IBM must pay lost benefits for shift to 'cash balance' pensions

NEW YORK · IBM Corp. owes back payments -- possibly worth billions of dollars -- to 140,000 older employees who were harmed when the technology giant converted to a new kind of pension plan in the 1990s, a federal judge has ruled.

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IBM to appeal federal judge`s pension-plan ruling

February 18, 2004 18:14:15 (ET)

SAN FRANCISCO (CBS.MW) -- IBM said Wednesday it would appeal a federal judge's decision in a pension case that could be worth billions of dollars in back payments to 140,000 Big Blue employees.

Judge G. Patrick Murphy ruled that IBM owes back payments, which plaintiffs claim could be worth up to $6 billion. IBM had argued that it should not have to make the retroactive payments because it had no way of knowing Murphy would declare the pension plan illegal on age discrimination grounds when he originally ruled on it last July.

In a Feb. 12 ruling, Murphy struck down IBM's arguments, saying the computing giant could not claim it was surprised by his earlier decision.

Murphy, who sits on the U.S. District Court in East St. Louis, Ill., said IBM presented a "clever, but ineffectual, response to law that finds it too restrictive for its business model," and that the need to prevent age discrimination under such circumstances existed long before IBM changed its plan.

Kendra Collins, an IBM spokeswoman, said the company "disagrees with the court ruling and believes no retroactive payments are warranted." Collins said IBM would appeal the case and stands by its defense.

At issue is IBM's (IBM, Trade) conversion to a so-called "cash-balance" pension plan in the 1999. Under such a plan, employees are given their own pension accounts that can be tracked over time, but they can't put any of their pay into the plan or choose where the funds are invested. The plan allows for employees to take the money with them in a lump-sum payment should they take a job with another company.

The main argument against cash balance plans its that they are often enacted when older, long-term workers are closing in on retirement age, and are thus prevented from both the potential gains of the program and from having a enough working years to build up significant cash-balance reserves.

George Elling, an analyst with Deutsche Bank Securities, said that while it is impossible to predict how the IBM case will turn out, it has potential ramifications for other companies that either have, or might consider cash-balance plans.

"It's important because it's the first time the judge has said IBM might have to make retroactive pension payments," Elling said. "At issue for a lot of companies now is that they will probably have to look at what they are doing and decide if they want to go through with it." Deutsche Bank has an investment banking relationship with IBM.

IBM shares fell 95 cents to close Wednesday at $98.42.

IBM - like a lot of companies that had defined benefit plans in those days - saw their benefit plan assets grow to large surpluses in the 90's due to the stock market boom, and they could not resist the temptation to try to raid those funds that had been promised to the pensioners.

The business downturns gave them the opportunity to do just that. They offered early outs and extra credits for early retirement, as well as limited pension eligibility for thousands who would not have qualified without the extensions. Then they did the plan conversion, which enabled them to restructure the entire asset base for the plans, draining all the surpluses and transferring all the risk to the pensioners instead of the company.

As a stockholder I can appreciate it, but as a retiree, albeit under the old pension plan, I certainly feel the pain in what I must now pay for medical benefits. I am in an in-between group that was supposed to have a slightly larger subsidy than those who retired after me, but that disappeared after just a couple of years. And the retirees from today have no assurance of lifetime benefits at all.

I got out just in time, for a lot of reasons. One was the opportunity to do consulting work on the year 2000 problem, which made me a LOT more than my IBM salary. The other was the benefits, even though they cost a lot more today.

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