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Does the pension plan at International Business Machines Corp. treat its older workers fairly? IBM says yes, because it’s contributing the same percentage of pay to the plan for every employee, regardless of age. But older workers who have sued the company say no, because they’re receiving lower benefits than younger employees. Now IBM is asking a circuit court to decide the question. The suit over the IBM plan was filed five years ago in federal court in East St. Louis, Ill., on behalf of 130,000 current and former employees. In two other cases, federal judges have ruled that the kind of pension plan in place at IBM — known as a cash balance plan — isn’t discriminatory. But in a ruling last year, the district court judge in the IBM action disagreed. This past September, the Armonk, N.Y.-based computer giant reached a partial settlement with the plaintiffs in which it secured the right to appeal the judge’s decision to the 7th U.S. Circuit Court of Appeals. The stakes are high not just for IBM, but for at least 1,200 other companies with cash balance plans that cover more than 7 million workers. Besides IBM, six other businesses with these plans have been hit with age discrimination class action suits. Mark Ugoretz, the president of The ERISA Industry Committee, says, “There’s no question that if IBM loses on appeal, every company with a cash balance plan would become a target for a suit.” Ugoretz’s nonprofit group, based in Washington, D.C., advocates for employer interests on benefits issues. Many large companies switched from a traditional pension plan to a cash balance plan in the late ’80s and early ’90s. In a traditional plan, an employer increases the annual contribution that it makes for each worker as the employee grows older. In a cash balance plan, an employer makes the same annual contribution for each worker regardless of age. The result is that under a cash balance plan, older workers receive a smaller pension when they retire than if they’d been covered by a traditional plan. In his July 2003 ruling, Chief Judge G. Patrick Murphy granted the IBM plaintiffs’ motion for summary judgment. He based his decision on an actuarial formula commonly used to determine annuity benefits at age 65. The judge said such a test is required under the federal Employment Retirement Income Security Act. As an example, Murphy applied the annuity test to a 49-year-old employee. The judge found that under IBM’s cash balance plan, this employee’s future annual pension would decrease during each subsequent year of his employment, due to mortality tables and economic factors. Murphy’s opinion noted that IBM’s actuaries had made the company aware of the potential age discrimination issues in its cash balance plan. The judge also found that IBM’s pension plan would save the company almost $500 million by 2009, since it would reduce future benefits paid to older employees by 47 percent. In September 2004, IBM partially settled the plaintiffs’claims for $300 million. Under the settlement, the parties agreed that IBM could still appeal Murphy’s ruling, and that its liability on the remaining claims would be capped at $1.4 billion. Donald Rosenberg, an assistant general counsel at IBM who is overseeing a half-dozen in-house lawyers working on the pension suit, says that the company’s appeal cannot go forward for another six to 12 months while the interim settlement is finalized and then approved by the court. If the experience of Xerox Corp. is any guide, that could take a while. The Stamford, Conn.-based company settled a similar case over its pension plan in November 2003. Yet a year later, Xerox spokeswoman Christa Carone says that company lawyers are still trying to determine how many and which employees are affected by the settlement. Rosenberg says that if IBM loses its appeal, pension plans at some 1,200 companies — and at perhaps as many as 1,800 — could be illegal. “Then employers will have to decide what to do about their plans, and worry about paying out billions of dollars in a retroactive fix,” Rosenberg says. The IBM attorney adds, however, “We believe we will prevail on appeal.” Rosenberg says Murphy “had to reach” to interpret the law in order to arrive at his decision. But plaintiffs attorneys in the IBM case (who declined comment for this article) dispute that view. In a statement released after the September settlement, Douglas Sprong, a member of the plaintiffs’ legal team, said, “We are confident the class will win any appeal, because � older workers received less than their younger counterparts for no reason other than age.” Sprong is a partner with Korein Tillery in Belleville, Ill. The IBM plaintiffs are supported by AARP (formerly the American Association of Retired Persons), which has filed amicus briefs in some of the suits challenging cash balance plans. Mary Ellen Signorille, senior litigation attorney in AARP’s Washington, D.C., office, says, “You can still have a cash balance plan that does not violate the law if it is designed properly.” She adds, “Of course, it won’t be as cheap as what [companies] want.” Signorille maintains that in order for a plan to be legal and nondiscriminatory, a company would have to increase the amount of its annual contribution for each employee as the worker grows older. Ugoretz at The ERISA Industry Committee says that Murphy was wrong to apply the annuity test to IBM when judges have declined to use it in other cases involving cash balance plans. In June 2004, for example, Maryland federal district court judge Catherine Blake specifically rejected the annuity analysis in a challenge to the cash balance pension plan at Annapolis-based Arinc Inc. In her ruling, Blake cited a 2000 ruling by an Indianapolis federal district court judge who similarly found that the cash balance plan at Minneapolis-based Onan Corp. wasn’t discriminatory. Murphy’s decision — the first to say that cash balance plans are illegal — has emboldened the plans’ opponents. In the same Illinois federal court where the IBM plaintiffs brought their action, three other class action suits have been filed in the past six months, against Bank of America Corp., Allied Waste Industries Inc., and Monsanto Co. Similar cases also are pending in other federal venues against Gannett Co. Inc., AT&T Corp., and The Equitable Life Assurance Society. James Klein, president of the American Benefits Council in Washington, D.C., says that “even if IBM wins, I don’t see the critics of cash balance plans stopping there. They will try to undermine those plans in the courts and in Congress.” Klein’s group aids Fortune 500 employers and other organizations in operating pension plans that cover 100 million employees. Klein adds that the real losers could be employees. He notes that ERISA does not require companies to provide pensions, and only states that the process for providing a pension shouldn’t be discriminatory. In Klein’s view, “Most definitely, many companies would drop pension plans altogether” if IBM loses. The company’s Rosenberg agrees, saying that if Murphy’s ruling stands, it could force many businesses to end their pensions or reduce the number of employees who receive pensions. The one thing worse than a small pension, it might turn out, would be no pension at all.

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