Human Capital & Careers

Utility Sued over Pension Conversion

At Southern California Gas, the company's switch from a traditional plan to a cash-balance plan is at the center of age-discrimination claims.
Craig SchneiderJuly 11, 2005

Two employees of Southern California Gas Co. filed suit against the utility on Friday, alleging the company discriminated against older workers when it changed its traditional pension to a cash-balance plan in 1998, and violated a federal provision that workers be notified in advance of changes that reduce benefit accruals, according to The New York Times.

The age-discrimination claim, filed in Federal District Court in Los Angeles, argues that the plan’s changes that made the alleged discrimination apparent did not come into effect until 2003, the paper reported. The plaintiffs are requesting that the court nullify the changes and reinstate the earlier pension plan.

The claim centers on an issue known as “wearaway” that can occur when employees are switched from the traditional plan to the new one. In 2003, a federal judge ruled that similar pension changes at IBM Corp. illegally discriminated against workers on the basis of age, but the judge’s decision did not directly address the wearaway issue, and it is being appealed.

The age discrimination issue arises because in a traditional, defined-benefit pension plan, workers build up their benefits fastest in their final years at a company. Benefits are calculated according to a formula that typically multiplies each worker’s pay and years of service by some factor.

In contrast, a cash-balance plan works by allowing an employee to earn benefits and see them more easily as a balance in a hypothetical individual account, which grows every year based on a predetermined interest rate. Older workers have criticized these plans because they are deprived of earning their biggest benefits in their final years, while younger workers arguably have more years to benefit under the new plan.

Wearaway affects employees who have already earned bigger benefits under the traditional pension plan than they would have earned, in theory, if the new cash-balance plan had been in place throughout their careers, the Times explains. The wearaway occurs when the employer stops the older employees’ accruals for several years until the theoretical amount they would have earned catches up with the amount they actually did earn.

Wearaway is discriminatory, according to worker advocates, because older employees earn no new pension benefits as younger ones continue to build theirs. While not addressed in the IBM suit, employees at other companies including AT&T, Cigna, and El Paso have filed age-discrimination complaints about wearaway. Congress has also introduced bills to make it illegal.

Southern California Gas officials tried to lessen the effect of the pension conversion on the oldest workers by delaying the wearaway period for five years. Workers who wished to retire between 1998 and 2003 could receive the traditional pension benefit, as if the conversion had never taken place, the paper noted. The option was removed in 2003, the year the wearaway period began.

As a result, plaintiffs Susanna H. Selesky and David Hurlic claim in the suit that their pensions would remain frozen until 2009 and 2015, respectively, while younger colleagues continue to build up their benefits.

If the plaintiff’s prevail, the case could be “very costly,” for Southern California Gas, a subsidiary of Sempra Energy, the Times noted. Companies that convert their pension plans generally achieve accounting gains that can be spread across several years, the paper explained.

Southern California Gas spokesman Ed Van Herik told the paper that the utility had not yet seen the lawsuit, and only commented in general terms. “When we did adopt the cash balance plan, the conversion was designed with a number of benefits enhancements to ensure a smooth transition for our employees,” he said. “We are confident that legal challenges to our plan will be dismissed.”