At the recent ALI-ABA seminar on Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers, IRS officials stated that, due to the recent changes brought about by the Pension Protection Act of 2006, the IRS plans to start moving cash balance plans out of what the IRS referred to as "cash balance plan jail." "Cash balance plan jail" is the whimsical name given to the status of numerous cash balance plans (around 1200 plans) which have been submitted to the IRS for a determination letter over the past number of years, and which remain in a holding pattern, since the IRS had suspended the issuance of determination letters on all cash balance plans that had been converted from traditional defined benefit plans. The IRS said at the conference that one of its "high priorities" is to close out the cash balance plans waiting for a determination letter within a year from now (with governmental and nonelecting church plans not subject to section 411 of the Internal Revenue Code at the forefront of the movement). While this is good news for many, there was some bad news mixed in: officials said "some may not get a favorable determination letter."
You can access a copy of the the recent case of Richards v. FleetBoston Financial Corp here [pdf]. A federal district court in Connecticut has opined in that case that an employee could continue with a claim that the company's cash balance plan violates the age discrimination prohibitions under ERISA.
(Comment: The old adage that "you can't fit a round peg in a square hole" really seems to apply here. Congress needs to fix this sooner rather than later. You can read about how things are going with pension legislation here.
I liked what House Education and the Workforce Committee Chairman Howard P. "Buck" McKeon (R-Calif.) had to say about hybrid plans on the floor of the House in early April:
"[H]ybrid pension plans represent an important component of worker retirement security. In fact, more than 9 million workers today rely on these benefits for a safe retirement. Unfortunately, some continue to paint a misleading picture about these pension plans. . .Not only are hybrid plans especially advantageous for women and lower-paid workers, but they also comprise the only part of the defined benefit system that is growing. Hybrid plans now provide the PBGC with approximately 25 percent of its premium income. And because the total number of defined benefit plans has declined significantly over the last 20 years, it is now more important than ever to encourage employers to stay in the defined benefit system and offer these benefits. . )
For those who can't wait to read it, I am posting a copy of the Memorandum issued by the court in the Sandra Register vs. PNC Financial Services Group Inc. case. The decision, which addresses the issues involved in cash balance plan conversions, was rendered on November 21, 2005 by the Federal District Court for the Eastern District of Pennsylvania. The court granted the defendants' motion to dismiss. PlanSponsor.com has a summary of the case here: "Cash Balance Plan Foes Lose in PA Federal Court."
The Government Accountability Office has issued its report on Cash Balance Plans:
Concluding Remarks from the Report ("CB" stands for "cash balance, "DB" stands for "defined benefit" and "FAP" stands for "Final Average Pay"):
Our analysis illustrates one of the difficult choices facing the Congress in crafting comprehensive DB pension reform legislation, including the controversial issues surrounding the legal status of CB plans, and particularly CB conversions. The current confusion concerning CB plans is largely a consequence of the present mismatch between the ongoing developments in pension plan design and a regulatory framework that has failed to adapt to these designs. Although CB plans legally are DB plans, they do not fit neatly within the existing regulatory structure governing DB plans. This mismatch has resulted in considerable regulatory uncertainty for employers as well as litigation with potentially significant financial liabilities. For many workers, this mismatch has raised questions about the confidence they may have in the level of income they expect at retirement, confidence that has already been shaken by the termination of large pension plans by some bankrupt employers.CB plans may provide more understandable benefits and larger accruals to workers earlier in their careers, advantages that may be appealing to a mobile workforce. However, conversions of traditional FAP plans to CB plans redistribute benefits among groups of workers and can result in benefits for workers, particularly those who are longer tenured, that fall short of those anticipated under the prior FAP plan. Our simulations suggest that grandfathering plan participants who are being converted can protect those workers' expected benefits, and, in fact, such protections, in some form, are fairly common in conversions. Our simulations also show that without such mitigation, many workers can receive less than their expected benefits when converted from a traditional FAP plan, even in cases where the CB plan is of equal cost to the FAP plan it is replacing. As a result, as we noted in our 2000 report, additional protections are needed to address the potential adverse outcomes stemming from the conversion to CB plans. For example, requirements for setting opening account balances could protect plan participants, especially older workers, from experiencing periods of no new pension accruals after conversion while other workers continue to earn benefits.
Our simulated comparison of CB plans with the termination of a FAP plan leads to several important observations. First, the immediate vesting of all unvested workers requirement in a plan termination actually leads to a greater number of workers getting some retirement benefits and highlights the portability limitation of DB plans. Workers in an ongoing DB plan only receive benefits if they are vested. Appealing to a mobile workforce would seem to place an even greater significance on pension portability. Yet even CB plans, which often feature lump sum provisions in their design, do not address this issue because they typically have similar vesting requirements as traditional FAPs.
In our simulations, vested workers under either a typical or equal cost CB plan still fare better than if the FAP plan is terminated. We note further that some sponsors of CB plans have already exited the DB system, a system that has been declining in sponsorship and participation for several decades now. There is a crucial balance between protecting workers' benefit expectations with unduly burdensome requirements that could exacerbate the exodus of plan sponsors from the DB system. Congress, as it grapples with the broader components of pension reform, has the opportunity not only to protect the benefits promised to millions of workers and eliminate the legal uncertainty surrounding CB plans that employers face, but also to craft balanced reforms that could stabilize and possibly permit the long-term revival of the DB system.
It is interesting that the media is going crazy over this report, noting that "Democratic lawmakers, who last year asked the GAO to examine the matter, [have] seized on the report as fresh evidence that the so-called cash balance pension plans hurt workers." See Pension Plan Switch Hurts Employees. In addition, the article reports:
The GAO study "is further proof of the need to stop companies from slashing the pension benefits of older workers through cash balance schemes," Rep. Bernie Sanders, I-Vt., said Friday in a statement.
However, that is not the main message of the report at all. See bolded portion above which states that a CB plan is far better than a terminated FAP plan, and that Congress should "eliminate the legal uncertainty surrounding CB plans" and do everything possible to keep plan sponsors from exiting the DB system. In other words, employers are always free to terminate their DB plans (freezing accruals as of the date of termination) without adopting any plan to replace it. Such a scenario is far worse for the employee than replacing it with the "controversial" cash balance plan, "warts and all."
See also this Plan Sponsor article here with some success stories involving cash balance plans. (One could hardly call them "schemes.")
I received a copy of the Order (access it here [pdf]) denying the defendants' motion to dismiss in the cash balance plan litigation involving the Gannett Retirement Plan. The Order is too sparse in its analysis to provide any meaningful discussion here other than to say that the opinion seems to disagree with Eaton v. Onan Corp., 117 F. Supp. 2d 812, 817 (S.D. Ind. 2000) and Tootle v. ARINC, Inc., et al. (discussed here) on whether 29 U.S.C. section 1054(b)(1)(H) applies to employees who have not yet reached normal retirement age. That provision prohibits the reduction of the rate of a participant's benefit accrual because of age and reads as follows:
. . .[A] defined benefit plan shall be treated as not satisfying the requirements of this paragraph if, under the plan, an employee's benefit accrual is ceased, or the rate of an employee's benefit accrual is reduced, because of the attainment of any age.
Read more about cash balance plan litigation and legislative developments at this link here.
This article from Law.com--"Employment Law Forecast: Stormy Weather"--lists the cash balance pension plan litigation as one of the hot topics in 2005 for general counsels to keep an eye on:
. . . [I]n the wake of IBM's massive settlement, other companies with pension plans are wondering whether they, too, could pay a steep price. Bank of America Corp., Allied Waste Industries Inc., Monsanto Company, and AT&T Corp. are among the companies that are defendants in class action suits that challenge cash-balance plans. GCs may soon be making a cost-benefit decision: Is the risk of class action litigation worth the savings from switching from a defined-benefit pension plan to a cash-balance or 401(k) plan?
(Link from George's Employment Blawg.)
Interesting article from Workforce Insights entitled "In the Balance: The Future of Pension Rights." The article discusses the future of the cash balance plan and suggests that the cash balance plan controversy may be headed for the U.S. Supreme Court:
IBM’s cause – which has become the cause of pension sponsors generally – may not end at the Circuit Court in Chicago. The issue seems likely to wind up in the Supreme Court, especially if the split that has already shown up at the District Court level also occurs among the Circuit Courts of Appeals. There also could be legislation.The Treasury has urged Congress to act. It told the lawmakers last February that the split among federal judges "has created uncertainty about the basic legality of these plans. Removing that uncertainty is critical to preserving the vitality of the defined benefit system, which provides retirement income security for millions of American workers and their families."
Lyle Denniston is a veteran Supreme Court reporter, having covered the highest court for 46 years. He thus has covered one out of every four Justices ever to sit on the Court. Denniston is now reporting on the Court for SCOTUSblog, a Web site devoted to news and information about the Court, and for the NPR Boston affiliate, WBUR.
The New York Times is reporting: "IBM Employees Get $320 Million in Pension Suit." According to the article:
Under the settlement, which is subject to approval by the court, IBM would pay at least $300 million to current and former employees and $20 million to employees who had not been at the company long enough to earn a pension. The payment of $300 million settles all disputes that arose when IBM changed its pension plan the first time, in 1995, to an interim design called a pension-equity plan.But the settlement leaves unresolved the two claims in the class-action lawsuit that pertain to cash-balance pensions. IBM intends to appeal those claims. One remaining claim is at the very heart of the case: whether cash-balance pension plans by definition discriminate against older workers.
PlanSponsor.com has a good summary of the development here and reports that the settlement caps IBM's liability with respect to the cash balance plan issue at $1.4 billion if IBM were to lose that issue on appeal.
From the Wall Street Journal article here:
IBM Treasurer Jesse Greene said that "this settlement protects the company and our shareholders." He said that even if it loses the sections it is appealing, "the remedies are within IBM's ability to handle." IBM said it expects to prevail on appeal.
As noted in this previous post here, the House of Representatives on Tuesday (237-162) approved the Gutknecht-Sanders Amendment pertaining to cash balance plans, which reads as follows:
None of the funds appropriated by this Act may be used to assist in overturning the judicial ruling contained in the Memorandum and Order of the United States District Court for the Southern District of Illinois entered on July 31, 2003, in the action entitled Kathi Cooper, Beth Harrington, and Matthew Hilleshein, Individually and on Behalf of All Those Similarly Situated vs. IBM Personal Pension Plan and IBM Corporation (CivilNo. 99-829-GPM).
For those who are interested in reading the debate which took place on the floor of the House of Representatives over the Amendment, continue reading . . .
AMENDMENT NO. 5 OFFERED BY MR. SANDERS
Mr. SANDERS. Mr. Chairman, I offer an amendment.
The CHAIRMAN pro tempore. The Clerk will designate the amendment.
The text of the amendment is as follows:
Amendment No. 5 offered by Mr. Sanders:
At the end of the bill, insert after the last section (preceding the short title) the following new section:
SEC. __X. None of the funds appropriated by this Act may be used to assist in overturning the judicial ruling contained in the Memorandum and Order of the United States District Court for the Southern District of Illinois entered on July 31, 2003, in the action entitled Kathi Cooper, Beth Harrington, and Matthew Hillesheim, Individually and on Behalf of All Those Similarly Situated vs. IBM Personal Pension Plan and IBM Corporation (Civil No. 99-829-GPM).
The CHAIRMAN pro tempore. Pursuant to the order of the House of Tuesday, September 14, 2004, the gentleman from Vermont (Mr. Sanders) and a Member opposed each will control 20 minutes.
The Chair recognizes the gentleman from Vermont (Mr. Sanders).
Mr. SANDERS. Mr. Chairman, I yield myself 7 minutes.
