IBM Reaches Deal on Pension Plan
IBM Corp. and plaintiffs challenging the legality of its pension plan agreed to a deal Wednesday that settles most claims and caps the company’s potential liability at $1.7 billion. The company previously had estimated that a settlement could cost as much as $6.5 billion.
IBM reached a $20-million settlement this month with 15,000 of the 140,000 workers who claimed its adoption of a “cash-balance” pension plan discriminated against older workers. That agreement, together with Wednesday’s $300-million settlement, will lead the company to take a one-time charge of about $320 million in the third quarter.
The latest deal, which must be approved by the U.S. District Court for the Southern District of Illinois, ends the company’s pension litigation on all but two claims.
The plaintiffs settled for much less than IBM’s highest projection because some lawyers believe a federal judge’s ruling against IBM this year may have been wrong, said Bruce Wolk, a law professor at the UC Davis School of Law. A federal court in Maryland ruled for a company in a similar case, he said.
“I’m not surprised there’s a big discount, because IBM had a pretty good chance,” he said.
IBM announced the deal after the end of regular trading. Its shares closed at $84.98, up 50 cents, on the New York Stock Exchange, then gained 4 cents in extended trading.
The crux of the case is the company’s “cash-balance” pension plan, which it adopted in 1999 for all new employees and some longtime employees.
Cash-balance plans, which mushroomed in popularity in the 1990s, resemble 401(k) plans in that they let workers track the growth of their money in a hypothetical individual account. Unlike a 401(k), workers can’t allot any of their own pay toward the plan or decide how it’s invested.
Traditional pension plans reward workers for staying with a company over time, often making their last years with the company the time when their eventual pension increases the most.
Cash-balance plans are computed using a formula that awards benefits at a steady rate through a worker’s tenure, which gives workers who jump from job to job more benefits than they would have under a traditional plan.
But workers counting on a leap in benefits at the end of their careers can be sorely disappointed if their company switches to a cash-balance plan not long before the employees’ retirement.
The federal judge hearing the IBM case ruled in favor of the workers this year, saying the company’s cash-balance plan is illegal because it discriminates against workers on the basis of age. IBM has said it will challenge that contention.
The other remaining issue is the plaintiffs’ contention that the transition from the previous pension plan to the cash-balance plan was also age discriminatory. The judge has ruled for the plaintiffs on that as well. IBM has said it would appeal.
