http://www.latimes.com IBM Loses Pension Ruling A judge says 140,000 employees and retirees are entitled to back pay in a 'cash-balance' case. By Kathy Kristof Times Staff Writer
February 19, 2004 In a decision that could cost IBM Corp. billions of dollars, a federal judge has ruled that the company must make retroactive payments to employees and retirees who were hurt when IBM abandoned its traditional pension plan. The Feb. 12 ruling, released Wednesday, is the latest development in a case that could ultimately affect hundreds of big companies that have swapped traditional pensions for so-called cash-balance plans over the last decade. "Technically this ruling only applies to these IBM employees, but the implications are tremendous," said Karen Ferguson, director of the Pension Rights Center in Washington. "IBM has been the precedent setter in this area all along. If the courts uphold this, this could be dynamite." The case, filed in 1999, claimed that IBM discriminated against older, long-serving employees when it replaced its pension program with a cash-balance plan. Cash-balance accounts are similar to 401(k) plans. Employers contribute money into individual employee accounts that can be tapped at retirement; traditional pensions guarantee a set monthly payment. Older workers have complained that cash-balance plans don't give them enough time to build solid nest eggs for retirement, and that thousands of dollars in promised benefits are ripped away from them at a time when they are least able to make up for the loss. U.S. District Judge G. Patrick Murphy ruled last summer that IBM's cash-balance plan was inherently discriminatory against older workers under pension law. In his follow-up ruling last week, Murphy said 140,000 current and former IBM employees were entitled to retroactive payments for retirement benefits they lost when the company converted to the new plan in 1999. Murphy did not rule on what that amount should be or how it would be calculated. IBM has estimated that the ruling could cost the company $6 billion under one formula. After the ruling was released, Armonk, N.Y.-based IBM saw its shares fall 95 cents to $98.42 on the New York Stock Exchange. IBM argued in court that it should not be liable for back payments, saying that it could not have foreseen that its cash-balance plan would be declared illegal. "Our view is that retroactive remedies are not appropriate in this case," said IBM spokeswoman Kendra Collins. Murphy, based in East St. Louis, Ill., rejected that argument. "The prohibition against age discrimination existed long before the appearance of cash-balance plans. All that has changed is IBM's clever, but ineffectual, response to law that it finds too restrictive for its business model," Murphy wrote. The lead plaintiff in the class-action case was Kathi Cooper, a 24-year IBM veteran from Bethalto, Ill. "What IBM has done is wrong," Cooper said by phone Wednesday. "I hope and pray for a successful outcome for the entire class, and there are about 140,000 of us now." IBM has appealed Murphy's ruling that its retirement plan is discriminatory, and plans to fight this one as well. "We stand by our defense and continue to believe that our pension is legal and sound and that we will prevail on appeal," Collins said. Collins could not say Wednesday whether the company had set aside reserves to pay damages in the case, or whether any final judgment would come out of the company's earnings. The ruling is "potentially devastating" to IBM, said Paul Gewirtz, a Cleveland-based pension consultant. "The wider question," he added, "is whether it is devastating to all cash-balance plans, which hundreds of companies have adopted across the country." Gewirtz believes that some cash-balance plans - most notably those that provided all workers with the option of sticking with the traditional pension or opting into the cash-balance system - will emerge unscathed. But, companies that forced their workers to join the plan, as IBM did, may not. There are probably millions of employees in this situation, he added. Companies such as IBM have shifted to cash-balance plans to save money in retirement costs. Advantages include the ability of workers to take their cash-balance account to another company when they change jobs. But the conversions have come under criticism from employee advocates, who say companies typically play up the advantages of these plans, while downplaying the disadvantages. Dozens of employee lawsuits are pending, pension experts note. Meanwhile, the Bush administration has proposed legislation that would provide a new legal formula to allow cash-balance conversions while providing some safeguards for older employees.
