IBM Puts a Cap on CB Exposure – But Still Plans Cooper Appeal

September 29, 2004 ( - IBM announced yesterday that it has agreed in principle with plaintiffs to resolve certain claims in the class action lawsuit relating to its cash balance pension plan, Cooper et al v. The IBM Personal Pension Plan and the IBM Corporation.

The settlement caps what IBM and its pension plan ultimately will have to pay, although IBM said it still expects to appeal two aspects of the ruling pertaining to age-discrimination claims to the Seventh Circuit Court of Appeals. If IBM wins on the remaining claims – and it remains confident that it will prevail, according to a press release – it will pay only the $300 million portion agreed to in the settlement, a figure that includes plaintiff’s attorneys fees). If unsuccessful, IBM’s potential liability for the claims being appealed is capped at $1.4 billion.

Appeal Plans

However, IBM will appeal the cash balance pension plan claims to the Seventh Circuit Court of Appeals and believes it is likely to be successful on appeal, according to a press release . The agreement, still subject to final approval by the Court after notice to the class, provides that plaintiffs would be eligible to receive an incremental pension benefit worth approximately $300 million (which includes plaintiffs’ attorneys fees to be determined by the Court) in exchange for the settlement of certain claims and a stipulated remedy in the event that IBM loses the remaining cash balance claims on appeal. Under the stipulated remedy,

Together with an ancillary claim that was settled earlier (see IBM Reaches Partial Cash Balance Lawsuit Settlement ), IBM will take a one-time nonrecurring charge of approximately $320 million to 3Q earnings as a result of this agreement.

In announcing the settlement, IBM said it continues to believe that its pension plan formulas are fair and legal, and that the firm reached this agreement in the interest of the business and its shareholders, and to allow for a review of its cash balance formula by the Court of Appeals. IBM noted that there are more than 1,200 U.S. cash balance and related plans in operation today that would be deemed illegal under the rulings in the Cooper case (see Murphy’s Law: IBM Loses Cash Balance Ruling ).

Cash balance pension formulas are defined benefit plans that provide the employee with interest credit from the moment a retirement benefit is earned until it is taken. IBM claims that although employees under IBM’s plan earn interest credits at the same rate regardless of their age, the U.S. District Court for the Southern District of Illinois ruled that IBM’s cash balance formula is unlawful because a younger employee will earn more years of interest by the time he becomes age 65 than an older employee.

Potential Implications

The Cooper case is being watched intently because of its potential implications for other major corporations where employees have complained that pension and health care benefits were reduced in corporate cost-cutting moves (See One Bad Apple ). Companies in addition to IBM that moved to “cash-balance” pension plans in the 1990s include Eastman Kodak Co. and Electronic Data Systems Corp.

Earlier this summer, in a direct refutation of the US District Court of Southern Illinois ruling in Cooper v. IBM, US District Judge Catherine Blake of the US District Court for the District of Maryland read ERISA’s age-discrimination provisions as being applicable only to employees who have reached normal retirement age. Thus, in Tootle v. ARINC Inc, Blake found ERISA’s age-discrimination provisions “do not bar all cash balance plans.” (see Tootle Do? )

Plan sponsors hoping for a legislative solution to the judicial logjam were thwarted again last week when the US House of Representatives approved an amendment to the Treasury Department’s funding bill for the third time that would prevent it from helping to overturn the decision in Cooper (see House Approves Measure Blocking Treasury Cash Balance Intervention ). The amendment was sponsored by Representative Bernie Sanders (I-Vermont), a long-time and vocal critic of the cash balance programs.