Human Capital & Careers

Read Blue’s Lips: No New Pensions

New hires at IBM will instead be offered an expanded version of the company's 401(k) plan; an appeals court is still weighing the company's existin...
Stephen TaubDecember 10, 2004

In a move that could potentially rock the shrinking world of defined-benefit pension plans, beginning in 2005 International Business Machines Corp. will no longer offer its pension plan to new employees.

New hires at IBM will instead be offered an expanded version of Big Blue’s 401(k) plan. The current 346,000 workers with pension plans will not be affected by the decision.

The decision could have wide implications. A number of existing defined-benefit plans are in dire financial shape and threaten to sink the Pension Benefit Guaranty Corp. if that government agency is forced to bail out too many of them at once — notably, those offered by airlines.

IBM, in particular, has been under attack for changing its traditional pension plan to a cash-balance plan — a hybrid that discriminates against older workers, according to critics. Earlier this year the company agreed to pay out $320 million to settle part of a class-action lawsuit relating to its cash-balance plan; the settlement did not, however, address the issue of discrimination.

The U.S Seventh Circuit Court of Appeals is expected soon to rule on that issue. If the court upholds a prior ruling that cash-balance plans illegally penalize older workers, IBM’s potential liability for the claims will be capped at a total of $1.7 billion, according to the settlement.

Despite these developments, an IBM spokeswoman told The New York Times that the company was “still committed to defined-benefit pensions.” Even so, the company conceded that its decision to move new employees into 401(k) plans reflects IBM’s desire to keep compensation in line with the pay and benefits offered by its competitors, according to the report.

Under the revised version of IBM’s 401(k) plan, new employees will be able to put 6 percent of their annual pay into the plan, and the company would match those contributions dollar for dollar — double the current rate at which IBM now matches employee contributions, according to the report.

The Times surmised that one reason for IBM’s decision to no longer offer cash-balance plans to new employees might be related a change in accounting rules for pensions, expected to take effect next year. The new rules, explained the paper, will require many companies to calculate the benefits their workers have earned in a way that will increase the reported value of the benefits by as much as a third.

“It will have a dramatic effect” on company balance sheets, said Mark G. Beilke, an actuary with Milliman USA, according to the paper. Companies that allow retirees to take their benefits in one lump sum would be most affected by the rule change, the report added, noting that IBM paid lump sums to more than 5,000 retirees in 2002.

However, company spokeswoman Kendra R. Collins told the paper that the new accounting rules were not a factor in the company’s decision to close the plan. “The uncertain regulatory environment regarding cash-balance plans has made it difficult for employers like IBM to have the comfort level people would like us to have with defined-benefit plans,” she said.