Ruling Casts Doubt on Pension Change

With help from a federal judge, Kathi Cooper has thrown a monkey wrench into the world of corporate pensions.

In late July, Cooper, a 53-year-old internal auditor at IBM Corp., won a landmark court ruling that could make it tougher for companies to convert their traditional pension plans into so-called cash-balance retirement plans. U.S. District Judge G. Patrick Murphy, ruling in IBM vs. Cooper, found that the computer giant illegally discriminated against older workers when it switched to a cash-balance plan in the 1990s.

Murphy hasn’t yet ruled on damages or indicated what changes he may order IBM to make in its pension plan. But the decision already is having far-reaching effects.

Some 400 companies that converted to cash-balance plans now are trying to figure out whether Murphy’s ruling has derailed those plans. Hundreds of other firms that expected to switch to cash-balance pensions this year are suddenly in a holding pattern.

“Everybody is looking at this,” said Doug Baj, a spokesman for the ERISA Industry Committee, an employer group that says the ruling “threatens to outlaw” hundreds of cash-balance pensions.

The ruling also has sparked new congressional resolve for pension regulation, causing some consumer advocates to crow about the possibility of reforms that would provide more protection for older workers.

“This is a very significant ruling,” said David Certner, director of federal affairs at AARP (formerly the American Assn. of Retired Persons). “This is a court saying what we have said all along -- these plans discriminate against older workers.”

The repercussions of her case come as a bit of a shock to the widowed grandmother who started it all. Cooper says she’s not a crusader. When she filed suit against IBM in 1999, she was just a middle-aged, mid-level worker who felt she was getting shafted by a company cost-cutting move. She sued her employer because she was too old to make up for pension benefits she was about to lose -- and too good at math not to figure that out.

“There comes a time in your life when you realize you are out of runway,” she said. “You have no alternatives.”

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Cost-Cutting Effort

Cash-balance plans gained popularity in the late ‘90s as a way for companies to reduce mushrooming pension costs. About 44 million Americans are covered by traditional, or defined-benefit, corporate pension plans, which promise to pay a retired worker a set amount each month for life. Traditional pensions tend to favor older workers -- especially those who remain with one employer for many years -- because benefits accrue at a much faster rate during their last years of employment.

With a cash-balance plan, workers have individualized retirement accounts that are funded by the company. The amount that retired workers receive in pension benefits is determined by how much money builds up in their accounts. Unlike traditional pension plans, workers can take the money from their cash-balance accounts with them when they change jobs -- a feature that makes them more suited to younger workers, who tend to change jobs more often.

By 1999, about 20% of the nation’s biggest employers had converted their traditional pensions to cash-balance plans. The Internal Revenue Service declared a moratorium on approving conversions for tax purposes while it analyzed claims that the plans discriminated against older workers.

Meanwhile, workers such as Cooper filed lawsuits against employers that had converted to cash-balance plans, including Xerox Corp., AT&T; Corp. and Cigna Corp.

Critics contend that older workers often suffer when companies switch to cash-balance plans. The reasons vary but include the fact that cash-balance conversions sometimes can cause older workers to stop accruing pension benefits for several years. Younger workers in the same plan, however, continue to accrue benefits.

The results can be devastating, particularly for those 10 to 15 years from retirement -- such as Cooper -- who are too close to retirement to rebuild their pensions before they quit working.

Court filings in Cooper’s case indicated that IBM expected to save $500 million a year by converting to a cash-balance plan. Cooper said she and other older IBM workers couldn’t afford to have that savings come out of their pockets. Until the penalty phase of the trial is complete, Cooper won’t disclose how much the cash-balance conversion cost her. But the loss was significant, she said, and was indicative of the huge toll such plans can take on older workers.

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A Question of Definition

Companies that sponsor cash-balance plans contend that slower pension accruals for older workers, though not allowed under the Employee Retirement Income Security Act, or ERISA, the federal law governing defined-benefit plans, are acceptable with cash-balance plans because these plans are a hybrid of traditional pensions and so-called defined-contribution pensions, such as 401(k) plans.

Murphy disagreed, ruling that if companies wanted to maintain the tax and balance-sheet benefits of a traditional pension plan, the plan must conform with all of the requirements of the defined-benefit law.

“This court will not perform legal legerdemain by dodging the detail requirements of ERISA in order to save IBM’s 1999 plan,” Murphy wrote.

What companies liked about cash-balance plans was that they thought the plans allowed them to pick and choose among the rules governing defined-contribution plans such as 401(k)s and traditional pensions, said Norman Stein, a professor of law at the University of Alabama.

IBM said it would appeal Murphy’s ruling. The appeal would be heard by the same court -- the U.S. 7th Circuit Court of Appeals in Chicago -- that sided with employees in a recent ruling on the lawsuit involving Xerox’s cash-balance pension plan.

The Xerox case dealt with another aspect of cash-balance plans, but both rulings pivoted on a key element of pension law -- how benefits are calculated when a worker retires at age 65, Stein noted. That could make it less likely that the IBM ruling would be overturned on appeal.

For the millions of workers already covered by cash-balance plans, Murphy’s ruling -- if it stands -- could put their pensions into legal limbo.

“Congress needs to step up and resolve this,” said Mark Iwry, a former pension regulator who now is a senior fellow at the Brookings Institution in Washington. “There actually is a middle ground here. A rational legislative solution could meet older workers’ need for reasonable protection and the employers’ need for reasonable flexibility.”

Rep. Bernie Sanders (I-Vt.) proposed to resolve the cash-balance question by simply mandating that companies give older workers a choice to stay in the old pension or participate in the new plan. But the Sanders legislation made little progress in the Republican-dominated Congress. Industry leaders generally thought their chances were better in the courts than in Congress, some experts said.

Now, dozens of corporate lobbyists have descended on Capitol Hill to urge lawmakers to act on cash-balance legislation, potentially turning the tide for legislation, said Joel Barkin, a spokesman for Sanders.

“Now we are in a position of playing defense rather than offense -- and that’s helpful,” Barkin said. “Our focus now will be to make sure that Congress doesn’t do anything to undermine this ruling.”

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Times staff writer Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit The Times’ Web site at www.latimes.com/perfin.