Pension Provision Aimed at Cash-Balance Plans


Battle lines are being drawn over a one-paragraph legislative amendment aimed at protecting worker pensions when companies convert traditional pensions to so-called cash-balance plans.

The amendment--tagged onto the Treasury-Postal Appropriations bill by U.S. Rep. Bernard Sanders (I-Vt.)--would keep the Internal Revenue Service from undermining existing rules governing the calculation of certain corporate pension benefits.

This bill is being debated this week in the House.

The Sanders provision--supported by the American Assn. of Retired Persons and the Pension Rights Center--is strongly opposed by a powerful industry group whose members include some of the biggest companies in the country.

The amendment could force companies to provide more generous benefits to early retirees, and it could help the case of thousands of workers who have sued their companies for allegedly underpaying pensioners.

Cash-balance plans are hybrid pensions that look like a 401(k) but operate more like a traditional defined-benefit plan. Companies, and some younger workers, like the plans because they are transported easily from one firm to the next if an employee changes jobs.

But some older workers have sued over the plans, alleging that some companies' efforts to convert their traditional pensions to cash-balance plans rob longtime employees of promised benefits.

"Sanders is protecting the litigation bar's efforts to litigate this issue," said Mark Ugoretz, president of the ERISA Industry Council, which represents 125 large companies. "There are probably a couple hundred of these plans in litigation."

Sanders said he became involved in the cash-balance pension issue because IBM Corp. is the largest private employer in Vermont.

When IBM converted to a cash-balance pension plan, Sanders was inundated with calls from workers contending the company had improperly cut their pension benefits in half.

The IBM controversy was voluntarily resolved, largely in workers' favor. But hundreds of other companies have converted their traditional pensions to cash-balance plans, touching off protests from workers.

The IRS has not approved any conversions to cash-balance plans in at least a year.

Earlier this year, the Department of Labor's inspector general issued a study that said one in five cash-balance plans improperly calculates early-retirement benefits, underpaying workers by millions of dollars each year. Extrapolating the study sample to the hundreds of cash-balance plans nationwide, Sanders said retirees in cash-balance plans are being shortchanged by $85 million to $199 million each year.

Ugoretz denies that firms have underpaid workers. However, he said the determination of whether they did or did not probably will rest on the maintenance of the IRS rule that Sanders wants to legislatively protect.

The issue boils down to this: Companies are barred by federal pension law from taking away earned retirement benefits from workers when they terminate or convert their pension plans. As a result, companies must give each worker an amount equal to the "present value" of their future pension benefits when the old pension plan is changed.

But that value can swing wildly based on the assumption of what the invested money would earn in the long haul.

Companies would like to assume relatively high returns--in the 7% to 10% a year range. In turn, that could drastically reduce that present value of the benefits.

The IRS rule that Sanders wants to protect sets the assumed rate at around 5%, which would mean a higher present value for many retirees.

The IRS' conservative rate assumption has been upheld in two recent court cases, said David Certner, director of federal affairs at AARP. But companies have been negotiating with the IRS to change the rule, which like many IRS regulations was never made permanent. The rule has been in place since 1996, but is still technically a proposed rule.

Sanders' amendment would bring those negotiations to a halt because it would bar IRS staffers from negotiating any settlement that changed the return assumption.

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