Power Company Cleared of Cash Balance Conversion Miscue

November 5, 2008 (PLANSPONSOR.com) - A Newark, Delaware, power company did not have to tell workers when it converted its defined benefit pension plan to a cash balance program because the change was not expected to cut employees' benefits, a federal appellate court ruled.

The 3 rd  U.S. Circuit Court of Appeals asserted in a decision involving a cash balance challenge against Pepco Holdings and its subsidiary, Conectiv, that the conversion did not violate theEmployee Retirement Income Security Act (ERISA).The appellate panel decided that because the plan change was not “reasonably expected to significantly reduce” employees’ future benefits, ERISA Section 204(h) did not mandate an employee notice the conversion was taking place.

The section provides that participants must receive 15 days’ notice prior to a plan amendment that results in a significant reduction in the rate of future benefit accrual.

In reaching its decision, the court was persuaded by expert testimony on behalf of Pepco, the parent company, which used an assumption that participants’ wages would experience zero growth.

According to the appeals court, during trial the defendants’ expert witness calculated that future benefits at retirement for each individual would be expected to increase, instead of decrease, under the new cash balance plan if salaries were held constant at 1999 levels. An expert for the participants argued against this “zero growth” in wages used by the defendants’ expert and instead testified that future benefits decreased when using a 4.5% salary growth assumption.

The case is   Charles v. Pepco Holdings Inc., 3d Cir., No. 07-4044, unpublished 11/4/08.