Human Capital & Careers

IBM Pension Ruling Stands

Finale to a long-running class-action lawsuit spares Big Blue a $1.4 billion payout and raises a shadow from cash-balance plans that have been adop...
Stephen TaubJanuary 16, 2007

The Supreme Court has refused to hear a case involving IBM’s conversion of its defined-benefit pension plan to a cash-balance plan.

By letting stand a lower-court ruling that the conversion did not discriminate against older workers, the high court has spared IBM the expense of a payout that could have amounted to as much as $1.4 billion. The court has also raised a shadow from similar plans that have been adopted by perhaps 1,500 other companies, according to the Associated Press.

A cash-balance plan is a hybrid of defined-benefit and defined-contribution plans. Legally it’s a DB plan (the employer, not the employee, takes on the financial risk of achieving a preset benefit), but it’s structured like a DC plan (somewhat like a 401(k), it features a stated account balance). Compared with traditional pension plans, cash-balance plans can provide employers with more funding flexibility while often demanding lower payouts. Critics, however, have maintained that they shortchange retirees and older workers, whose contributions have a shorter time to accrue interest than those of younger workers.

Last summer, Congress passed a pension bill that in part aimed to clarify the legality of cash-balance plans. However, according to published accounts, IBM changed its traditional pension to an interim plan in 1995 and to a cash-balance plan in 1999, long before the effective date of the act.

In 2003, ruling on a class-action lawsuit brought against IBM, the U.S. District Court for the Southern District of Illinois determined that the company owed compensation to roughly 140,000 current and former workers as a result of the conversion to the cash-balance plan. That court held that the revamped plan violated age discrimination provisions of the Employee Retirement Income Security Act.

IBM subsequently agreed to pay $320 million to the plaintiffs in that case, and as much as $1.4 billion more if it lost on appeal.

Last August, however, the U.S. Court of Appeals for the Seventh Circuit, sitting in Chicago, overturned the district court’s ruling. “All terms of IBM’s plan are age-neutral,” the judges reportedly wrote. “Removing a feature that gave extra benefits to the old differs from discriminating against them.”

In their brief to the Supreme Court, attorneys for the workers had continued to maintain that “IBM’s pension plan plainly discriminates on the basis of age,” Dow Jones reported. “Millions of workers are subject to pension plans similar to that at issue in this case and the Seventh Circuit’s misapplication of ERISA’s nondiscrimination mandate threatens to deprive them of its essential protection.”