IBM OKs Partial Pension Conversion Suit Settlement

The company put out a statement emphasizing that it still believes its pension plan formulas are fair and legal. "The position that cash balance plans are unlawful seriously jeopardizes the security of an already fragile U.S. pension system," Randy MacDonald, IBM's senior vice president of human resources, says in the statement. "While IBM has the financial strength to deal with the ramifications of this case, many companies do not. If the ruling in this case is upheld, many companies will be forced to end their pensions, reduce the number of employees who receive pensions, or become noncompetitive which could result in job losses."

The Illinois court found that IBM's cash balance plan design was discriminatory, but other federal courts have found cash balance plans to be lawful, IBM says.

Background

A sponsor of a traditional plan calculates contributions based on a formula that depends partly on each participant's age or number of years of service. The traditional formula assumes that the participant will stay with the same employer for many years, and it assumes that early contributions can be smaller than later contributions because the early contributions will have many years to accumulate interest earnings.

A sponsor of a cash balance plan uses a formula that ignores each participant's age and years of service. The employer allocates a certain amount of cash for the pension contribution each year, then uses a contribution formula that depends mainly on participants' salaries and other compensation. The employer promises to provide only the amount of benefits that can be supported by the annual contributions.

Supporters of cash balance plans argue that they are better for modern workers, who tend to change jobs many times, but lawyers for older workers, including the IBM workers, say a formula that generates the same level of contributions for older workers and younger workers discriminates against the older workers because the older workers will receive less interest by the time they retire than the younger workers will.