*NEWS*IBM EMPLOYEES GET $320M IN LAWSUIT /2004-10-01
*NEWS*IBM EMPLOYEES GET $320M IN LAWSUIT /2004-10-01
2013-06-23 at 8:54:27 pm #2179
I.B.M. Employees Get $320 Million in Pension Suit
I.B.M. Said yesterday that it had agreed to pay $320 million to current and former employees to settle in part a class-action lawsuit over its pension plan in a case that may affect millions of workers at many companies and nonprofit organizations.
Under the settlement, I.B.M.'s liability in the case will be limited to an additional $1.4 billion if the courts uphold a ruling that a new pension plan discriminates against its older workers and is illegal.
The agreement came as a federal judge was preparing to rule on how much I.B.M. should pay to some 130,000 current and former employees. The judge, G. Patrick Murphy of the Federal District Court in Southern Illinois, had ruled a year ago that the company discriminated against its older workers in the 1990's when it changed its traditional pension plan twice, leaving them with what is known as a cash-balance plan. A cash-balance plan combines some features of traditional pensions with other features of 401(k) plans.
Under the settlement, which is subject to approval by the court, I.B.M. would pay at least $300 million to current and former employees and $20 million to employees who had not been at the company long enough to earn a pension. The payment of $300 million settles all disputes that arose when I.B.M. changed its pension plan the first time, in 1995, to an interim design called a pension-equity plan.
But the settlement leaves unresolved the two claims in the class-action lawsuit that pertain to cash-balance pensions. I.B.M. intends to appeal those claims. One remaining claim is at the very heart of the case: whether cash-balance pension plans by definition discriminate against older workers.
Since 1995, a fifth of large companies have converted their traditional defined-benefit pension plans, which pay a monthly sum based on salary and years of work, to cash-balance plans, which allow employees to accrue benefits at a fixed rate over their careers. A switch to cash-balance plans can cause older workers to lose a chunk of their benefits.
Companies like the cash-balance design because it allows them to shrink long-term pension debt and reap accounting gains while still providing benefits to employees.
An appeals court ruling against I.B.M. would be devastating, said Mark J. Ugoretz, president of the Erisa Industry Committee, which represents large companies with pension plans. If I.B.M. lost on appeal "it would jeopardize over a thousand pension plans and the benefits of millions of current and future plan participants," he said.
Because of uncertainty about their legality, conversions to cash-balance plans have stopped for now. If I.B.M. wins its appeal, many more companies are expected to adopt cash-balance plans because they are generally less costly than traditional plans.
In a cash-balance plan, companies set aside a specific sum for each worker and guarantee a minimum interest rate will be earned, a design that favors younger workers because of the compounding effect of the interest. It also favors workers who switch employers because they can roll their cash balance over into an Individual Retirement Account.
For older workers with years in a traditional plan, the switch to a cash-balance plan at age 45 or older can halve the benefits they ultimately collect, compared with a traditional defined-benefit plan.
I.B.M. had earlier said that if it lost the case it might owe $6.5 billion, but the plaintiffs said that was an exaggerated figure intended to scare workers into abandoning the case.
Kathi Cooper, the lead plaintiff, said that if the full $1.7 billion was paid out, it would have cost I.B.M. "just about what I always thought the case was worth."
In August 2003, Judge Murphy found I.B.M.'s cash-balance plan – and by implication all such plans – discriminatory and illegal, a finding that alarmed corporations and administrators who have adopted or want to adopt such plans.
Jesse Green, I.B.M.'s treasurer, said, "That ruling potentially affects millions of American employees working for a broad spectrum of companies and nonprofits throughout the nation." The company "continues to believe that its pension plan is fair and lawful."
He said I.B.M. agreed to the settlement to place a cap on its potential liability. "Even if the plaintiffs prevail on appeal, based on our financial condition today, the remedies are within I.B.M.'s ability to handle," he said.
The central issue that will now be appealed is whether I.B.M.'s cash-balance plan illegally discriminated against older workers on a continuing basis. If Judge Murphy's rule that it does is upheld, I.B.M. will pay the affected workers $780 million, according to yesterday's settlement. A second issue that I.B.M. will now appeal is whether certain one-time payments that it made on July 1, 1999, the day it amended its pension plan for the second time, were also age discriminatory. If I.B.M. loses its appeal on that point, it will pay the affected employees $620 million.
Norman Stein, an expert on pension law who teaches at the University of Alabama and has advised a different group of I.B.M. employees on pension issues, said an appellate ruling against I.B.M would be the end of cash-balance plans. He is a critic of how such plans have been applied to reduce benefits to older workers.
"Federal law says the rate at which you accrue a pension benefit cannot decline because you are getting older," Professor Stein said. "But under a cash-balance plan, the interest on the contribution grows more for younger workers than older workers" and thus discriminates against older workers.
He warned that, under the plaintiffs' legal theory, those corporations with cash-balance plans would face costs "which would wipe them out" if they had to repair the plans to eliminate the age discrimination.
Mark Iwry, a senior fellow at the Brookings Institution, said that "Congress needs to resolve this whole controversy in a balanced way that protects older workers and clarifies the legal status of cash-balance plans."
Mr. Iwry said so many millions of workers were affected by the issue that Congress would have to balance the interests of those workers against the arguments advanced by corporate lobbyists.
Officials at the Pension Rights Center, a labor-supported group that works to protect employee pensions, said they feared that Congress might resolve the issue by approving plans, like I.B.M.'s, that can result in older workers losing half of the pension benefit they were planning on in retirement. "This settlement is good news for I.B.M. employees because they will get at least $320 million in increased benefits," said Karen Friedman, policy director for the center. "This is also an opportunity for Congress to protect the expectations of older workers.''
A. M. Sacconaghi, an analyst with Sanford C. Bernstein, said the size of the settlement would not materially affect the company.
* Post was edited: 2004-10-01 10:43:00