Ruling in IBM cash balance case has big impact on bias debate

The weight of a landmark federal appeals court decision on cash balance pension plans is being felt just two months after the ruling was handed down.

In a decision that captured national attention, a unanimous panel of the 7th U.S. Circuit Court of Appeals in August reversed an earlier district court ruling that IBM Corp.'s cash balance plan was age discriminatory.

That broad ruling--the first time an appeals court ruled on the issue--was a huge victory for employers with the plans. Point by point, the three-judge panel detailed why all cash balance plans--not just IBM's 7-year-old plan--are not age discriminatory.

The decision was of direct interest to the more than 1,000 employers, including many of the nation's largest corporations, that now sponsor cash balance plans. The plans--so named because benefits are expressed and are available as a cash lump sum rather than only as a monthly annuity--had been the fastest-growing defined benefit plan until they became the target of age discrimination lawsuits a few years ago.

The appeals court ruling already has been cited in the dismissal of age discrimination charges in two decisions handed down since the Chicago-based court vindicated IBM's plan.

The first post-IBM ruling involves a suit against PricewaterhouseCoopers L.L.P. by three former PwC employees. Last month, Judge Michael Mukasey of the Southern District of New York rejected the age discrimination charge by the plaintiffs. Citing a central point in the IBM ruling, Judge Mukasey, who has since retired from the court to become a partner with the law firm Patterson, Belknap, Webb & Tyler L.L.P. in New York, said the terms of a cash balance plan are age-neutral "because each participant receives the same pay credit and interest credit each year."

The other post-IBM decision involved a suit filed by four former employees of World Color Press Inc., which offered a cash balance plan. World Color Press later merged with another printing company to become Quebecor World Inc., which is based in Montreal.

In dismissing the age discrimination charge filed against Quebecor, Senior U.S. District Court Judge Karl Forester, of the Eastern District of Kentucky in Lexington, also quoted from the IBM decision that "all terms of IBM's plan are neutral. Each covered employee receives the same 5% pay credit and the same interest credit per annum."

While plaintiffs argued that the same benefit provided to younger employees as to older employees is more valuable to younger employees because their benefit would earn interest over more years, Judge Forester, again directly quoting from the IBM decision, wrote that analysis "treats the time value of money as age discrimination. Yet the statute does not require that equation.

"Interest is not treated as age discrimination for a defined contribution plan and the fact that these subsections are so close in both function and expression implies that it should not be treated as discriminatory for a defined benefit plan either," Judge Forester concluded.

Pension attorneys and others are not surprised that the 7th Circuit Court of Appeals ruling already is swaying judges with cash balance age discrimination cases before them.

"This is a highly regarded court with a very persuasive opinion. There was no question in my mind that it would have significant impact" in other cases, said Jeffrey Huvelle, a partner with Covington & Burling L.L.P. in Washington, who argued IBM's appeal before the appeals court.

"The clarity and focus of the decision certainly will influence other courts," said Russ Hall, a principal with Towers Perrin in Valhalla, N.Y.

Still, attorneys point out the legal climate for cash balance plans is far from settled and perhaps won't be until other appeals courts rule on the age discrimination issue.

"We don't have closure yet," said Nancy Ross, a partner with McDermott, Will & Emery L.L.P. in Chicago, who successfully defended Equitable Life Assurance Society--now known as AXA Equitable Life Insurance Co.--against cash balance plan age discrimination charges.

Indeed, in mid-December, the 3rd U.S. Circuit of Appeals will hear oral arguments in a cash balance plan age discrimination suit filed against PNC Financial Services Group Inc., a Pittsburgh-based bank. Last year, a district court dismissed the age discrimination charges and plaintiffs then appealed the ruling.

Additionally, the 9th U.S. Circuit Court of Appeals is reviewing--but has not yet set a date for oral arguments--a lower court ruling dismissing age discrimination charges against Southern California Gas Co., the nation's largest natural gas distribution utility and a subsidiary of San Diego-based Sempra Energy.

The decisions reached by those appeals courts, observers say, will be critical in whether the age discrimination issue is put to rest.

"We won't have certainty until the other appeals courts rule. We need to ride the wave longer to have greater comfort," said McDermott, Will & Emery's Ms. Ross.

"The 3rd and 9th Circuits are the wild cards," said Christopher Rillo, a principal with Groom Law Group in Washington.

If the two other appeals courts join the 7th Circuit, additional age discrimination suits likely will dry up and pending suits in courts covered by those circuits will be dismissed, attorneys note.

"The controversy then would pretty much come to an end," said Kyle Brown, an attorney with Watson Wyatt Worldwide in Arlington, Va.

While the last battle in the cash balance age discrimination conflict is not over, the impact of IBM's victory cannot be overstated, experts say.

Had the 7th Circuit ruled against IBM, a slew of employers would have rushed to phase out their cash balance plans. "That was the critical result of the 7th Circuit decision. It saved a lot of retirement benefits provided through cash balance plans," Ms. Ross said.

Congress, as part of a pension funding reform bill passed this summer, shielded cash balance plans from age discrimination suits. But that protection applies only to new plans, leaving it up to the courts to resolve the issue for existing plans.