Mr. Chairman, this tripartisan amendment is cosponsored by the gentleman from Minnesota (Mr. Gutknecht), the gentleman from California (Mr. George Miller), the gentleman from New York (Mr. Hinchey), and the gentleman from Illinois (Mr. Emanuel). This amendment also has the strong support of the AARP, the largest senior citizen group in this country, representing over 35 million Americans; the AFL-CIO, representing all of organized labor; and the Pension Rights Center.
Mr. Chairman, last year, this amendment passed the House by a vote of 258 to 160. Two years ago, a similar amendment passed by a vote of 308 to 121. By voting for this amendment today, we will be protecting the retirement benefits of some 8 million American workers who have seen their pensions slashed by as much as 50 percent through age discriminatory cash balance pension schemes and the 14 million more American workers who still have traditional, defined benefit plans that could be converted to cash balance schemes. That is the issue today: standing up for those workers and protecting the pensions that they have been promised.
The reason that this amendment is coming up again today is, despite the very strong, tripartisan support that we have seen in the House, this bill has yet to be implemented into law, and it is imperative that we keep fighting and keep standing with American workers who want us to do that.
Mr. Chairman, this amendment is simple and straightforward. In July of 2003, a Federal court ruled that IBM's cash balance pension plan violates Federal anti-age discrimination law. The judge in this case is expected to award damages to IBM employees any day now, after which the company will appeal to the Seventh Circuit Court of Appeals.
Our amendment today would simply prohibit the Federal Government from assisting in overturning this pro-worker court decision. IBM deserves its day in court, like every other litigant, but taxpayer money should not be used to support an age-discriminatory cash balance plan. And this amendment gives Congress the opportunity to make that very clear.
Mr. Chairman, let us be very clear. While this particular lawsuit involves IBM's conversion to a cash balance plan, there are hundreds of other companies that have done exactly the same thing. This is not just IBM; it is hundreds of companies, companies like AT&T, Duke Energy, CBS, Bank of America, Enron, WorldCom and many others. It is not only IBM employees who are hurting but millions of workers from one end of this country to the other who have also been affected, people whose retirement dreams have been shattered when companies change the rules of the game and slash the retirement benefits that were promised to their employees.
This precedent-setting court ruling against cash balance plans confirms what American workers have been saying for years: Cash balance pension conversions discriminate against workers based on age, are illegal and, without adequate protections for older workers, must be stopped. And that is what we are here to do today.
Mr. Chairman, let me just read a brief excerpt from the ruling of Judge Murphy: ``In 1999, IBM opted for a cash balance formula. The plan's actuaries projected that this would produce annual savings of almost $500 million by 2009. These savings would result from reductions of up to 47 percent in future benefits that would be earned by older IBM employees. The 1999 cash balance formula violates the literal terms of the Employee Retirement Income Security Act. IBM's own age discrimination analysis illustrates the problem.'' That was Judge Murphy.
Mr. Chairman, I became involved in this issue several years ago when hundreds of IBM employees in Vermont contacted my office and told me that the pensions that they had been promised by the company had been cut by 20 to 50 percent. In fact, the largest town meeting that I have ever held in Vermont, and I have held many, was for some 700 IBM workers who came out to demand that the company rescind the changes that had been made in their pension plan.
Mr. Chairman, think about it. Think about workers staying at a company through good times and bad times, providing loyalty to their employers because, among other reasons, they expect to receive certain agreed-upon pensions when they retire. And then, Mr. Chairman, one day, out of nowhere, the company sends a document, maybe it is an e-mail, which says, in so many words: Thank you, employees, for your dedicated service to the company, but forget about the promises that we made to you regarding the retirement that you and your family were anticipating. Forget about it. That is gone.
And, in many instances, while pulling the rug out from under their employees, we are seeing older workers, years of service to a company, suddenly find that the pensions that they had been planning on, the retirement dreams that they had been expecting, slashed by up to 50 percent.
Mr. Chairman, for those Members who will tell us that cash balance conversions are good things and should be supported, and there will be some today, I would remind them of a report from the Congressional Research Service that I requested. And very simply, what I asked the CRS to tell me is, what impact would a conversion to cash balance mean for Members of Congress, because I hear over and over again, Members of Congress, they want the American people to have what they have.
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Well, surprise, surprise. What the CRS reported was that, if Congress converted to cash balance payment plans, our retirement benefits would go down, down, down. So, if any Member today thinks that it is a great idea to force cash balance payment plans on the workers of America, I hope that they will do the same thing for the Members of Congress and cut their pensions by up to 50 percent.
Mr. Chairman, all over this country today, there is enormous pension anxiety. People who have worked for decades are wondering whether the promises made to them will be kept. That is the issue today. Let us vote for this tripartisan amendment.
Mr. Chairman, I reserve the balance of my time.
Mr. ISTOOK. Mr. Chairman, I claim the time in opposition to the amendment.
The CHAIRMAN pro tempore. The gentleman from Oklahoma (Mr. Istook) is recognized for 20 minutes.
Mr. ISTOOK. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, maybe people do not realize what we are actually debating. We are not debating pension plans. We are not debating conversion of pension plans from one type to another. We have before us the amendment by the gentleman from Vermont to this Transportation and Treasury appropriation bill, and maybe people do not realize what the amendment says.
The amendment says that you cannot use any of the money appropriated in this bill to assist in overturning the judicial ruling on a particular court case. That case, which was in the Southern District of Illinois, decided last year, was the action of Kathi Cooper, Beth Harrington and Matthew Hillesheim, Individually and on Behalf of All Those Similarly Situated v. IBM.
The amendment says, do not use any of the money in this appropriations bill to assist in overturning a court case to which the United States Government is not even a party. It is a case between IBM and some workers at IBM. Not only that, this bill does not contain funding for the judicial system, nor do I believe it is the role of this Congress to say, when I like a court decision, I am going to come here with a bill that says, nobody can overturn this court decision. If I do not like a court decision, I am going to come here with a bill that says, we must overturn the court decision.
Now, we can change underlying law. That is our job. But it is not our job to say, we are going to decide a particular court case. If we want to change the law that governs the entire country, we ought to do it, but not come with a bill that has nothing to do with the judicial system and say, you cannot use this to overturn a court case between IBM and some of its workers.
Now, there is a lot of controversy, we know, about types of pension plans and conversions of pension plans. We have legislation that is being considered. We have the Treasury Department, which is working on potential regulations relating to those conversions. And the Treasury Department works with every company in the country and every individual covered by a pension plan in the country, and you cannot say you do not communicate with each other.
[Time: 15:30]
But, again, that is not what this says. It says, do not help somebody overturn a court case to which you are not a party. Come on, get real. Besides which, there has been other litigation on this case, and other courts came down on the other side. I think there have been four cases around the country. Three went one way; this one went the other.
If we want to talk about the issues, let us bring legislation to talk about what pension laws should be generally, not try to say we are going to overturn a court case with an action before this Congress in the amendment.
One final thing just because I know that the proponents of the amendment are getting into the merits of the case. Basically, that case said, well, it is age discrimination if somebody is going to work for a company longer and so their benefits earn more interest than somebody that works for a shorter period of time. And this court decided that was age discrimination. If money accrues more interest because it is invested longer, they call that age discrimination. I do not. I do not think most people who apply common sense would think that.
But this amendment does not belong on this bill. This is not changing the law of the land. This is trying to change the outcome of a lawsuit that is now on appeal to which the United States is not even a party. We should not be doing that.
I ask for opposition to this amendment.
Mr. Chairman, I reserve the balance of my time.
Mr. SANDERS. Mr. Chairman, I yield 4 minutes to the gentleman from Minnesota (Mr. Gutknecht), a gentleman who has been very active in supporting workers on pension issues.
Mr. GUTKNECHT. Mr. Chairman, I thank the gentleman for yielding me time.
I want to agree in most part with what the chairman said about this issue. It probably is not the appropriate time to have a big debate about pension policy, but I come to a completely different conclusion.
He said this amendment does not belong on this bill. It is a shame that we have to talk about this amendment on this bill, because it really is about pension policy, and it is about age discrimination, and it is about one company in particular. Now, I do disagree with the gentleman from Vermont (Mr. Sanders). I do not think all of these cash balance plans are inherently evil. And, frankly, there have been a number of companies that have converted their pension plans working with the collective bargaining units, working with their employees, giving employees their choice that have done things the right way. So these are not inherently evil things in terms of pension.
As we go forward as a society, as people change jobs more often, the idea of a cash balance plan may make some sense; but it does not make sense when you have a system that works the way it did in the IBM employees' case, and that is where they were given no choice, they were given no say. These were people with vested benefits.
Let me remind Members about what vested says about things. This is the quotation from Webster's Collegiate Dictionary. It says: ``Fully and unconditionally guaranteed as a legal right, benefit, or privilege.''
Now, these employees showed up for work one day, and they thought they had a pension benefit plan that was vested, that was theirs, that was fully and unconditionally guaranteed; and all of the sudden they found out that day that vested does not mean what they thought it meant. And they finally wound up getting this case before a Federal judge in a Federal court. And the Federal court, and I believe the Federal court in this case was absolutely right, said, wait a second. You cannot do this because the way pensions accrue value is you get most of the benefit.
There is sort of an ascending curve in pension benefits, and it is toward the end of your working career when you get the most benefit. So people who had worked for IBM for 20 years and were going to retire in 5 or 6 years, and I will say that IBM under enormous pressure did rescind the original package that they put in front of the employees, they made it a little better for older workers.
But it did not change the basic facts. First of all, the employees were given no choice even if they were vested. What it did and the reason why IBM and a lot of other employees wanted to convert to these cash balance plans is because they understood that it was a way to shave off those benefits for older workers in the last 5 or 6 years that they might be working for the company.
The bottom line is this: what they were really trying to do is get their hands in the pension funds, because they realized and their actuaries realized that most of these pension funds were overfunded, and they could literally move that money from the pension fund to their bottom line by making these conversions.
Companies are now coming and saying, gee whiz, this is going to cost us billions of dollars. Well, yes, it is going to cost billions of dollars because that was the employees' money. It did not belong to the employer. In fact, in some respects pension funds do not belong to the employee or employer. It is money being held in trust. And one company broke that trust, and the
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Federal courts have come down on them very heavily.
I agree with the chairman, we should not have to be offering this amendment today because it is just outrageous for us to think that our own Federal Government would attempt to intervene in a case in which they are not a party to try and overturn a hard-won victory for the employees of IBM. This is an outrage. This is where we, whether Republicans or Democrats, ought to stand together and say it is wrong to steal from pension funds.
Support the Gutknecht-Sanders amendment.
[Begin Insert]
I come to the floor as a cosponsor of this important amendment. IBM employs about 5000 people in my district and there are close to 5000 IBM retirees across the state of Minnesota. Their employees are also my constituents and I, therefore, have a vested interest in ensuring IBM employees are treated fairly.
Fifty years ago a salary was the most important thing to workers. Times have changed. today pensions and other benefits are the main reasons workers choose a particular company. It is important we encourage employers to keep their promises to their employees and not change their pension plans in midstream.
When an employee becomes vested in a pension plan he or she expects to receive those benefits. ``Vested'' according to my Webster's Collegiate Dictionary means ``fully and unconditionally guaranteed as a legal right, benefit, or privilege.'' These expected benefits should not be taken away.
Unfortunately, IBM did just that. Perhaps IBM received bad business advice, but the method by which IBM went about switching to a cash balance pension plan was far from exemplary. Let me remind you we're not talking about a company in dire fiscal straits. We're talking about a very healthy company.
Originally IBM offered only those employees within five years of retirement a choice between the old and new pensions plans. While I am pleased they expanded this choice to cover more employees after the employees rightly expressed their outrage, I believe the court case brought against IBM should proceed without intervention by the U.S. Treasury Department.
I wish IBM had adopted models used by other companies when they switched to alternatives to traditional defined benefit pension plans.
For example, Honeywell, another company with many employees in Minnesota, across America, and around the world, switched to a pension equity plan in 2000. Honeywell offered all their employees a choice between remaining in the old plan and switching to the new plan. This is the model of how I feel companies should proceed in this area.
