November 30, 2005
Wednesday

WASHINGTON - Kathi Cooper has a lesson for anyone covered by a traditional pension or considering going to work for an employer who offers one: Study up on the future of the pension system, now that it's a pitched battleground in Congress and the courts.

Cooper, a University of Texas accounting graduate who has worked at IBM for 26 years, ran the numbers when her employer converted its pension to a cash-balance plan, and she figured out the change would leave her $400,000 the poorer in retirement.

So she and 130,000 IBM colleagues sued in federal court, where U.S. District Judge Patrick Murphy agreed with them that cash balance plans inherently discriminate by age because of the way benefits are calculated.

Traditional pensions reward length of service by weighting benefits to years of service and final salary, while cash-balance plans generally set aside a yearly sum that grows by a set percentage. That helps younger workers because the pension contributions grow more rapidly in early years. Such plans also save employers money because they're less subject to market fluctuations and serve today's mobile young workforce.

The 7th U.S. Circuit Court of Appeals will soon hear IBM's appeal even though the company settled other claims with a onetime $320 million payment to workers affected by the pension change. The settlement also limits IBM's liability to another $1.4 billion if it loses its appeal.

Meantime, the IBM case so chilled cash-balance conversions that they all but ground to a halt.

The Treasury issued a moratorium on conversions until the legal issues were resolved, then proposed an executive order declaring that cash-balance plans don't inherently discriminate by age. Congress, though, voted to stop the Bush administration from resuming approval of hundreds of pending cash-balance applications. Twenty-five percent of plans had converted before they came under a legal cloud.

Instead, the White House asked Congress to OK a new formula under which cash-balance benefits would have to equal the benefits under the old pension plan for five years after the switch.

A variation of that proposal is part of a larger pension reform bill to shore up the Pension Benefit Guaranty Corp. and improve pension solvency that passed the Senate 97-2 before Thanksgiving. Similar legislation goes before the House when Congress returns next week.

Chief House sponsor John Boehner, R-Ohio, said Congress must provide legal clarity for cash-balance plans that are "the future of the defined benefit system."

Employer groups agree that cash-balance plans are "the sole bright spot in the pension landscape," as American Benefits Council vice president Lynn Dudley put it. Otherwise, she warned, companies will continue to terminate traditional defined-benefit pensions, either by voluntarily dropping them or shedding pension payments they cannot meet onto the PBGC, which faces a $23 billion deficit since taking over U.S Airways and United Airlines pensions.

However, not all cash-balance plans are the same.

Congress' Government Accountability Office reports that workers generally lose retirement benefits when employers switch from traditional pensions to cash-balance plans - a conclusion praised by cash-balance critics. But its study didn't follow job changers to see if they were better or worse off when they took their cash-balance coverage with them.

Separately, AARP looked at the 25 largest cash-balance plans and found that 23 of them provide transition protections to older workers, with newer plans grandfathering veteran employees under the old "final-pay" formula.

"The study shows that the large majority of employers that have converted their plans not only recognize the importance of older workers to the current and future economy, but have been able and willing to ensure protections for employees facing cash balance pension conversions," said AARP federal affairs director David Certner.

"It's not a question of whether FedEx and Kroger should grandfather older workers; they can do it and are doing it," he said.

For instance:

- When Cincinnati-based Kroger changed its plan in 2001, it let the 67,126 active participants choose to be grandfathered under the old plan if they had five years' service and were 39 1/2 years old or if their age plus service totaled 50 years.

- FedEx Corp. of Memphis, Tenn., let its 137,000 workers choose to stay under the old defined benefits plan, with its monthly check for life, or go with the cash-balance plan for new employees when the change was announced in 2003. FedEx also set up hotlines and Web sites so workers could see how different scenarios affect retirement finances.

The 44 million Americans who still have traditional pensions should keep these examples in mind as the House and Senate work out their differences on pension reform:

- The Senate bill forbids cash-balance plans from freezing pension benefit accruals for veteran workers. It also lets pension-plan participants choose between old and new pension formulas for the first five years after conversion or if they are 40 or older and their age and service total at least 55.

- The House bill simply says that cash-balance plans henceforth meet all age-discrimination tests if a worker's benefits are equal to or greater than benefits of a "similarly situated" younger worker.

Not chancing it to courts alone, IBM employees and retirees are lobbying Congress not to desert older workers. As Kathi Cooper told lawmakers, any congressional compromise should "protect employees from the most egregious practices of the past while allowing the employer community flexibility to offer cash balance plans."

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