Murphy's Law: IBM Loses Cash Balance Ruling

July 31, 2003 ( - Big Blue got a black eye from a federal judge today, who ruled that IBM's pension plan conversion and operating assumptions violated age discrimination laws.

>The ruling, by Judge G. Patrick Murphy in the US District Court of Southern Illinois, found that the computer giant violated age discrimination laws by amending its pension plan in a way that would make older employees accrue retirement benefits at a lower rate than younger workers.  

>Focusing on the rate of accrual, rather than the benefit itself, Judge Murphy noted that IBM’s argument was based on the “actuarial premise” of the “time value of money.”    However, Murphy dismissed that claim, noting that “From an economist’s perspective, Defendants have a good argument…. This does not mean, however, that the (IBM plan) is legal.”

Age Claims

>The plaintiffs had claimed that the IBM plan violates ERISA because it is age discriminatory based on a conversion factor that increases in direct correlation to an employee’s age – causing older workers to receive a lower rate of benefit accrual and thus a smaller accrued benefit at age 65 than a younger employee who had the same service and salary as the older worker.

>In today’s decision, Murphy held that IBM’s formula was set up so that older workers would receive a lower benefit accrual rate than younger employees if they worked the same years at the same salary and both retired at age 65.   In further dismissing IBM’s claims, Murphy went on to categorize Congress’ decision to use the different terms “accrued benefit” and “benefit accrual” in ERISA as a “simple” attempt to be “grammatically correct.”  

Plan Patterns

>IBM changed its pension plans in 1995 and 1999 to create a cash-balance plan.   At first, IBM allowed only employees within five years of retirement to keep the traditional plan, but in the aftermath of a backlash from older workers and a flurry of negative media reports, IBM relented somewhat - and allowed employees ages 40 or above with at least 10 years of service to choose between the two types of plans.

>In a cash-balance plan, employees get individual accounts and are generally provided regular statements showing their account's value. The employer credits the employee's account with income based on a pre-determined formula.   Unlike a traditional pension plan where much of the benefit accrual occurs in the latter years of a worker's career, in a cash-balance plan the company steadily funds the plan over the worker's tenure. Thus, if employees decide to leave the company, the accounts can be taken with them. Opponents charge that the plans discriminate against older workers because they exclude the company's hefty contributions at the end.

>The lawsuit was originally filed by Kathi Cooper, 53, of Bethalto, Illinois, a 24-year IBM veteran who filed the case in 1999.   Eventually, 140,000 IBM employees in the US joined the suit.

Appeal Pending

>Not surprisingly, IBM challenged the ruling, and said it would seek an immediate appeal of the decision.   "IBM's pension plan doesn't discriminate on the basis of age," the firm said in a press release following the ruling.   J. Randall MacDonald, IBM senior vice president, human resources, said, "This ruling affects not just IBM's pension plan, but the pension plans of more than 400 major U.S. companies. This is a situation where a few have spoiled it for millions of U.S. workers."

>Indeed, IBM claims, "Under the court's interpretation of the law, every cash balance plan in the country is illegal," as well as "pension equity plans, contributory defined benefit plans, indexed career pay plans, and variable annuity plans."   IBM also said that if the court's "notion of age discrimination" were applied, "Social Security would be condemned as age discriminatory."

>A later set of hearings will determine the damages to be paid.