The Director of Benefits for Eaton Corporation, Ellen Collier, testified in front of the House Education and Workforce Committee this year that her company has given employees the choice between two retirement plans. Motorola, Deloitte & Touche, Northern States Power, Eastman Kodak and many other companies have all given their employees choice between old and new plans.
I understand that cash balance plans are a reality of the modern world and we should not discourage companies from offering them. I, however, do feel there are right and wrong ways to go about converting from one plan to another.
IBM handled this inappropriately and I believe the court case should proceed without federal government involvement.
This amendment overwhelmingly passed the House last year by a vote of 258 to 160 with strong support from both sides of the aisle. It is supported by the AARP. I urge my colleagues to support the Sanders/Gutknecht Amendment.
[End Insert]
Hon. GIL GUTKNECHT,
House of Representatives,
Washington, DC.
DEAR REPRESENTATIVE GUTKNECHT: AARP supports the Gutknecht-Sanders amendment to the Transportation, Treasury and Independent Agencies Appropriations Act for Fiscal Year (FY) 2005 to ensure that the Internal Revenue Service (IRS) does not use any funds in contravention of current law prohibitions on age discrimination in pension plan funds and to specifically prohibit the IRS from issuing regulations or implementing any other measure that would conflict with the July 31, 2003, federal court ruling in Kathi Cooper, et al. v. IBM Personal Pension Plan, et. al.
AARP has long been concerned with the legal basis for the hybrid cash balance formula and the significant age discriminatory issues that arise when employees convert defined benefit pension plans to a cash balance formula. We believe that a careful review of the legal distinction between defined benefit and defined contribution plans such as was conducted by the federal court in Cooper makes clear that the most common designs for hybrid cash balance plans do not fit within the current legal framework of the Internal Revenue Code (IRC), the Age Discrimination in Employment Act (ADEA), and the Employee Retirement Income Security Act (ERISA).
As the court concluded in Cooper, the cash balance plan formula discriminates against older workers, and older workers are particularly disadvantaged when an employer converts from a defined benefit pension plan to a cash balance plan. These longer-term employees have given up wages and accepted a lower pension in the early years of their employment in exchange for the larger future benefits from their employer's traditional defined benefit pension plan. Without adequate protection, older workers will now lose some of the benefits they were promised. Older workers generally have less time to accumulate benefits under a new cash balance formula, have a harder time leaving their current job if compensation and benefits are cut, will have fewer prospects of finding a new job, and are less able to adjust to the changes that may dramatically reduce their retirement security (for example, they have less time to adjust by increasing their savings for retirement).
In September 1999, the IRS imposed a moratorium on corporate plans that convert traditional defined benefit plans to a cash balance formula so the agency could review the matter. The moratorium suspended consideration of approximately 300 pending applications submitted by corporations to convert an existing plan to a cash balance formula. The Treasury initially proposed regulations in December 2002 that would have lifted the moratorium and permitted corporations to establish cash balance plans. However, the IRS withdrew the proposed regulations in July of this year.
In its FY 2005 budget, the Administration proposed legislation that would have addressed some of the concerns related to cash balance plan conversions. AARP was pleased that the legislative proposal recognized the problem with so called ``wear-away'' and recommended a ban on the wear-away of any benefits at any time after a cash balance plan conversion. In recognition of the transition problem faced by workers, the Administration's proposal also included a five-year ``hold harmless'' period after each cash balance plan conversion.
While the proposal is a step in the right direction, it does not go far enough. More can be done to ensure that older workers are adequately protected from the impact of a ``pension pay cut'' in any conversion to a cash balance plan. In fact, many of the recent pension conversions--recognizing the harm to older workers--have provided older and longer-service workers with more generous transition relief, including a choice to remain in the old plan rather than move to the new cash balance plan. This is further confirmation that business can and should do the right thing for their older, longer-service employees.
AARP believes that Treasury should not take any action that would encourage companies to change their pension plans in a manner that is contrary to the age discrimination laws and the federal court ruling. Rather, Congress should act to ensure that older workers are protected in any cash balance conversion. We urge adoption of this amendment.
Thank you for your leadership and dedication to strengthening the private pension system and protecting the pension benefits of workers. Please let me know, or have your staff call Frank Toohey (202-434-3760) of our Federal Affairs office, if we can be of further assistance.
Sincerely,
Michael Naylor,
Director of Advocacy.
Mr. SANDERS. Mr. Chairman, does the gentleman have additional speakers?
Mr. ISTOOK. Mr. Chairman, I have another speaker that may be arriving, but they are not here at this time; and other than that, I know of no other Members seeking time.
Mr. SANDERS. Mr. Chairman, I yield 4 minutes to the gentleman from Illinois (Mr. Emanuel).
Mr. EMANUEL. Mr. Chairman, I thank the gentleman for yielding me time.
I would like to commend the gentleman from Vermont (Mr. Sanders), the gentleman from Minnesota (Mr. Gutknecht), the gentleman from California (Mr. George Miller), the gentleman from New York (Mr. Hinchey) for their leadership on this issue.
We have been down this road before. We dealt with this earlier where a bipartisan group of Members of Congress came together and sent a clear message as it relates to retirement and pensions that you cannot do what IBM and other corporations tried to do. And Congress in that issue was not left versus right. As my colleague from Minnesota (Mr. Gutknecht) always says, it is about right versus wrong. And a bipartisan group came together as it relates to the retirement plans of Americans who negotiated a deal and woke up in the middle of the night and had that deal abrogated, and that is not right.
Now, as my colleague from Minnesota said, there is a right way and a wrong way and you can create a win-
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win situation. For the older workers who have a defined benefit plan, we are going to honor that. And for younger workers, we are going to get you into a 401(k) or what is called typically a defined contribution, that can happen as well. But you cannot wholesale change something people negotiated in good faith, won at the negotiating table and try in a backhanded way to take that money away. And if we had done that, and as my colleague from Vermont (Mr. Sanders) has shown, if Members of Congress had opposed all of the sudden a cash balance type of retirement system, people here with 18, 20 years would lose hundreds of thousands of dollars in their retirement plan. They would not think it is right. And if it is not right for a Congressman, it should not be right for people who are employees of companies who agreed to something. That would be wrong.
Now, we are dealing with two cases here: the particular case of IBM and the general issue of retirement plans. On the IBM case, I think it is appropriate for this amendment because to date the Treasury Department has consistently tried to find a way, and this is the latest vehicle to get involved in this IBM case as it relates to the retirement plan and IBM's attempt to go to a cash balance retirement plan which would cheat older workers of many years of their retirement savings that they agreed to and have knowledge that they have when they retire.
We need to stop Treasury from doing what they have been trying to do for 2 years. I do compliment them for their resourcefulness. They have never missed an opportunity to try to figure out a back door to imposing cash balance as a retirement plan.
Now, in general, the larger subject, and, unfortunately, we in this Congress have not gotten to dealing with retirement plans yet as I in my city, we have United Airlines, we have a crisis in people's retirement plans, but we have a subject here. We as a society have told people, save for your retirement outside of Social Security. It is important for you to save and not just rely on Social Security. And here you have a case of workers who have saved outside of Social Security, done everything they have been told to do, and then corporate America is allowed to walk away and cheat them of that.
You cannot tell people on one hand, you need to save for your retirement, and on the other hand let corporate America steal from it or cheat them of it. You either tell them one thing and have the laws of the land follow it, or you tell them another thing and have the laws of the land follow it.
And the deal we are having here on this, because we have no other venue in dealing with the retirement crisis in America, is that we have to tell people, you are going to save outside of retirement and the laws of the land are going to respect what you have done for your life, which is to plan for you and your spouse's retirement and so you can retire with dignity, with Social Security, health care as well as the retirement plan you have in the private sector. And our laws are not going to undercut what you have done your whole life. And we are not going to allow management, I understand the pressure management is under, but we are not going to allow them to walk away with what they agreed to.
You can create, as Secretary of Treasury John Snow did at CSX when he was in private sector, he went to a cash balance, and did right. He did right to older workers. He did right to younger workers, and he did right to his bottom line and his shareholders; and he did not cheat anybody.
It is high time the folks in the Treasury Department get their greedy little hands off and stop trying to figure out every way to undermine working men and women in this country and retirees from what they have earned rightfully at the negotiating table.
Mr. SANDERS. Mr. Chairman, does the gentleman's status remain the same?
Mr. ISTOOK. Mr. Chairman, I just received a note that there is a Member that is on his way.
Mr. SANDERS. Mr. Chairman, I yield 2 minutes to the gentleman from Massachusetts (Mr. Tierney).
Mr. TIERNEY. Mr. Chairman, I thank the gentleman from Vermont (Mr. Sanders) for yielding me time.
This amendment is, in fact, about fairness. It is fairness to the American workers. A Federal court ruled in 2003 in the IBM case a conversion to cash balance plan, in that instance, which would have reduced pensions for older workers by 47 percent was a violation of Federal age discrimination rules.
Now, even though that provision has become law, it has not stopped consultants from trying to convince the Treasury Department to issue new guidance that would overturn that rule and other Court rulings in favor of employees.
By prohibiting the Federal Government from assisting in overturning these judicial rulings, this amendment protects millions of people. Those people stand the risk of having their pensions from hard work and long hours taken away from them by the conversion. It is only right and fair and just that we pass this amendment. More than 8 million employees and retirees have lost $334 billion in benefits as a result of pension plans being shifted to cash balance plans inappropriately.
A large number of older Americans, in this case defined by people 40 years and older, have lost up to 50 percent of the values of their plans. So I think what is even worse about this is the fact that President Bush's administration has supported treating these workers unfairly by backing cash balance plans.
In December of 2002, the IRS proposed lifting the 1999 moratorium on cash balance plan conversion. This year, the administration's budget proposed to give corporations a green light to violate pension age discrimination laws, while providing inadequate protection to workers affected in the future. These threats by the administration to workers' pensions demonstrate the importance of passing this amendment.
By voting for this amendment, Congress will be taking another important step toward protecting the rights of workers. I urge my colleagues to do just that. Support this amendment and stand up for America's workers.
Mr. SANDERS. Mr. Chairman, how much time is left on both sides?
The CHAIRMAN pro tempore (Mr. Thornberry). The gentleman from Vermont (Mr. Sanders) has 3 minutes remaining. The gentleman from Oklahoma (Mr. Istook) has 16 minutes remaining.
Mr. ISTOOK. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, I think it is important to remind people what this amendment is and what this amendment is not.
This amendment is not determining the question of what types of pension plans are permitted by law. This amendment does not determine the question about whether you can convert, if you are a company, from one type of pension plan to another. That is not what we are talking about. This amendment says specifically that you cannot overturn a particular court case between IBM and its workers that is in contradiction of multiple other court cases about whether a retirement plan is age discriminatory or not.
[Time: 15:45]
That case is on appeal. That case is going to be decided under the law as it existed at the time. We are not changing the underlying law. We are not being asked to create a uniform standard for all companies. We are being asked to help people make sure that they do not lose their case on appeal, even if that appeal is contrary to other court decisions, even if that is not a proper role of this Congress. That is what the amendment is about. It is about stopping the overturning of a particular court case.
Mr. Chairman, yes, there is a large part of other issues that are out there that relate to pension plans, and most of the speakers have been talking about those issues. There are many companies that will tell us they made some bad decisions in years past, and because of it, they and their workers are in a tough spot. They may not be able both to pay the benefits they promised to workers in years past and stay in business.
Many companies have gone into bankruptcy because of this; and in bankruptcy court, if it is a reorganization procedure, they can abrogate, or in other words, they can do away with, or change the terms of, prior pension plans. It is a conflict often between people who worked for a company and received certain promises, and they
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want those promises fulfilled and people who currently work for a company, and the company is not going to be able to stay in business if it is stuck with the old pension plan rules.
