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High Court won't review IBM pension bias case


WASHINGTON—The U.S. Supreme Court's refusal last week to review a federal appeals court decision that cash balance pension plans do not discriminate against older employees means it could be years before the plans' legal status is resolved.

The justices let stand an August 2006 ruling involving IBM Corp. by the 7th U.S. Circuit Court of Appeals that said the design of cash balance plans in general, and IBM's plan in particular, do not violate age discrimination law (BI, Aug. 14, 2006).

While the same benefit earned by a younger employee and an older employee will result in a bigger retirement annuity for the younger employee, that is the result of the time value of money and, therefore, the plans are not discriminatory, the appeals court ruled.

The appeals court decision did not, though, put an end to the age discrimination issue. Since the ruling, several lower courts in other cash balance plan suits have embraced the decision in rejecting age discrimination charges, while other courts have ruled that the plans are age discriminatory.

With the Supreme Court taking a pass in the IBM case, the key battlegrounds in the litigation will be other appeals courts as they take up lower court decisions.

"It will come down to what appeals courts decide," said Sheldon Gamzon, a principal with PricewaterhouseCoopers L.L.P. in New York.

"We will have to see what happens in the other circuits," said Larry Sher, a principal and director of retirement policy at Buck Consultants L.L.C. in New York.

The next appeals court ruling likely will come from the 3rd U.S. Circuit Court of Appeals, which last month heard oral arguments in a suit against Pittsburgh-based PNC Financial Services Group Inc. In 2005, a lower court dismissed cash balance plan age discrimination charges against PNC (BI, Nov. 28, 2005).

Several other appeals courts also are expected to take up cash balance plan age discrimination rulings, though when that will happen is not known.

Experts doubt if Congress will return to the issue anytime soon. As part of a comprehensive pension funding measure passed last year, Congress protected new cash balance plans--those established after June 29, 2005--from age discrimination suits so long as the plans meet a few basic standards (BI, Aug. 7, 2006).

"There was a strong lobbying effort to make the cash balance provisions retroactive and Congress didn't do it," said Nancy Ross, a partner with McDermott, Will & Emery L.L.P. in Chicago.

While the roughly 1,200 to 1,500 employers that have the plans are anxiously awaiting the outcome of suits, other employers interested in setting up new plans--thanks to the prospective cash balance plan protection provisions in last year's pension law--have no such worries.

New plans

And benefit consultants expect new plans to be established as employers analyze and come to appreciate the advantages of cash balance plans.

"These plans still make enormous sense and sophisticated plan sponsors will come to realize that," said Kevin Wagner, a senior consultant in the Atlanta office of Watson Wyatt Worldwide.

For example, unlike 401(k) plans, in which employer contributions are locked in, contributions to cash balance plans, which legally are defined benefit plans, can be slashed if plan assets earn superior investment results. Employers decide how plan assets are invested.

At the same time, one financial risk of traditional pension plans--that retirees may live longer than expected, resulting in longer-than-calculated monthly annuity payments and greater employer costs--is not much of a risk in cash balance plans, Mr. Wagner said.

That is because the overwhelming majority of cash balance plan participants take their accrued benefit as a lump sum when they leave, ending the employer's benefit obligation.