Proposed Pension Rule Scrapped

The federal government has scrapped -- for now, at least -- a proposed rule that some critics contended could have made regulations governing corporate pensions less worker-friendly.

The rule was part of a planned pension overhaul that would end the current ban on converting traditional defined-benefit corporate pension plans to so-called cash balance plans. Such conversions have been stymied in recent years by concerns over age discrimination, and the Treasury Department proposed a set of rules to allay those concerns and reopen the door to future conversions.

The proposed rule that was withdrawn Monday was intended to stop companies from unjustly enriching high-level managers when converting pension plans. But it would have had the unintended effect of hindering companies that wanted to help older workers, who are frequently the most harmed when a company moves from a traditional pension to a cash balance plan, industry experts said.

“This is an unusual case where both industry and employees would agree with what the Treasury has done,” said Eric Lofgren, global director of the benefits consulting practice at Watson Wyatt & Co., a national benefits consulting firm. “It was a necessary technical correction.”

Experts said, however, that the age-discrimination issue is secondary to the remaining elements of the pension overhaul plan, which will be the subject of a public hearing Wednesday in Washington.

The Treasury Department hearings are a final step in finalizing the government’s proposed rules, which would end a three-year ban on approving new cash balance conversions.

The proposed regulations already have drawn thousands of comments from labor and consumer groups, corporations, consultants and workers, Treasury officials said Monday.

“The issue they have addressed here is a significant second-order issue, but it’s not the main issue,” said J. Mark Iwry, senior fellow at the Brookings Institution and a former Treasury benefits counsel.

“The core of the regulations are the provisions that define when a cash balance plan and a conversion to a cash balance plan would be considered age discriminatory and when they would not,” Iwry said.

The Treasury issued proposed rules late last year that clarified the administration’s view of how age-discrimination rules can be applied to cash balance pensions, which appeal to companies seeking to cut pension costs.

Unlike traditional pensions, which reward longtime employees by providing bigger pension accruals for longer service, cash balance plans even out pension accruals over the lifetime of the worker.

Though that tends to be a better deal for young workers and those with less tenure at one company, it can be a huge loss to longtime employees who anticipated retiring under the old formula.

As a result, some companies have proposed that older workers and longtime employees be given a choice: They can move into the cash balance system or they can choose to stay in the old defined-benefit pension. The now-tabled rule would have prevented this choice.

Meanwhile, Reps. George Miller (D-Martinez) and Bernard Sanders (I-Vt.) also vowed to introduce legislation today requiring that long-term employees -- those who have been with the company 10 years or more -- and workers over the age of 40 be given a choice to remain in the old defined-benefit pension when companies convert from traditional pensions to cash balance plans.

Companies that offer pension plans must follow certain rules essentially requiring that they treat all workers fairly and that they don’t take away a benefit that already has been earned.

Some experts say cash balance pensions do not take away already earned benefits, but they can halt additional benefit accruals for older workers.

As a result, hundreds of workers whose employers switched them to a cash balance plan have sued, claiming age discrimination.