That is why so many companies want options in this. That is why we are looking at legislation to give companies options. It is a bona fide, honest debate that we need to be having, but it is not what this amendment is about.
This amendment, says, well, you cannot use any money in this particular appropriations bill to help overturn this one case with one set of workers and one company. We should not even be considering an amendment like this, and I oppose it.
Mr. Chairman, I yield 4 minutes to the gentleman from Texas (Mr. Sam Johnson).
(Mr. SAM JOHNSON of Texas asked and was given permission to revise and extend his remarks.)
Mr. SAM JOHNSON of Texas. Mr. Chairman, I rise today to oppose the amendment by the Representative from Vermont.
The gentleman from Ohio (Chairman Boehner) and I are working on legislation to reform the pension system, and this ill-timed amendment will undermine our efforts. I ask my colleagues to refrain from using the appropriations process to undermine our comprehensive reform efforts in the committee of jurisdiction.
The various sponsors of this amendment have had a problem with the conversion of the IBM pension plan 5 years ago. Despite the fact that IBM gave its employees everything they were asking for, the sponsors of this amendment now want to continue pushing this issue past its logical conclusion.
They now want to enshrine in law a flawed court case. The court case essentially found that the time value of money is age discriminatory.
An example might explain this crazy logic. Let us say a 25-year-old and a 52-year-old were hired on the same day to do the same job at the same pay. Their company would make an equal contribution to each employee's pension account.
The Cooper case found that the equal pension contribution is age discriminatory. Why? Because the 52 year old has less time to accumulate interest before retiring.
Yes, the logic of the case is that interest or the time value of money is age discriminatory. It is flawed logic, and it has been found to be flawed in every other court that has reviewed this issue.
Thousands of cash balance pension plans cover millions of Americans.
To the extent that the flawed logic of this amendment is given any support in Congress, it will undermine pension plans. Given the growing reluctance of businesses to sponsor traditional defined benefit pension plans, this amendment is just one more reason for companies to walk away from this type of pension and our constituents who need them.
We need to oppose this flawed amendment.
Mr. SANDERS. Mr. Chairman, I yield 1 minute to the gentleman from Minnesota (Mr. Gutknecht).
Mr. GUTKNECHT. Mr. Chairman, I hate to rise and oppose two of my good friends, but I thank the gentleman from Texas (Mr. Sam Johnson), who has just given a speech; and I just want to contradict a couple of things he said.
First of all, if the IBM company had given IBMers all they wanted, they would not be in court; and if there were not age discrimination, they would not have won; and if it were not for the IRS and the Department of Treasury wanting to get involved in this case, we would not have to offer this amendment.
This is wrong. As my friend said, this is not a matter of right versus left. It is right versus wrong. It is wrong for employers to steal from pension funds. It is that simple.
The reason we are here today is to try and keep this administration from doing something incredibly stupid, and that is, getting involved in this case which the workers have already won, and they are right, because it is the age discrimination.
Cash balance plans are not intrinsically evil. I said that earlier; but when you do it in such a way so that you shave off the end where people really accrue benefits, the courts have correctly ruled.
Mr. SANDERS. Mr. Chairman, I would inquire as to the amount of time left both on sides.
The CHAIRMAN pro tempore (Mr. Thornberry). The gentleman from Vermont (Mr. Sanders) has 2 minutes remaining. The gentleman from Oklahoma (Mr. Istook) has 11 minutes remaining, and he has the right to close.
Mr. ISTOOK. Mr. Chairman, I intend to reserve the balance of my time for closing.
Mr. SANDERS. Mr. Chairman, I yield 2 minutes to the gentleman from Massachusetts (Mr. Olver).
Mr. OLVER. Mr. Chairman, I applaud the gentleman from Vermont (Mr. Sanders) and the gentleman from Minnesota (Mr. Gutknecht) for their leadership and work on this issue.
The gentleman from Vermont's (Mr. Sanders) amendment is very clear. It would prohibit the Federal Government from assisting in overturning or, for that matter, in taking any role thereby in overturning the court decision in this case.
Now, the chairman has characterized this amendment as saying that this court decision cannot be overturned. That is not true at all. IBM and the workers for IBM can contest that, and it can be overturned. The amendment merely says that the U.S. Government cannot take part in the overturning.
The gentleman from Texas has said that this amendment would undermine pension reform. Whatever the chairman's views on the appropriateness of this amendment for this bill, last year this amendment passed this House on this very same bill by a vote of 258 to 160. The chairman was the chairman then. Two years ago, a similar amendment passed the predecessor subcommittee, the Subcommittee on Treasury, Postal Service and General Government, which the chairman was the chairman of also, by a 308 to 121 vote.
So it has been applied to this bill at previous times; and here again, the only issue is that taxpayer money should not be used to support IBM's age discriminatory cash balance plan, as the court decided. It would be an insult to workers if their own Federal dollars were used to cut their own pension plans, and we should overwhelmingly adopt this amendment today as we have done on two previous occasions to the exact same bill in previous years.
Mr. ISTOOK. Mr. Chairman, I yield myself such time as I may consume.
This amendment is not necessary for us to intervene in a lawsuit that is on appeal. Even if we did, we would be intervening against the weight of what other courts have ruled, and we would also threaten the efforts that this body and many people in it are undertaking, trying to resolve the tricky issues of pension plans, conversions of other pension plans between defined benefit and defined contribution plans.
This does not belong on this bill, and I ask Members to oppose the amendment.
[Begin Insert]
Mr. GEORGE MILLER of California. Mr. Chairman, I rise in support of the Sanders Amendment.
The Sanders amendment would ensure that the Treasury Department does not use any of its funds to undermine the Federal court decision in Cooper v. IBM that held that cash balance conversions violate Federal pension and age discrimination law.
We've been here many times before.
In fact, this is the fourth time that the House is voting to protect older workers' pensions under cash balance pension plan conversions. The last two times the amendment passed by 308-121 and 258-160.
Instead of voting to prevent the Treasury Department from undermining workers' pensions, I wish we were voting affirmative legislation to set standards for cash balance plans.
This issue has been going on since 1999.
In 1999, IBM converted its pension plan to a cash balance plan. Luckily, its computer savvy workers quickly figured out that the conversions would reduce their expected pensions. The workers mobilized and got Congress to hold hearings.
The Clinton administration imposed a moratorium on approvals of conversions in September 1999. But then, the new Bush administration tried to issue regulations lifting the moratorium and permit conversions without any worker protections.
Immediately 218 Members of Congress wrote to the President urging him to revise the regulations and protect older workers.
Four times the House and Senate have voted to require Treasury to withdraw its regulations and protect older workers.
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Finally, this year, in 2004, the Bush administration relented and withdrew the regulations. The administration even sent up a revised legislative proposal that contained a modicum of older worker protections through it did not go far enough to protect older workers.
But, still the issue is not resolved. Either Congress or the courts must set standards for cash balance plans and conversions to such plans.
The Republican Congress has done nothing on this issue for almost 6 years. If anything, Republican leader would defer to employer lobbying and simply permit cash balance conversions without any protections for older workers.
That's why the courts may have to be the body that resolves some of these issues.
One court, the Federal district court for the State of Illinois, determined that conversions are illegal. Other courts have disagreed. These cases and others still waiting to be heard will take years to resolve.
This amendment makes clear that the Treasury Department shall not interfere in these cases.
Today worker pension security is in crisis. This administration has done nothing to protect worker's pensions and done everything to undermine them.
They didn't protect workers after Enron and Worldcom from employers loading pension plans with employer stock and letting the executive protect themselves while leaving the workers stuck with worthless stock.
They didn't protect participants in 401(K) plans from a broad range of mutual fund abuses that have decimated retirement nest eggs.
And they are not protecting workers now from rampant pension underfunding. The PBGC, the agency that insures traditional pensions, has a $10 billion deficit. And if the airlines go under, the deficit will increase by another $30 billion. Over 1,000 pension plans are more than $50 million underfunded. And workers don't even know because the PBGC is required to keep the information secret.
The administration and the Republican majority are doing nothing to protect worker pensions.
I urge my colleagues to vote once again and remind the majority that it is the will of the Congress that older workers be protected in cash balance pension plan conversions.
[End Insert]
Mr. ISTOOK. Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN pro tempore. All time for debate has expired. The question is on the amendment offered by the gentleman from Vermont (Mr. Sanders).
The question was taken; and the Chairman pro tempore announced that the ayes appeared to have it.
Mr. SANDERS. Mr. Chairman, I demand a recorded vote.
The CHAIRMAN pro tempore. Pursuant to clause 6 of rule XVIII, further proceedings on the amendment offered by the gentleman from Vermont (Mr. Sanders) will be postponed.
CNNMoney.com is reporting: "House backs IBM pension ruling." According to the article:
The House of Representatives voted 237-162 Tuesday to prohibit the government from trying to use regulations to overturn a court case that ruled against the cash balance pension plan of International Business Machines Corp.The move echoed a vote the House took a year ago. But the sponsor of both measures, Rep. Bernard Sanders, an Independent from Vermont, argued that Congress should weigh in on the subject again to make clear its opposition to cash balance plans that do not include protections for older workers.
Opponents of the measure charge that Sanders is trying to "enshrine in law a flawed court case," and warned that such a measure would undermine pension plans generally:
"Given the growing reluctance of business to sponsor additional defined benefit plans, this amendment is just one more reason for companies to walk away from this type of pension," [Rep. Sam] Johnson said.
The Wall Street Journal (subscription required) also reports on the development: "House Votes to Bar U.S. Intervention On IBM Pensions."
You can access the legislation here. The language of the amendment reads as follows:
None of the funds appropriated by this Act may be used to assist in overturning the judicial ruling contained in the Memorandum and Order of the United States District Court for the Southern District of Illinois entered on July 31, 2003, in the action entitled Kathi Cooper, Beth Harrington, and Matthew Hilleshein, Individually and on Behalf of All ThoseSimilarly Situated vs. IBM Personal Pension Plan and IBM Corporation (CivilNo. 99-829-GPM).
You can read about the amendment in this previous post here. (For background on the cash balance plan controversy, previous posts on the topic are here and here.)
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.
For those who don't have time to read all of the testimony at the hearing, here are some important excerpts:
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.
On the heels of Treasury's announcement yesterday that it was withdrawing proposed regulations governing cash balance plans, House Workforce Committee leaders announced plans to move forward and look at solutions to solve the cash balance plan quagmire. The announcement is here and provides in part:
“Our Committee is not going to shy away from complex issues and difficult decisions, and that is why we plan to work in a responsible manner to pursue permanent solutions that preserve cash balance pension plans as a viable retirement security option for workers and employers,” Boehner added. “We look forward to working with all parties, including the Treasury Department, in a productive manner to implement responsible solutions and preserve the integrity of the defined benefit system.”“It’s important we proceed with a careful, deliberative approach that starts with a hearing and bipartisan discussions on our Committee as we draft a comprehensive bill this year to strengthen and reform the defined benefit system,” said Employer-Employee Relations Subcommittee Chairman Sam Johnson (R-TX). “There are plenty of hybrid plans that currently need the certainty we will provide in our legislation and we will work to ensure that defined benefit pensions remain a vital and thriving employee benefit far into the future.”
The IRS and Treasury issued this press release today:
Today, the Treasury Department and the IRS announced the withdrawal of proposed regulations on cash balance pension plans and cash balance conversions.The regulations are being withdrawn to provide Congress an opportunity to review and consider a legislative proposal on cash balance plans that was included in the Administration's Budget for Fiscal Year 2005. The legislative proposal would require a five-year "hold harmless" period for current employees following a cash balance conversion, would ban benefit "wear-away" after a cash balance conversion, and would clarify the legal status of cash balance plans and other hybrid plans.
