In a ruling that appears to have something for everyone, a U.S. appeals court in Pasadena decided Wednesday that Southern California Gas Co. did not discriminate against older employees when it converted its traditional pension to a cash-balance plan 10 years ago.
But, the court said, the company owed its workers fair warning so that they could save more -- or find another employer.
The ruling in Hurlic vs. Southern California Gas concurred with other recent appeals court rulings in its finding that cash-balance conversions were not illegal, even if they diminished future pension accruals for older workers.
However, the court cleared the way for employers to offer transitional benefits that would be more generous than what the cash-balance plan would normally provide.
Cash-balance plans, introduced about 15 years ago, accrue benefits fairly evenly over time, while traditional pensions favor those with the most tenure. They’re also portable, making it possible for workers to leave a company and take their pensions with them.
But they have spurred a flood of lawsuits by older employees who claim their benefits are being eaten away through a cash-balance formula that is discriminatory.
The U.S. 9th Circuit Court of Appeals said that companies were required to provide workers fair warning when diminishing future benefit accruals.
“Even without an individualized explanation of how the provision would affect their benefits, notice of the provision could have induced the employees to increase savings in other retirement vehicles or to consider other employment,” Judge N. Randy Smith said in the opinion.
The ruling sends the case back to U.S. District Court in Los Angeles to determine what remedies, if any, are warranted over the lack of notice. If the trial court rules that proper notice was not given, the appeals ruling suggests that the entire conversion could be considered invalid, forcing the company to revert to the old defined-benefit formula, said Karen Ferguson, director of the Pension Rights Center in Washington.
“That means that the old pre-conversion plan remains in effect, which would be the best thing possible for the older employees,” she said.
Added University of Alabama professor Norman Stein, an expert on pension law: “That could be a very significant victory for participants.”
Southern California Gas said it had yet to present evidence about the notice that was provided.
“We look forward to showing the court our side of this argument,” company spokeswoman Christy Heiser said.
Employers also hailed the ruling, but for other reasons.
“It affirms the viability of cash-balance plans,” said Mike Chittenden of the ERISA Industry Committee, a group that represents major employers. “And it allows companies to provide transition benefits to employees, which is the most generous thing an employer can do in a conversion.” (ERISA, the federal Employee Retirement Income Security Act, regulates employee pension plans.)
In the Southern California Gas case, two longtime employees had sued because the cash-balance formula resulted in their receiving no additional pension benefits for several years of work -- a phenomenon called wear-away.
The court, concurring with decisions made by four other appeals courts, said that wear-away was not inherently discriminatory.
“This essentially says that you can’t take away benefits that have been earned and vested, but you have wide discretion to change future benefit accruals,” Chittenden said.