Old Cash Balance Plans may Get no Protection from US Pension Reform

June 15, 2006 (PLANSPONSOR.com) - Pension legislation now being ironed out by members of the House and Senate probably will not protect companies that are already under fire for offering hybrid, or cash balance, pension plans, according to House Majority Leader John Boehner.

Bloomberg reports that 39 companies offering hybrid plans, including International Business Machines Corp. and AT&T, wrote a letter in early January to Congress asking it to provide them with “comprehensive clarification of the basic age-discrimination standard for defined benefit plans that provides legal certainty for all existing and future hybrid plans.” The companies that are currently in litigation regarding age-discrimination in cash balance plans are hoping that a retroactive measure from Congress will end the litigation.

Boehner said the idea of going back in a retroactive fashion has met with stiff resistance in both the House and the Senate, according to Bloomberg.”We are dealing with it, and there will be some agreement on this issue in the pension bill,” Boehner said in the news report.

Though more than 1,800 companies offer hybrid plans, organizations such as the AARP and employees of hybrid-offering companies are criticizing the plans, alleging that they hurt older employees. More than 300 lawsuits have been filed against companies offering cash balance plans.

AT&T is being sued by 30,000 company employees. A federal judge has already cleared AT&T of allegations that it violated the Employee Retirement Income Security Act (ERISA) by not providing employees 15 days notice it was converting its defined benefit pension to a   cash balance plan (See AT&T Cleared in Cash Balance Notification Suit ).

The US Treasury Department suspended the licensing of hybrids following a federal court’s ruling, which decided in 2003 that a hybrid plan offered by IBM discriminated against older workers. The workers said they lost potential accruals during the most profitable years of service when IBM switched to the hybrid plan. The case is now being reviewed by the US Seventh Circuit Court of Appeals, however IBM recently announced plans to move workers from defined benefit plan offerings to defined contribution offerings (See IBM Beefs Up 401(k), Backs Off DB – Come 2008  and Q/A: “Blue” Moves ).

A recent Government Accountability Office Study found that older workers who moved their funds from defined benefit to hybrid plans could lose as much as $250,000 of their earnings in a defined benefit plan, the news report said. However, the study showed that almost half (47%) of the older employees who converted their savings to hybrid plans were compensated.

Plan Advisory Services has created a new consulting support service for providers in March to help providers quickly explain the implications of the new legislation to plan sponsors (See Consultancy Offers a Plan to Gear Up for Pension Reform ).