Human Capital & Careers

IBM Pays Out in Cash-Balance Case

The company, however, is appealing a ruling that asserted that its pension plan illegally discriminated against older workers. An adverse judgment ...
Stephen TaubOctober 1, 2004

IBM will pay out $320 million to settle part of a class-action lawsuit relating to its pension plan. The settlement does not, however, address the critical issue of whether the company’s controversial cash-balance pension fund discriminates against older workers.

The U.S Seventh Circuit Court of Appeals is expected soon to rule on the issue. If it upholds a prior court’s ruling that cash-balance plans discriminate against older workers, IBM’s potential liability for the claims will be capped at an added $1.4 billion, according to the settlement.

Such a ruling could send a chill through the large slice of Corporate America that offer such plans, which are reportedly a good deal less costly to run than the defined-benefit plans that many of them replaced. Indeed, some experts believe that a decision that goes against IBM could be the death knell for cash-balance plans overall, according to press reports.

Since 1995, about one-fifth of large companies have converted their traditional defined-benefit pension plans to cash-balance plans, according to The New York Times. Altogether, there are more than 1,200 U.S. cash-balance and related plans in operation today, according to IBM.

Traditional defined-benefit pension plans offer retirees a monthly check for life based on their salary and the number of years they worked for the company. In cash-balance plans, by contrast, companies set aside a specific sum for each worker and guarantee that a minimum interest rate will be earned, the Times explained.

The reason this structure is thought to favor younger workers is that they would have more time to enjoy the benefits of compounding interest. If a company switches to a cash-balance plan from a traditional defined-benefit plan, on the other hand, a 45-year-old worker could ultimately collect half of the retirement benefits he or she would have collected, according to the newspaper.

Such structures are popular with companies offering traditional defined-benefit pensions because cash-balance plans can help them shrink their long-term pension debt while still providing retirement benefits, the Times reported.

The U.S. District Court in the Southern District of Illinois ruled last February that IBM owed compensation to roughly 140,000 current and former workers as a result of the switch to the cash-balance plan, according to Reuters.

The district court ruled that IBM’s cash-balance formula discriminates illegally against older workers because younger employees would earn more years of interest by the time they become 65 than older workers would, the company noted in a press release.

For its part, IBM contended that its cash-balance plan enables employees to interest credits at the same rate regardless of their age. The district court’s ruling “is not supported by judicial, regulatory or legislative authority,” the company asserted.

“That ruling potentially affects millions of American employees working for a broad spectrum of companies and nonprofits throughout the nation, ” IBM treasurer Jesse Green said in a conference call, according to the Times. The company “continues to believe that its pension plan is fair and lawful.”

On the other hand, Greene said, this week’s settlement “protects the company and our shareholders,” according to The Wall Street Journal. He added that even if it loses the parts that the company is appealing, “the remedies are within IBM’s ability to handle.”

Under the settlement announced Wednesday, IBM would pay at least $300 million to current and former employees to settle all disputes that arose when the computer giant changed its pension plan in 1995 to an interim one called a pension-equity plan, according to the paper.

Another $20 million will go to employees who had not been at the company long enough to earn a pension, the Journal reported.

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