Last week the Committee on Education and the Workforce held a hearing entitled “Examining Cash Balance Pension Plans: Separating Myth from Fact.” Plan Sponsor has an excellent summary of the hearing here.
Don’t have time to read it all? Here are some important excerpts from testimony at the hearing:
Opening Statement by Rep. John Boehner (R-OH), Chairman:
The recent wave of litigation surrounding cash balance plans has raised concerns from employers, workers, and policymakers alike. One well-documented court case involves IBM, but the initial ruling runs counter to existing law and a large body of other court decisions. In this case, the judge found the cash balance plan design inherently age discriminatory because equal pay credits for younger workers have a longer period of time to earn interest and accrue benefits before retirement than the same pay credits for older workers. This interpretation essentially means it would be age discriminatory to make equal contributions on behalf of workers with different ages. This is inconsistent with every other pension design and this logic would make a basic savings account, 401(k) plans, and even Social Security benefits automatically age discriminatory. We’re not here to debate the IBM case, but we also need to make sure cash balance plans aren’t forced into extinction at the expense of the interests of workers.Most courts have ruled no age discrimination occurs with cash balance plans if the pay and interest credits given to older employee accounts are equal to or greater than those of younger employees. The most recent ruling on this topic, issued just last month in the Tootle case, agrees that cash balance plans are not inherently age discriminatory.
Testimony of James M. Delaplane, Jr., Partner, the Benefits Group of Davis & Harman LLP, Special Counsel, American Benefits Council:
Disregarding the interpretation contained in the proposed regulations and other legal authorities, one federal district court judge dramatically shifted the focus of the debate surrounding hybrid plans by declaring in July 2003 in the case of Cooper v. IBM that hybrid plan designs were inherently age discriminatory. According to the court’s flawed logic, simple compound interest is illegal in the context of defined benefit pension plans. Under the Cooper court’s reasoning, a pension design is discriminatory even if the employer makes equal contributions to the plan on behalf of all its workers and, ironically, even in many instances where the design provides greater contributions for older workers. Such a conclusion flies in the face of common sense. It would hold all 1,200 plus hybrid pension plans, regardless of whether adopted as new plans or through conversion from traditional plans, to be in violation of the pension age discrimination laws.The conclusion that all hybrid plan designs are inherently age discriminatory begs the question why the Internal Revenue Service issued favorable determination letters for fifteen years blessing hybrid plan designs and issued proposed regulations providing that the cash balance plan design is not inherently age discriminatory. It is surprising, at a minimum, that the Cooper decision completely ignored this history. .
Testimony of Ellen Collier, Director of Benefits, Eaton Corporation, on behalf of the Coalition to Preserve the Defined Benefit System:
If Congress does not move quickly to provide legal certainty for hybrid plans, many Americans may soon lose valuable retirement benefits. The current legal landscape is ominous. One rogue judicial decision has made the threat of age discrimination class action litigation a very real concern for employers. Potential damage awards from such suits could reach astronomical figures — into the hundreds of millions or even billions of dollars – and the potential amounts of these awards continue to grow the longer the plans remain in effect. In Eaton’s case, the cost to modify our plan for alleged “age discrimination” in its design could curtail our ability to commit funds for other important functions, such as for research and development – and this is for a plan that has not yet been in existence for 3 years!
Testimony of Robert L. Clark, Professor, College of Management, North Carolina State University:
. . [P]olicy makers must remember that the pension system is voluntary and employers have many choices. A key concern is what is the appropriate counterfactual if conversions to cash balance plans are not allowed. If cash balance plans are not an option, firms my terminate their defined benefit plans and have no new plan, they might terminate their defined benefit plans and establish a new defined contribution plan, or they may retain the current plan but change the benefit formulas to reduce or eliminate the early retirement subsidies. Would the opponents of cash balance plans prefer one of these options? With this caveat in mind, regulations that are only aimed at preventing cash balance conversions would seem unwise and unlikely to achieve the desired result.
Testimoy of Robert F. Hill, Esq.:
. . . Congress has enacted very specific and very different legal frameworks for defined benefit plans and defined contribution plans. These rules were designed—with a recognition that taxpayers pay hundreds of millions of dollars to subsidize the private tax-qualified pension system–to assure that employees were treated fairly and to avoid abusive practices that undermine the promises made to employees and the employees’ reasonable expectations. The Joint Committee on Taxation has estimated that in 2004 taxpayers will pay about $89 billion in foregone taxes to subsidize the private tax-qualified pension system. It is only right and proper that Congress assure that the taxpayers’ monies provide a system that is fair to all workers, including older workers.
Testimony of Nancy M. Pfotenhauer, President, Independent Women’s Forum:
We believe the emergence of hybrid plans is encouraging news for many and a cause for particular hope among women. In fact, one benchmark study done in 1998 by the Society of Actuaries found that an amazing 77% of women do better under a cash balance approach. They are better off under a cash balance system because they move in and out of the workforce in order to balance family needs and because they cannot afford to take early retirement. Despite this promise, it is clear that controversy exists about how firms should transition to hybrid plans. Many have questioned the fairness of changing pension approaches for employees over 40 years of age.An alternative perspective, and one that IWF believes has credence, is that any adoption of restrictions that effectively limit the ability of companies to transition to hybrid plans places the financial well-being of the relatively few employees who have had the luxury of staying with one company for a long period of time (decades), have the luxury of taking early retirement, and have the luxury of taking their pension benefit in the form of an annuity rather than as a lump sum, ahead of all of the employees who do not have these options.