What about all of those cash balance plans sitting at the IRS, waiting for determination letters to be issued? Announcement 2004-57 published with the press release contains the following statement:
Beginning September 15, 1999, cases in which an application for a determination letter or a plan under examination involved a cash balance conversion were required to be submitted to the Washington, D.C. office of the IRS for technical advice on the conversion's effect on the plan's qualified status. Many such cases were submitted and are still pending. Treasury and the IRS do not intend to process these technical advice cases while cash balance plan and cash balance conversion issues are under consideration by Congress.
U.S. District Judge Catherine Blake for the federal district court in Maryland has provided her opinion on the whole cash balance plan controversy in Tootle v. ARINC, Inc., et al., holding that a company's cash balance plan did not discriminate against employees because of their age.
Facts of the Case. The company's defined benefit plan ("DB Plan") was converted to a cash balance pension plan ("CB Plan"), effective January 1, 1999. Employees who were eligible to participate in the DB Plan at the time of the conversion and who were transferred to the new CB Plan received initial credits to their cash balance accounts equal to the lump sum value of the benefits they had accrued under the DB Plan, as well as bonus "transition credits." A group of almost 300 employees were offered a choice between continuing under the DB plan or switching to the CB plan. Under the CB plan the percentage of the employee's salary that was to be credited to the account (the "contribution credit") increased with the employee's age. For example, an employee under age 25 would receive a contribution credit of 3% of salary, while an employee age 60 or over would receive a contribution credit of 16% of salary.
The plaintiff was offered a choice between the two plans and agreed to the switch. When he was terminated in March 2002, he elected to take a lump sum distribution of $94,772.24 for his accrued benefits under the CB Plan. An actuary for ARINC had calculated that if the plaintiff had remained under the DB Plan until his termination, he would have been entitled to a lump-sum equivalent of $80,438.42. (The court stated that the "difference of over $14,000 in these two figures may be attributed in part to the transition credits of $11,466 which [plaintiff] received when he switched to the cash balance plan.") The plaintiff brought suit under the Age Discrimination in Employment Act and ERISA and sought class certification for all participants who "suffered age discrimination due to the conversion" of the plans. The plaintiff claimed that the conversion constituted unlawful age discrimination under ERISA, saying that the manner in which accrued benefits were calculated under the CB Plan favored younger workers.
What the Court Had to Say About Cash Balance Plans
1. "The claim of age discrimination arises because money contributed to a younger employee will be worth more (when expressed as an annuity starting at age 65) than the same amount of money contributed to an older employee, because the contribution to the younger employee will have more years to accrue interest before normal retirement age. . . Stated another way, if any employer contributes the same amount to an employee's cash balance account every year, the value of those annual benefits (when expressed as an annuity starting at age 65) decreases with every passing year. . . This inevitably results in a declining benefit accrual rate as an employee ages, in apparent violation of ERISA. In other words, all cash balance plans per se violate the ERISA age discrimination provision, by virtue of their design (See Eaton, 117 F. Supp. 2d at 814-15, 823 (noting that if this argument is accepted "it is likely that hundreds of cash balance plans with millions of participants will be deemed illegal")."
2. "The existing case law on this specific issue is sparse and divided. Compare Cooper, 274 F. Supp. 2d at 1022 (finding violation of ERISA), with Eaton, 117 F. Supp. 2d at 826 (finding no violation of ERISA); see also Campbell, 327 F.3d at 10 (noting problems with this theory of age discrimination). I agree with Judge Hamilton's conclusion in Eaton that ERISA's age discrimination provisions do not bar all cash balance plans. First, the legislative history and statutory language provide strong evidence that this aspect of ERISA is not intended to protect workers until after they have attained normal retirement age. See Eaton, 117 F. Supp. 2d at 826-29. Statutory headings in the text of the original enactment and in a parallel age discrimination provision in the Internal Revenue Code enacted at the same time both refer to accrual of benefits "beyond normal retirement age." See id. at 826 (citing 26 U.S.C. section 411(b)(1)(H) and Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, 100 Stat. 1874, 1975). Statements in the legislative history confirm that ERISA's age discrimination provisions were enacted to protect employees after normal retirement age. See Id. at 827-29."
3. "Applying the ERISA provisions designed for traditional defined benefit plans to cash balance plans could lead to illogical results, as illustrated in this case. On its face the terms of the ARINC cash balance plan appear to favor older employees. All employees are entitled to regular interest credits at the same guaranteed rate, the regular contribution credits are based on a percentage of an employee's salary that increases with age, and the transition credits were provided in terms slightly more favorable to older employees. The potential claim of age discrimination arises only by applying a definition for accrued benefits which does not fit with the way cash balance plans are structured. The more sensible approach is to measure benefit accrual under cash balance plans by examining the rate at which amounts are allocated and the changes over time in an individual's account balance, as the ERISA provisions designed for traditional defined contribution plans would direct. Judge Hamilton followed a similar approach in Eaton, adopting the defendant's suggestion to measure benefit accrual by the changes in an individual's account balance from year to year. See 117 F. Supp. 2d at 832-33. Applying either the ERISA provisions for defined contribution plans or the approach taken in Eaton ARINC's cash balance plan does not discriminate against employees because of their age."
Comments: This case is very important in that it provides another federal district court's "take" on the cash balance plan controversy, with the count now being 3 to 1 (with 3 courts generally holding that CB Plans do not violate ERISA, and the lone case of Cooper v. IBM et al. holding that they do.) It is interesting to note that Judge Blake in this recent case relied heavily on the reasoning in the Eaton case (holding CB plans did not violate ERISA). Oddly enough, the Eaton case was never even mentioned in the Cooper case which was decided last year.
The Tootle case also seems to be consistent with Treasury's recent proposals which would "clarify that a cash balance plan satisfies the age-discrimination rules if the plan provides pay credits for older participants that are not less than the pay credits for younger participants, in the same manner as any defined contribution plan."
You can read more about the cash balance plan controversy at this link. Also, PlanSponsor.com has a great article on the case here.
Another "whipsaw" cash balance plan case to add to your reading list--West v. AK Steel Corporation Retirement Accumulation Plan, USDC So Ohio, 1:02cv0001. (No link available.) The issue presented in the case was whether the lump sum payments to plaintiffs complied with ERISA. The plan was paying out lump sum distributions equal to the hypothetical account balance. Plaintiffs contended that they should have been paid a higher amount equal to the actuarial equivalent of the annual benefit to which plaintiffs would have been entitled if they had remained in the plan until age 65.
The court held that the plan's payment of lump sum distributions did not comply with ERISA and reiterated the positions espoused in other cases, upholding the resulting "whipsaw" effect. (The Treasury Department has defined this whole "whipsaw" problem in its recent cash balance plan proposals, issued in February of this year:
Three federal appellate courts have addressed the calculation of lump sum distributions under cash balance plans. Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003); Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); Lyons v. Georgia-Pacific Salaried Employees Retirement Plan, 221 F.3d 1235 (11th Cir. 2000), cert. denied, 532 U.S. 967 (2001). All three courts held that a participant's hypothetical account balance must be projected to normal retirement age using the plan's interest crediting rate, converted to an annuity, and then discounted to a lump sum using the section 417(e) interest rate. If the plan's interest crediting rate is the section 417(e) rate, the present value of the normal retirement age annuity will be the same as the hypothetical account balance. However, if the plan's interest crediting rate is higher than the section 417(e) rate, the present value of the normal retirement age annuity - and the amount of any lump sum distribution - will be greater than the hypothetical account balance. This result is sometimes referred to as "whipsaw."These federal court decisions have followed an analysis set out in IRS Notice 96-8. Many plan sponsors have responded to whipsaw by limiting the interest crediting rate to the section 417(e) rate (or a deemed equivalent). This response effectively makes the section 417(e) rate a ceiling on plan interest credits.
While the West case is not a court of appeals decision, arguments which were rejected in the case are particularly noteworthy. (At one point in the opinion, the court goes so far as to call the defendant's arguments as "creative.") Of interest is the fact that the defendants in the case tried to argue that the "accrued benefit" under the plan was the hypothetical account balance, but the court noted that the plan document clearly defined it as a "single life annuity commencing at normal retirement age." The court did indicate in dicta, however, that "[i]f the plan drafters had intended otherwise. . . they could have indicated that intent in the language of the Plan."
The court went on to reject the defendant's argument that, when projecting the benefit forward to an annuity at age 65 (for purposes of discounting back for the lump sum amount) the interest to be utilized should be governed by section 204(c)(3) of ERISA. Instead, the court held that the rate which should be utilized for projecting the benefit forward to an annuity at age 65 was the rate at which future interest credits would be calculated under the terms of the plan.
As far as the discount rate to be utilized in determining the lump sum benefit, the court relied on IRS Notice 96-8, Regulation section 1.411(a)-11(d), and previous cases which had upheld the Notice and Regulation, and rejected the defendant's argument that Regulation section 1.411(a)-11(d) was invalidated when ERISA section 203(e) of ERISA was amended in 1994.
Please note that under the Bush administration's cash balance plan proposals, whipsaw would be eliminated prospectively, as indicated in the 2004 Blue Book entitled "General Explanations of the Administration's Fiscal Year 2005 Revenue Proposals." :
The proposal would eliminate whipsaw, providing that a cash balance plan may distribute a participant's account balance as a lump sum distribution as long as the plan does not credit interest in excess of a market rate of return. The Secretary would be authorized to provide safe harbors for what constitutes a market rate of return and to prescribe appropriate conditions regarding the calculation of plan distributions. This would permit plan sponsors to give higher interest credits to participants, resulting in larger retirement accumulations.
More cash balance plan reading:
An article by Dallas L. Salisbury, president and CEO of the Employee Benefit Research Institute from BenefitNews.com--"Will cash balance plans survive?"
Judge Patrick Murphy has issued a Memorandum and Order in the case of Cooper v. IBM Personal Pension Plan and IBM Corporation. The Memorandum and Order grants plaintiffs' motion to strike defendants' attempt to assert "an affirmative defense out of time, or, in the alternative, to compel discovery and for extension of time." IBM was arguing against the retroactive relief requested by plaintiffs based upon an argument that IBM was "blind-sided by what is characterized as a drastic change in the law." IBM argued that the Court's declaration that IBM's 1995 PCF and 1999 cash balance plan violated the age discrimination prohibitions of ERISA section 204(b)91)(H) was a "startling new development in pension law" so that the "Court should exercise its discretion and grant only prospective relief."
The Court says the following, in granting plaintiffs' motion to strike:
. . . IBM is by no means in the sympathetic position of the employer in Manhart. Defined benefit plans are highly regulated and strictly scrutinized relative to defined contribution plans. The prohibition against age discrimination existed long before the appearance of cash balance plans. Indeed, the voluminous record in this case unequivocally shows that cash balance plans were a "response" to the long standing restrictive proscriptions that are the woof [warp?] and weave of a defined benefit plan. If this Court is correct, then the class is entitled to retroactive relief. There has not been a change in the law. All that has changed is IBM's clever, but ineffectual, response to law that it finds too restrictive for its business model. . .
Yesterday, the Treasury Department released its legislative proposals regarding cash balance plans in response to a requirement Congress imposed in a recent Appropriations Act (which you can read about here.) The proposal is contained in the 2004 Blue Book entitled "General Explanations of the Administration's Fiscal Year 2005 Revenue Proposals." No actual statutory language has been published as yet.
You can read the Treasury Department's press release here. Remarks by Secretary John Snow: "This proposal will make sure that every company converting to a cash balance plan deals fairly with its older workers. Cash balance plans play an important role in achieving retirement security for millions of American workers and their families. But we must make sure that companies changing from a traditional pension to a cash balance pension include a fair transition for older workers. Cash balance plans can be a better option, particularly for today's younger, more mobile workforce."
By the way, Benefitslink has posted that portion of the Blue Book pertaining to the cash balance plan proposals entitled "Strengthening the Employer Based Pension System" here.
