IBM Keeps Appealing As It Settles Pension Case
By Susanne Sclafane
NU Online News Service, Sept 30, 1:15 p.m. EST?In a case watched closely by fiduciary liability insurers, IBM announced a settlement agreement that limits to $1.4 billion its potential liability for claims related to its 1999 pension plan conversion to a cash-balance structure.[@@]
The Armonk, N.Y.-based firm has also agreed to pay $300 million to employees that were affected by an earlier conversion to a pension equity plan in 1995, and $20 million for an ancillary claim.
The claims stem from a class action lawsuit, Cooper et al vs. The IBM Personal Pension Plan and the IBM Corporation. A ruling by a judge in the Federal District Court for the Southern District of Illinois in East St. Louis last July put the legality of cash balance plans in question.
In his ruling the judge found the pension credit formula and cash balance formula that IBM used to reform its defined benefit pension plan in 1995 and 1999 discriminated against older employees and, essentially, that all cash balance plans were inherently discriminatory toward older employees in the way they accrue benefits.
Many companies have converted from traditional defined benefit pension plans to cash balance plans in recent years. Under a traditional defined benefit plan, the employer guarantees a specified benefit at retirement. In a cash balance plan like IBM's, each employee has a hypothetical account to which contributions and interest payments are credited. (See NU, Aug. 11, 2003, for more on the July 2003 IBM decision.)
Although employees under IBM's plan earn interest credits at the same rate regardless of their age, Judge G. Patrick Murphy ruled that IBM's cash balance formula was unlawful because a younger employee will earn more years of interest by the time he or she becomes age 65 than an older employee.
IBM will go forward with its appeal on the cash balance pension plan claims to the Seventh Circuit Court of Appeals and believes it is likely to be successful on appeal, the company said yesterday. But in the event that IBM loses the cash balance plan claims on appeal, the company has agreed to a stipulated remedy with plaintiffs, capping its liability at $1.4 billion.
"The position that cash balance plans are unlawful seriously jeopardizes the security of an already fragile U.S. pension system," said Randy MacDonald, IBM's senior vice president of human resources, in a statement. "While IBM has the financial strength to deal with the ramifications of this case, many companies do not.
"If the ruling in this case is upheld, many companies will be forced to end their pensions, reduce the number of employees who receive pensions, or become noncompetitive, which could result in job losses."
There are more than 1,200 U.S. cash balance and related plans in operation today that would be deemed illegal under Judge Murphy's ruling, IBM reported in its partial settlement announcement yesterday.
Claims subject to the $300 million settlement also announced yesterday relate to IBM's conversion to a pension equity plan in 1995. Under that plan, participants earned a specific number of "base points," which were determined by each employee's age in the year worked. Employees could also earn "excess" points based on average earnings?and these base and excess points were applied to a formula to determine monthly retirement benefits. The formula included a "benefit conversion factor" that increased with an employee's age, according to last year's court documents.
In the property-casualty insurance world, the outcome of IBM's appeal on the question of whether cash-balance conversions are inherently discriminatory and in violation of the Employee Retirement Income Security Act of 1974 (the federal law that sets standards for pension plans) has implications for writers of fiduciary liability insurance.
Fiduciary liability insurance basically covers employee benefit plan fiduciaries (people who exercise control over the management or administration of pension, health plans and the like) for breaches of their fiduciary duties and errors they make.
While insurers have not seen a flood of fiduciary liability claims related to conversions since last year's IBM ruling, one insurance underwriter has reported that lawsuits related to conversions that happened as far back as nine years ago started to emerge after last year's ruling in the IBM case.
Essentially, plaintiffs' lawyers filing those suits interpret the statute of limitations?which starts running when a plan participant has knowledge of a breach of a fiduciary duty?to start running on the date that the IBM decision came down, the insurer told National Underwriter. (See NU's print edition, Sept. 20, page 12.)
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