IBM, responding to heavy criticism, said Friday that it will allow an additional 35,000 workers to stay in its traditional pension plan rather than being forced into a controversial new program that reduces the pensions of older workers.
IBM is among the largest of the many companies that have switched to the new “cash balance” pensions, which often provide expanded benefits for younger workers at the expense of more veteran employees.
The policy change, announced in a letter to employees, came a day after the Internal Revenue Service disclosed that it has ordered a slowdown in reviewing new applications by corporations to switch their pension programs to the cash balance model. The IRS change did not affect IBM, since its change was already in effect.
IBM said all workers who are at least 40 years old and have 10 years of service at the company can stay in the traditional pension system. Before, only those employees within five years of retirement--at least 50 years old--had the choice. For many IBM workers in their mid- to late 40s with a long tenure at the company, being forced to join the new plan would have ultimately reduced their pension checks by 30% to 50%.
The number of workers being allowed to choose will increase to 65,000, up from 30,000 when IBM announced the plan in May.
Since then, “we’ve heard from thousands of IBMers, many of whom expressed deep concerns about how the changes would affect their families and their long-term financial planning,” Tom Bouchard, the firm’s senior vice president for human resources, said in a letter to employees. “While some of what was expressed was not very productive, most of the comments we received were thoughtful, professional and very insightful.”
Angry IBM workers organized a Web site to complain about the pension plan change, held rallies, sent a delegation to lobby lawmakers in Washington and made the topic a high-profile media issue.
“The fact that IBM decided to significantly change its tune will send a very clear signal to many corporations out there considering whether to convert to cash balance plans,” said Rep. Bernard Sanders (I-Vt.), one of the congressional leaders pushing the issue. “Many of these companies will now say, ‘We should give workers a choice.’ ”
“IBM responded in what I consider to be a very positive way,” Sanders said. With 7,500 workers in Vermont, IBM is the state’s largest private employer.
“I’m sure the IBM employees are very happy,” said Ron Gebhardtsbauer, senior fellow at the American Academy of Actuaries. Corporations will “let this idea [of converting to a cash balance pension] cool for a while,” he predicted. “Maybe another year will go by before a major corporation does this again.”
The IRS, which determines whether pension plans are following the rules of the tax code, decided to slow down the approval process by ordering its regional offices to ask Washington for technical advice before approving any applications for cash balance plans. And the Equal Employment Opportunity Commission, which enforces age discrimination laws, is studying whether the cash balance plans are unfair to workers 40 and older.
“If I were advising an employer, I would say, ‘Don’t do it now, the laws may change,’ ” Gebhardtsbauer said. The Senate Health, Education Labor and Pensions Committee will hold hearings Tuesday to examine the impact of cash balance plans.
The cash balance pension is an attractive incentive for businesses trying to attract younger workers in a highly competitive, tight labor market. A worker who leaves after five or 10 years can walk out the door with a generous amount of cash, compared with the traditional system, which fattens pensions in the last five years before a worker retires, according to Gebhardtsbauer, former chief actuary for the federal civil service retirement system.
The potential problems come with switching from the traditional plan to the new one, and the decision about whether senior workers should be required to join the new plan.
Because of the need to attract workers, “no one questioned the rationale for the new plan or the need for it,” IBM’s Bouchard said in his letter. “The one question that came up over and over again was about how we would transition from the prior plan to the new one,” he wrote.
Because more people will be able to stay in the old plan, IBM will have to pay more for pensions. “This change will have a cost to IBM, but it’s too early to say how much,” Bouchard wrote.
IBM said in a fact sheet that it is “announcing these adjustments because we respect our employees, listen to their concerns and value their views.”