Response to the proposals:
The American Benefits Council: "Treasury's hybrid pension plan proposal offers some good news, some cause for concern."
The ERISA Industry Committee: "Administration Proposes Legislation for Hybrid / Cash Balance Plans."
Towers Perrin in a press release: "Towers Perrin Says Treasury Department's Proposed Legislation to Protect Defined Benefit Plans and Older Workers Reaffirms Legitimacy of Cash Balance Plans."
Finally, a Summary of 2/2/04 Treasury Briefing on Bush Administration Legislative Recommendations Regarding Hybrid Pension Plans Prepared by the Benefits Group of Davis and Harman LLP from Benefitslink as well.
The Wall Street Journal has this article: "Pension Rules Proposed: Measure Aims to Protect Older Workers if Concerns Shift to Cash-Balance Plan." The article reports: "The proposal, part of the Bush administration's budget, is politically charged. Though intended to address concerns of both companies and their older workers, the plan has received only tepid support from employers, and also is drawing fire from employee advocates."
The New York Times: "Treasury Dept. Plans New 'Cash Balance' Pension Regulations."
Reuters via Forbes.com: "US Treasury offers new cash balance pension rules."
The first Law Firm report on the proposal:
Faegre & Benson: "Treasury Proposes Legislation Approving Cash Balance Pension Plans Prospectively."
Some of you may have read a recent article in a newsletter from a major benefits consulting firm which discussed developments in the cash balance plan litigation arena. The article states that "[t]he first appellate court to consider whether the plan design violates federal age discrimination laws has ruled in favor of the plans." The article later describes how in an unpublished opinion, the "Ninth Circuit Court of Appeals ruled on CBS’ adoption of a cash balance plan and the conversion method it used" and "held that the plan and conversion method do not violate ERISA’s fiduciary standards, do not result in an impermissible cutback of benefits and do not violate federal age discrimination laws."
Here is what the unpublished opinion in Godinez et al. v. CBS Corporation et al., 81 Fed.Appx. 949, 2003 WL 22803700 (9th Cir. 2003), actually said:
1. "Appellants' ERISA fiduciary claim fails because ERISA's fiduciary duty provisions are not implicated where the employer, acting as the Retirement Plan's settlor, changes the form or structure of the Plan."
2. "Appellants' claim under 29 U.S.C. section 1054(g) fails because Appellants did not put forth any substantive evidence to show a decrease in their benefit accruals. As CBS carried its burden of production on summary judgment, Appellants were required to present specific evidence in response. . . .The closest Appellants came to offering evidence of a decline in their accrual rate was their experts' promise that future study and analysis of the Cash Balance Plan would establish that the Appellants' pensions would have been larger had CBS continued the Traditional Pension Plan. However, no calculations were provided to the court, and Appellants' conclusory assertions are insufficient to defeat summary judgment. Therefore, the district court did not err in granting summary judgment in favor of CBS on Appellants' claim for decrease of accrued benefits under ERISA."
3. "Appellants' ADEA claim fails because they failed to produce any evidence that conversion to the Cash Balance Plan disproportionately impacted older employees."
When I first read the article, I became intrigued that there might now be a Court of Appeals decision supportive of cash balance plans. However, after reading the unpublished opinion, I do not think the case comes out quite as strongly in favor of cash balance plans as the article seems to imply, ruling instead that there was not any substantive evidence presented in favor of appellants' claims.
For more on the cash balance plan controversy, there are links pertaining to cash balance plan litigation in the right-hand column. You can also access previous posts on the subject here or here.
I enjoyed Alvin Lurie's article posted at Benefitslink.com entitled: "What Will Judge Posner Do Next? Balm or Bomb for Cash Balance Plans?" For those who do not know, the IBM case, Cooper et al. v. The IBM Personal Pension Plan et al., will go to the same court on appeal (the 7th Circuit) that decided the Xerox case, Berger et al. v. Xerox Corporation Retirement Income Guarantee Plan, with Judge Richard Posner being the likely author of any opinion in the IBM appeal. The article addresses the speculation that is running rampant that Judge Posner will not overturn the lower court decision which ruled that the IBM cash balance plan violated ERISA. Mr. Lurie calls the speculation "unwarranted" and predicts that "IBM has a fair chance of prevailing in his court, if the judge has his way." The article distinguishes the Xerox case in which Judge Posner ruled in favor of employees' claims:
But the point of this piece is not to criticize Xerox, but rather to describe it sufficiently to delineate its difference from the "rate of accrual" issue, as relates to the statutory test for age discrimination, which is the focus of the IBM litigation. . . It is immediately apparent that the matter decided in Xerox has no bearing on the discrimination issue in IBM, save that the decisions in both cases are heavily influenced by the "frontloaded" cash balance formats at issue, that is, "interest adjustments to a hypothetical (pay-based) allocation . . . provided through normal retirement age, even though the employee terminates employment . . . before that age." (Treas. Reg. Sec 1.401(a)(4)-8(c)(3)(iv).) Neither the issue of the proper discount rate that so dominated the Xerox decision nor the matter of the effect of pre-retirement cashouts has pertinence to IBM."
Please note that Judge Posner will be the featured judge for Howard Bashman's "20 questions for the appellate judge" in December.
Also, a previous post here at Benefitsblog notes that, in a CNBC interview with Judge Posner entitled "Richard Posner discusses his position on law, pragmatism and democracy" on July 28, 2003 (prior to the issuance of the opinion in the Xerox case) Mario Bartiromo for CNBC asked Judge Posner about his views regarding employees suing pension funds over reduced payments. His response was that with all of the litigation and all of the "detailed regulations of pension funds," Congress might have to "step in at some point and change the rules."
Unfortunately, Congress has not changed the rules, but suspended the rules (which you can read about here, here and here), creating a great deal of further legal uncertainty for these types of plans.
As discussed in previous posts, last week Congressional conferees completed their reconciliation of the House and Senate versions of the Treasury/Transportation appropriations legislation which included controversial language pertaining to cash balance plans. According to the American Benefits Council, the final report includes the following language:
Within one hundred and eighty days of enactment, the Secretary of the Treasury shall present to the Congress a proposal for legislation which would provide transition relief for older and longer-service participants affected by conversions of their employers' traditional pension plans to cash balance pension plans: Provided, that none of the funds made available in this Act may be used by the Secretary of the Treasury or his designee to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, or any amendments reaching results similar to such proposed amendments.
Thus, according to this language, the Treasury Department would be precluded from promulgating regulations on age discrimination in defined benefit plans – including hybrid plans – during the 2004 fiscal year that ends September 30, 2004.
The U.S. Chamber of Commerce's response to the proposed language is here. (Link via Benefitslink.com.)
The New York Times is reporting that Xerox has reached a settlement with former plan participants of the Xerox cash balance plan in the amount of $239 million: "Xerox Settles Pension Suit With Retirees."
The proposed settlement is contingent on court approval and involves former plan participants who left Xerox's employ between the years 1990 and 2000 and elected to take a lump sum when they left in lieu of a pension commencing when they reached age 65. According to the article, Xerox said it would not have to contribute additional money to the plan to cover the payout until at least 2005.
Quote of Note: "Xerox had said it might appeal the case to the Supreme Court but acknowledged with the settlement that it had abandoned that idea. A spokeswoman, Christa Carone, said the company wanted 'to avoid any further uncertainty or legal expenses" stemming from the dispute.'"
You can access the press release from Xerox here.
If you would like to learn more about the case, Berger et al. v. Xerox Corporation Retirement Income Guarantee Plan, you can access some links to articles discussing the case under "Cash Balance Plan Litigation Links" over on the right. (Scroll down some.)
The following articles discuss reaction to the agreement made by Congressional conferees to adopt the Harkin's Amendment relating to cash balance plans (discussed here and here):
Also, from the Wall Street Journal:
From Plan Sponsor: "Cash Balance Regs "On" Again - But…"
From the American Benefits Council: "Council Condemns Inclusion of Cash Balance Provision in Appropriations Bill"
From ERIC: "ERIC Statement on Passage of Harkin Cash Balance Amendment"
Reuters is reporting on what transpired late yesterday as representatives from the House and the Senate hashed out how to go forward with the Sanders' and the Harkin's measures addressing cash balance plans. (Previous post on the issues here.) The article by Reuters--"U.S. lawmakers hit cash balance pension rules"--indicates the following:
Negotiators from both chambers had to reconcile the two approaches as part of the annual spending bill that funds the Treasury Department. They basically embraced the Senate provision and dropped the House language involving the court case.
The article stated further:
. . . lawmakers also said the Treasury must offer legislation within 180 days on how best to convert traditional pensions to the newer cash balance plans -- giving the administration another chance to set out a regulatory framework for such changes that Congress might embrace.
You can read about the Senate provision here.
More on this later . . .
The American Benefits Council states on their website that "Congressional appropriations conferees are expected to meet no later than November 12 to reconcile the House and Senate versions of the Treasury/Transportation appropriations bill (H.R. 2989) containing harmful cash balance plan provisions." They also state that "[a]s part of the Council's continuing effort to strip these provisions from the final conference report" they have developed a draft letter for plan sponsors to complete and fax to the appropriations conferees and congressional leadership staff. You can access this information on their website.
At the ALI-ABA "Annual Fall Employee Benefits Law and Practice Update" (discussed in previous posts here and here) Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, encouraged practitioners to write their Congressmen regarding cash balance plans, since he said that there seems to have been very little support for cash balance plans expressed on the House or the Senate floor when the Sanders and the Harkin's measures were passed.
The American Benefits Council also has a legal opinion on cash balance plans prepared by Richard Epstein which you can access here. Highlights of the opinion are as follows:
(1) "In the House floor debate, the proponents of Section 742 [Sanders Amendment] portrayed CBF pension plans as a witch's brew of age discrimination, breach of contract, and theft of employe pension assets, which they claimed the Cooper decision remedies. Their portrayal of CBF plans and Cooper does not withstand scrutiny. . ."
(2) "The apparent aim of this provision is to block the Treasury Department from issuing further regulations on ERISA section 204(b)(1)(H) or from participating in the Cooper litigation or other litigation insofar as it wishes to register its disagreement with Cooper. Even the requirement that the Department be silent on the entire matter would be deeply troublesome. Even more troublesome is that the agency may be allowed to speak on one side of the issue but not the other (i.e. it may not assist in overturning, but could assist in upholding Cooper) . . . . It is a generally accepted principle of constitutional law that the Congress may not through its legislation trample on the prerogatives of the Executive Branch in the discharge of its duty to see that the laws are faithfully executed. . . ."
(3) "The IBM plan and all other CBF plans satisfy ERISA section 204(b)(1)(H) by using the same rate of interest throughout the plan. The district court, however, ruled that the rate of benefit accrual referred to in that provision is the same as the employee's total benefit accrued, thereby requiring the same dollar amount of interest for the 24- and 64-year old employees in the above example. The district court, in effect, confused velocity with distance. It is as though the court decreed that two people, one 24 and the other 64, running at the same speed, will be deemed to have run at the same speed only if both cover the same distance by the time each reaches age 65, 40 years apart. That, however, is a conceptual muddle and a physical impossibility. Congress clearly did not mandate such a nonsensical result."
(4) "The result in Cooper cannot be justified on a public policy basis to avoid discrimination against older employees. To the contrary, it effectively mandates reverse age-discrimination, on an unprecedented scale."
("CBF" stands for "cash balance formula.")
The irony of all of this is that tomorrow will be a big day for deciding issues pertaining to reverse age-discrimination: Congressional appropriations conferees will be deciding the fate of the Sanders and Harkin's measures while at the same time the U.S. Supreme Court will hear oral arguments in the General Dynamics case to decide the fate of reverse age-discrimination claims.
Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, and Roger Siske, attorney with Sonnenschein Nath & Rosenthal, spoke at the ALI-ABA "Annual Fall Employee Benefits Law and Practice Update" and enlightened practitioners on the cash balance plan controversy. (For those who do not know, a cash balance pension plan is a defined benefit plan that is designed to work like a defined contribution plan. A cash balance plan establishes a "hypothetical account" for each employee and credits the account with hypothetical "pay credits" and "interest credits." However, under these plans, the employer bears the investment risk which results in retirement security not available under a defined contribution plan.)
Bill Sweetnam gave an overview of what has transpired in the cash balance plan arena:
(1) Mr. Sweetnam remarked that, back in December of last year, the Treasury had issued regulations governing cash balance plans which basically opined that cash balance plan formulas and conversions in and of themselves were not age discriminatory if certain conditions were met. (Note: When the IRS issued its proposed cash balance plan regulations, they dealt with two separate types of discrimination: (1) discrimination in favor of highly compensated employees, and (2) discrimination against older employees. When the IRS withdrew a portion of the regulations, it withdrew the portion pertaining to discrimination in favor of highly compensated employees, but not the portion of the regulations pertaining to age discrimination.)
(2) Mr. Sweetnam also went on to say, that when the IBM cash balance plan decision was issued this summer (Cooper et al. v. the IBM Personal Pension Plan et al.) and ruled that cash balance plans were inherently age discriminatory, this sparked a lot of interest in the Treasury's cash balance plan regulations. Both the House and the Senate passed amendments to the Appropriations Bills blocking the Treasury from issuing regulations. Mr. Sweetnam said that there are various other measures on cash balance plans being proposed which would seek to resolve the differences in the House and the Senate measures. (You can access the House amendment called the "Sanders Amendment" here and the Senate amendment called the "Harkin Amendment" here from previous posts.) One of the most interesting comments made by Mr. Sweetnam was that when both of these measures were introduced in the House and the Senate, respectively, there was little, if any, support expressed on the House or Senate floor for cash balance plans.
(3) There is very little hope that the IRS will begin issuing determination letters for the cash balance plans which are "stuck" at the national office (400 or so of them, according to Mr. Sweetnam) due to the "freeze" on determination letters. Under this "freeze," determination letters will not be issued for cash balance plans which have been converted from defined benefit plans.
What should plan sponsors be doing regarding cash balance plans? Roger Siske stated that, even though the IBM decision did not reach a good result, in his opinion, it nevertheless was "well-reasoned" so that other courts may end up adopting this reasoning as well. For employers with current cash balance plans, the recommendation was to do a "risk analysis" and determine what it would mean for the employer if the IBM case is upheld. Because ERISA prohibits discrimination based upon increased age at all ages and not just for employees who have attained age 40, the possibility is raised that each employee would have to be "topped up" to the highest rate of benefit accrual of any other younger employee under the plan so that any "risk analysis" should include this possibility.
Employers should weigh the risks of continuing their plans and should consider amending their plans to traditional defined benefit plans or defined contribution plans, according to Mr. Siske. Regarding amendments to plans, the following was discussed:
(1) It is unclear whether any amendments may be made to reduce or even change the future interest crediting rates for existing accruals.
(2) The cash balance plan formula could be frozen, though, to limit the accrued benefits to benefits accrued on the date of the amendment.
(3) The Plan could be amended to provide for a benefit equal to the larger of the frozen cash balance plan accrued benefit or a new traditional defined benefit formula which over time would wear away the damage exposure with respect to employees who continue to accrue a benefit provided under the traditional defined benefit formula.
Yesterday, I noted that the Senate had voted to block the Treasury Department from issuing regulations governing cash balance plans. The amendment--referred to as the "Harkin's amendment" as introduced by Senator Tom Harkin (D-IA)--is Amendment No. 1905 to H.R. 2989, the Transportation, Treasury, and Independent Agencies Appropriations Act of 2004. The Amendment reads as follows:
(Purpose: To prohibit the Internal Revenue Service from using funds to go forward with its proposed cash balance regulation)You can find out more about the bill at this link. You can access the Congressional Record here and here.SEC. . None of the funds made available in this Act may be used by the Secretary of the Treasury or his delegate to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, filed December 10, 2002, or any amendments reaching results similar to such proposed amendments.
As most will recall, an opinion was issued last summer--Cooper et al. v. the IBM Personal Pension Plan and IBM Corporation--holding that the IBM cash balance plan violated certain provisions of ERISA.
According to the Congressional Record, Senator Harkin made these comments about the measure before its passage:
I offer this analogy. Let's say I am offered a job. The employer says to me: OK, Senator Harkin, we are going to hire you and we are going to have a 5-year job here for you to do. If you stay with us for 5 years and you work for 5 years, we will give you a $50,000 bonus. I think that is a pretty good deal, so we shake hands, and I agree on that. So I worked at the company for 3 years, then my boss comes to me and says: Harkin, you know that deal we made where we said if you would work here 5 years, you would get a $50,000 bonus? Well, you have been here for 3 years and, guess what, the deal is off. Just like that, the deal is off. But I went to work for that company depending upon that.
Comments: The analogy breaks down in two ways, in my opinion:
(1) Employment at will prevails in most states so that an employer would very rarely say to an employee "we are going to hire you and we are going to have a 5-year job here for you to do."
(2) Employers would never establish pension plans if they were going to be viewed as an obligation for the duration of the employee's service with the employer. Under current law, employers with non-collectively-bargained plans are free to terminate such plans at any time with proper notice and without taking away benefits that have already accrued. In addition, employees are always free to seek employment elsewhere.
The question that needs to be resolved is how these plans can be drafted so that they satisfy the requirements of ERISA. It seems that even one of our most esteemed judges would like for Congress to step in here and give some guidance quickly. . .
To learn more about what was said on the Senate floor Thursday before passage of the Amendment, continue reading . . .
Mr. HARKIN. Mr. President, I send an amendment to the desk and ask for its immediate consideration.
The PRESIDING OFFICER. The clerk will report.
The assistant legislative clerk read as follows:
The Senator from Iowa [Mr. Harkin], for himself, Mr. Feingold, Mr. Kennedy, and Mr. Durbin, proposes an amendment numbered 1905.
Mr. HARKIN. Mr. President, I ask unanimous consent that reading of the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To prohibit the Internal Revenue Service from using funds to go forward with its proposed cash balance regulation)
At the appropriate place, insert the following:
SEC. . None of the funds made available in this Act may be used by the Secretary of the Treasury or his delegate to issue any rule or regulation which implements the proposed amendments to Internal Revenue Service regulations set forth in REG-209500-86 and REG-164464-02, filed December 10, 2002, or any amendments reaching results similar to such proposed amendments.
Mr. HARKIN. Mr. President, this amendment has some history in the Senate and the House. I will try to enlighten Senators as to the background and what it is about. Hopefully, we can have support for the amendment and adopt it.
Basically, it stops the Treasury Department from moving forward with a regulation that would allow companies to convert from a traditional defined benefit pension plan to a cash balance plan in a way that would hurt older workers. We are not saying they can't promulgate a rule that wouldn't allow a company to go from a defined benefit plan to a cash balance plan. We are just saying, they should not do it in a way that hurts older workers. Let me talk about that a little bit and what is behind it.
I am not totally opposed to cash balance plans. Some designs can be very good. Some can be a great deal better for younger workers, for example, than an uninsured defined contribution plan. Some are not. I am not saying we should prohibit any cash balance plans from existing. However, we need to make sure employers put in place a fair and equitable manner for treating these.
I have been following this issue closely for several years. In the mid-1990s, a groundswell of companies started converting from traditional defined benefit plans to hybrid plans, including cash balance plans. A couple of years later, some older workers who were nearing retirement started looking at the effect of this conversion on their account. They were shocked to find they hadn't been accruing any benefits for years. In other words, workers who were, say, in their forties or early fifties when the company converted from a defined benefit plan to a cash balance plan, didn't really know how the conversion would affect them. Then after several years, these older workers looked and found out they had been working for several years and their pension had not increased one penny, even though they had been working. Yet younger workers, age 20, 25, saw their pension plans increase.
A lot of workers nearing retirement, thinking they were going to get what they had assumed was going to be their retirement and their pension, all of a sudden found out their pension had been worn away over several years. It turned out that employers were freezing the accounts in the old plan, then they established a lower opening account balance in the new plan which meant, simply, that the longer you were in the plan, the longer you were working without earning any new benefits. That became a term called ``wearaway.'' In other words, your pension benefits wore away.
Many people said: This is nothing less than age discrimination. In other words, I am working for the company. I have been there for 20 years. They switch their pension program. A younger person gets more in their pension program than I get in mine.
A new 25-year-old employee would be getting more money contributed to their pension account, while a 45-year-old who had been loyal to the company for 20 years would not get anything. I was shocked and appalled to learn about this practice, and so were thousands of loyal, hard-working Americans.
In 1999, I introduced a bill to make it illegal for corporations to wear away the benefits of older workers during these conversions. We raised the profile of this issue. We raised it with Treasury. In September of 1999, the Treasury Department issued a moratorium on conversions from defined benefit plans to cash balance plans. The momentum against these unfair conversions was building as more and more companies changed, as more and more workers found their pensions were worn away.
In April of 2000, we in the Senate passed a sense-of-the-Senate resolution without objection, stating that the wearing away of current benefits during cash balance conversions is unfair and wrong--a unanimous sense-of-the-Senate resolution in April of 2000.
Well, now we go to 2001 and 2002, and not much is happening. That moratorium stayed on, by the way, through 2000, 2001, and 2002. However, last December, Treasury issued a regulation that would turn the clock back, undo the moratorium, allow more businesses to go forward with conversions in this wrong manner--the manner that would wear away the pensions of older workers.
Very soon after that, 191 members of the House of Representatives, and 26 Senators signed a bipartisan letter to President Bush asking that we do not reopen the floodgates, that we withdraw this rule and promulgate a rule that is fair and equitable. Well, now, as you might imagine, during this period of time some of these workers who found that their pensions had been worn away went to court. In August, a district judge in East St. Louis, in the case of Cooper v. IBM--IBM was one of the larger, well-known companies that engaged in this practice--ruled in favor of the plaintiff on her age discrimination claim.
Now, on September 9--I am talking about last month, and this case was decided in August--the House of Representatives voted 258 to 160--again bipartisan, with 65 Republicans voting for the amendment--saying that the IRS should not issue a regulation that would overturn this ruling by the district judge in East St. Louis.
So now we are into October. I might just say that all of these have been positive steps. We had a sense-of-the-Senate resolution in 2000. We had the moratorium. Last December, the Treasury Department--I might add, if I am not mistaken, I don't think there was a Secretary of the Treasury at that time in place--issued this rule to turn the clock back, and 196 members of the House and 26 Senators signed a letter to President Bush saying withdraw this rule and have one that is fair and equitable.
In August, there was the district court ruling. On September 9, last month, the House voted 250 to 196 that the IRS should not issue a regulation that would overturn this ruling. There have been a lot of positive steps, but this regulation is still hanging out there.
One other thing happened. Last January, Senator Durbin and I indicated that we might place a hold on the nomination of Mr. John Snow to be Secretary of the Treasury. Well, Mr. Snow was a very popular person and we didn't have anything personally against him; I want to make that clear. But we wanted to raise this issue. So Mr. Snow, a fine gentleman and outstanding business executive, someone who has gotten high accolades for his tenure in business as a business executive, met with Senator Durbin and me in my office. He said on this critical issue he would let fairness guide the regulatory process.
Mr. Snow had talked about what they had done at CSX, the company he had been CEO of, and how they had, I believe, instituted a cash balance plan, and a choice between the old plan and the new plan, which sounded fair and reasonable to me--let the worker decide what they want, which means many younger workers would probably pick the cash balance plan, and older workers might stay with a defined benefit plan. Mr. Snow said he would let fairness guide this regulatory process. That is the way we ought to go.
