits for long service employees

 

In 1999, IBM announced that it would be converting its traditional defined benefit pension plan to a cash balance design.  We quickly figured out that the new plan would make a disastrous cut in the benefits they could rely upon when they retired from IBM. 

 

My friend Garrett, who was 36 years old at the time, saw his lifetime pension drop by 20%.  Another friend, 39, was shocked to learn he lost 42%.  In my own case, I could not believe the numbers.  My pension would have been about one year’s salary, after 30 years of employment.  How could anyone retire on one year’s salary?

 

The source of these benefit cuts was the reduction of future benefit accruals and the subsequent reduction in benefits under early retirement eligibility rules. Under the then current plan, IBM employees could retire at age 55 if they had 25 years of service.  With the advent of the cash balance conversion, employees saw the present value of their accrued benefit reduced by unreasonable interest rates to establish opening balances which in no way reflected the benefit they expected to see at retirement.

 

Many of my fellow employees at IBM began their employment in their early twenties.  As a result, by the time they reach age 40, they have accumulated at least half a career, and more in many cases.  Despite their education attainment and skill levels, they have no interest in plying the labor market for marginal improvements in compensation.  They have families, mortgages and roots in their communities; job mobility is not a highly valued commodity.  Indeed, until IBM began to focus on cost cutting and inflating corporate results in 1993, very few employees believed they could have found a better employment situation than they had at Big Blue. 

 

Indeed, IBM promised good retirement benefits in exchange for lower-than-market salaries.  So for many, with a 25 or more years in the company, it was too late to earn a better salary elsewhere, and save more.  We expected that IBM would live up to its promise, and we’d retire with the guaranteed pension benefits we had earned.

 

IBM’s cash balance conversion ignited a firestorm of protest from its workforce.  Indeed it inspired us to organize and fight back.  We took our protest to a Senate hearing, to the press, and to the Stockholders in the form of a shareholder proposal.

 

After months of employee anger and negative publicity, the company decided to modify its conversion plan and offer workers aged 40 with 10 or more years of service, a choice between the old plan and the cash balance plan.  For those of us that knew which plan was best, this was a fair improvement.  For others, it may not have been enough.  The point is that IBM recognized that it needed to provide some transition to the new plan, even if only after its employees and the public at large expressed their extreme dissatisfaction with the company’s cash balance plans.

 

2.     Will not eliminate “wearaway”

 

A worker can be hurt in two related ways by a conversion.  First, ERISA protects the level of benefits she has accrued to date, but does not ensure that additional benefits will be earned in future years. Benefits accumulate more slowly for an older worker under the cash balance design than had been the case under a traditional plan.  However, no new benefits are added until the guaranteed level is exceeded.  This can take many more years than the older employee plans to work.  This is what is known as “wearaway”

 

Second, a worker may suffer additionally from the fact that upon conversion of his pension plan to cash balance the ERISA guaranteed benefit is frozen at that point in his career.  He may age into eligibility for early retirement subsidies, but the benefit for which he will become eligible will be that which was frozen years before.  The benefit he had expected will have largely evaporated.

 

In fact, I believe that the impact on older employees of a conversion to cash balance should be the primary concern that Treasury should address in these regulations.   Treasury should determine a safe harbor approach that requires a transition during which eligible employees can receive benefits according to the former plan, if that plan would better suit their circumstances.

 

3.     The appearance of age discrimination

 

Many employee benefit consultants have touted the value of cash balance and similar hybrid pension designs for workers that may hold several jobs during their working career.  The traditional pension plan design instead rewards long service and penalizes a worker that moves from job to job over his or her career.

 

It is also often noted that employees don’t recognize the value of a traditional pension plan until they are close to retirement eligibility and can anticipate the actual benefit they can expect to receive.  Hybrid plans, by contrast, offer an employer a greater “bang for the buck” because of benefit portability, that is, benefits can be received from the plan upon termination of employment whether the participant is young or old.

 

Oddly enough, while cash balance plans are credited for the greater benefit they offer to younger workers and their employers, the fact that workers who are well on their way to retirement eligibility stand to lose benefits when their plan is converted to cash balance seems to be less important.

 

Few if any cash balance plans have been instituted at the time an employer made the decision to begin to sponsor a pension plan.  Rather, the norm is for traditional plans to be converted to cash balance plans.  It is in this conversion process that the discriminatory impact is perceived.

 

In our view there is inherent discrimination in cutting future benefit accruals for older workers.  While the plan continues to operate and in fact, as mentioned above, improves the benefits available to younger workers, the standard cash balance conversion, which would be acceptable under the proposed regulations, freezes future accruals for many older workers and reduces those accruals for the rest.

 

Reduced accruals are most negative for older workers.  They lack a time horizon long enough to enjoy any advantage from the portability the plan offers, if in fact it were to be of any use at all, under their circumstances.  In addition, the benefit level they will ultimately accumulate will be significantly lower than they would have attained under their former plan.

 

For workers victimized by conversions to cash balance plans, it is not the fact that their benefit accruals are equal to those of their younger counterparts which is most troubling.  Rather, it is the bleak comparison of what they were about to earn under their former plan with what they will now earn under the cash balance plan.

 

4.     Congress has never acted to authorize cash balance plans.

 

The fact that cash balance pensions have never been the subject of legislative action in the US Congress has prevented that body from performing one of its most important functions as a branch of our government.  Rather than to utilize the legislative process to develop consensus and legitimize the inclusion of such plans in the lexicon of acceptable retirement income policy, we have seen this concept grow in the insulated world of corporate human resources, the clients of the consultants and actuaries who have developed “innovative solutions” to corporate problems.

 

Though Congress has agreed that the many and varied retirement plan vehicles enabled by the tax code should receive significant subsidies because they are critical to the security of the nation’s workforce, cash balance plans have, in effect, flown under the radar of the legislative process.  Instead, faced with the many problems enumerated here today, Treasury chose to slow the rush to cash balance conversions in 1999.

 

Until now.

 

I come before you to ask that these regulations be rescinded.  I ask that the

Treasury Department draft legislation that will address the many concerns presented by cash balance conversions and allow the legislative process to go forward to enable the will of the American people to be expressed in a legislative solution to these problems.

 

Thank you.