The fairness ought to be in working with Congress to develop this new regulation. So I think the best way to ensure that we do this is to ensure, No. 1, that Congress speaks on this issue; that Congress is involved in working with Treasury to make sure we come up with a fair and equitable rule dealing with pensions.
Secondly, I think the best way to make sure this happens, and to make sure that Congress is able to work and have a seat at the table is to adopt this amendment.
This regulation must be withdrawn. We need to work together to find a reasonable, bipartisan legislative solution to this complex problem. This is an incredibly important issue to American workers. It is very important for them to know that we stand united behind them in this struggle for fairness.
Mr. President, I spoke about this many times on the Senate floor. In terms of what distinguishes the American workplace in so many ways from others around the world, we have always valued loyalty and productivity in the American workplace--loyalty and productivity. If you are hard working and you are productive and you are loyal, U.S. companies have always valued that--at least they used to. That is one of the reasons companies have offered defined benefit pension plans. The longer you work and the more loyal you are to the company, you get a bigger pension. It makes sense.
So the longer you work someplace, the better you do your job, the more you learn about it, the more productive you are, that is what we value. We value that productivity and loyalty.
Now if companies are able to just break these promises at random, what kind of a signal does that send to U.S. workers? It tells workers they are foolish to be loyal because their employer could just change the rules of the game at any time and leave them out in the cold. It destroys the kind of work ethic that we have come to value and that I believe built this country, which distinguishes us from other countries around the world. We value fairness when it comes to workers. A deal is a deal.
I offer this analogy. Let's say I am offered a job. The employer says to me: OK, Senator Harkin, we are going to hire you and we are going to have a 5-year job here for you to do. If you stay with us for 5 years and you work for 5 years, we will give you a $50,000 bonus. I think that is a pretty good deal, so we shake hands, and I agree on that. So I worked at the company for 3 years, then my boss comes to me and says: Harkin, you know that deal we made where we said if you would work here 5 years, you would get a $50,000 bonus? Well, you have been here for 3 years and, guess what, the deal is off. Just like that, the deal is off. But I went to work for that company depending upon that.
That is what happens to a lot of people. They depend upon the kind of pension program the company has. That is one of the things, when companies recruit workers out of college or vocational schools, people look at what kind of pension program they have. Well, if after a certain amount of time they say, sorry, it is off, you don't get any of this, what does that say about loyalty and productivity?
I don't think that is the way we want to treat workers in this country where the employer holds all the cards and can change the deal anytime they want.
Again, I didn't have any stake--but, Harkin, you didn't contribute anything to that bonus. We said if you worked here 5 years, we would give you a $50,000 bonus, but we paid you the salary we agreed upon, did we not?
Yes.
You didn't put anything into that $50,000 bonus; that is something we were going to give you. Now we reneged on it. You don't have anything to gripe about.
Wait a minute. I have given 3 years to this company. I worked hard. I was productive because I wanted to get that bonus for 5 years, so it is not true to say I didn't put anything into the bonus.
This is like saying you didn't put anything into the pension plan. This is something the company offered you. Oh, yes, you did. You may have put in 20 or 25 years of loyal, hard work and diligence. If you had known 20 years ago they were going to pull the rug out from underneath you, would you have stayed with that company or would you maybe have gone someplace else?
Again, I hope people disabuse themselves of the idea that somehow a pension is just what the company offers you and you don't have any stake in it. You have a big stake in it. It is what they promised you when you went to work there, and you went to work there relying upon that promise. I am not saying they can't change their pension programs. Times change, conditions change, the workforce changes. I understand all that. New kinds of pension programs come on the market dealing with existing circumstances or what the future might be. That is fine, just as long as, No. 1, they treat workers fairly, and No. 2, that a deal is a deal. It seems to me if you work for a company for 20 years and they want to switch their pension plan, but you made a deal on one and you want to stick with that one, they ought to at least let you continue to work and retire under that plan. If you want to switch, it ought to be up to the worker.
That is what this amendment is all about. It is simply about saying to the Treasury Department they can't issue this proposed rule they have come up with which, as I said, last month the House voted 258 to 160 to say no to and which earlier this year 191 Members of the House and 26 Senators signed a letter to President Bush saying withdraw the rule.
That is what this amendment does. It simply says: Withdraw this rule; work with Congress. Let's have something that is fair and equitable for our workers.
Again, I urge my colleagues to join in support of this amendment in fairness to American workers.
Mr. President, I ask unanimous consent that a letter from the AARP dated October 23, 2003, be printed in the RECORD.
There being no objection, the material was ordered to be printed in the Record, as follows:
AMERICAN ASSOCIATION
OF RETIRED PERSONS,
Washington, DC, October 23, 2003.
Senator TOM HARKIN,
Hart Senate Office Building,
Washington, DC.
DEAR SENATOR HARKIN: AARP supports your amendment to the Transportation, Treasury and Independent Agencies Appropriations Act for Fiscal Year 2004 that would prohibit the IRS from using funds to go forward with its proposed cash balance regulations. The House passed a similar amendment on September 9, 2003 by a strong bipartisan vote of 258-160.
This amendment would not change existing law. It is in keeping with the court decision in Kathi Cooper, et al. v. IBM Personal Pension Plan, et al. The court concluded that cash balance pension plans discriminate against older workers, cut older workers' benefits, and serve to lower the costs and contribute to the profits of companies sponsoring cash balance plans.
In September 1999, the IRS imposed a moratorium on corporate plans that convert traditional defined benefit plans to a cash balance formula in order to allow Congress and others to review cash balance plans to make sure that the conversions comply with current pension and age discrimination laws. The moratorium suspended consideration of approximately 300 pending applications submitted by corporations to convert an existing plan to a cash balance formula. The Treasury proposed regulations in December 2002 that would lift the moratorium and allow corporations to establish plans that the federal courts have ruled discriminate against older workers.
AARP believes that Treasury should not act on regulations that would encourage companies to change their pension plans in a manner that is contrary to age discrimination laws and the federal court ruling. Rather, Congress should review the ruling and enact the pension reform measures necessary to protect older workers.
AARP urges you to vote for this timely and important amendment. AARP hopes that this amendment will send a strong message that we value older workers and that we reaffirm those older workers should not be subject to age discrimination in their pension plans and their pension benefits should be calculated fairly as directed by Congress and the Federal courts.
Please let me know, or have your staff call Frank Toohey (202-434-3760) of our Federal Affairs office if we can be of further assistance.
Sincerely,
Michael W. Naylor,
Director of Advocacy.
Mr. KENNEDY. Mr. President, it is a privilege to join Senator Harkin on this amendment to protect workers' retirement.
We know that for millions of American workers, their pension benefits are in danger. The continuing weak economy and rising health costs are pressuring thousands of employers to reduce or terminate their traditional defined benefit pension plans.
One way that companies are slashing costs is by converting traditional pension plans to cash balance plans. Older employees are the hardest hit by these conversions. According to the General Accounting Office, annual pension benefits of older employees can drop as much as 50 percent after a company converts to a cash balance plan.
Companies are doing it to save hundreds of millions of dollars in pension costs. But those savings are being taken out of the retirement security of American workers.
These proposed Treasury regulations would give companies legal protection against claims of age discrimination by older employees. Thousands of companies would have a strong incentive to convert to cash balance plans. Millions of workers could lose huge chunks of the pensions they have been promised.
Cash balance pension plans do have some advantages for some workers. Increased portability of pensions is important. So is providing pension benefits for parents, particularly women, who move in and out of the workforce. We support greater benefits for younger workers, who are more likely than ever to have several employers throughout their careers. But Treasury can and must do more to protect the workers who are hurt by these conversions.
The Harkin amendment would halt Treasury's proposed regulations. Workers should have choice about benefits under their pension plans, and they deserve protections when their company converts to a cash balance plan. It is wrong to let companies freeze the benefits for older workers, or reduce future benefits, when these workers have already contributed so many years of service to their companies.
I urge my colleagues to support this amendment, and do the right thing to protect the retirement of our Nation's workers.
The PRESIDING OFFICER. The Senator from Alabama.
Mr. SHELBY. Mr. President, the managers have no objection to the amendment offered by the Senator from Iowa. I urge the amendment be adopted.
Mr. President, we need to check something. I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. SHELBY. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. SHELBY. Mr. President, I want to say again the managers have no objection to this amendment, and I urge the amendment be adopted.
The PRESIDING OFFICER. Is there further debate? If there is no further debate, without objection, the amendment is agreed to.
The amendment (No. 1905) was agreed to.
The PRESIDING OFFICER. The Senator from Iowa.
Mr. HARKIN. Mr. President, I thank the managers of the bill for accepting this amendment. Again, this amendment is going to send a strong signal that both bodies want to work with the Treasury Department to establish a fair and equitable rule on pensions. I thank the managers.
Mr. SHELBY. I move to reconsider the vote.
Mrs. MURRAY. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mrs. MURRAY. I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Ms. MIKULSKI. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Reuters is reporting via Forbes.com: "U.S. Senate moves to stop Treasury pension rules." The article reports that the U.S. Senate on Thursday voted to block the Treasury Department from issuing certain regulations governing cash balance pension plans. The House of Representatives approved a similar measure last month called the "Sanders Amendment." You can read about the House measure here and here.
The Wall Street Journal also reports: "US Senate Votes To Block Cash-Balance Pension Regs."
Today's Wall Street Journal reports: "IBM Workers Seek Payments In Cash-Balance Pension Suit." According to the article, the employees are asking that the company recalculate participants' benefits and make additional payments for accrued benefit increases going back to 1995. Back in July, Judge Murphy ruled in favor of employees in Cooper et al. v. IBM et al., holding that the IBM cash balance plan violated ERISA, but "left unresolved the question of what the workers should receive in damages, and directed parties in the case to propose what relief the court should order to address the violations." The article notes that if "the court approves the payment request, retired workers would get remedial payments if earlier benefits amounted to less than they would have been under the new formula, and some current employees would see benefits bumped up, according to Doug Sprong, a benefits lawyer at Korein Tillery in Belleville, Ill., who represented the plaintiffs." IBM has yet to file its response to the proposed damages.
"Treasury May Delay Pension Rules: White House Will Wait for Congress To Take Action on Cash-Balance Plans": the Wall Street Journal reports how "the Treasury Department may be backing off releasing long-awaited regulations on cash-balance pension plans, and will instead wait for Congress to act before it proceeds." The source of the information was an interview by Tax Analysts with Pam Olson, the assistant secretary for tax policy. (Tax Analysts reported the information on Wednesday.) The article also reports that the Journal confirmed this information with Treasury spokeswoman Tara Bradshaw who said that Ms. Olson had been accurately quoted in the Tax Analysts article, but added that the agency is still "working on the regulations -- we've been looking at all the [court] rulings and all the comments and are trying to figure out how to proceed."
Benefitslink.com has posted Alvin D. Lurie's very lively article on the cash balance plan litigation and controversy: "Murphy's Law Has IBM Singing the Big Blues." (You can read more about the cash balance plan litigation in links over on the right as well as in posts at Benefitsblog which you can access here.)
I have added the following to the Cash Balance Plan Litigation Links over on the right:
Buck Consultants: Court Rulings Question the Legality of Cash Balance and Pension Equity Plans
Watson Wyatt: Court Rules That Cash Balance and PEP Plans Are Age Discriminatory
I was in meetings all day yesterday and unable to post here, but will try to catch up today.
On Monday, in a hearing entitled "Safeguarding America's Retirement Security: An Examination of Defined Benefit Pension Plans and the Pension Benefits Guaranty Corporation," the Senate Subcommittee on Financial Management, the Budget, and International Security and the Committee on Governmental Affairs received testimony from various groups on the pension funding crisis:
You can view the hearing at this link.
Also on Monday, the Seventh Circuit Court of Appeals declined to reconsider this earlier decision holding that Xerox Corp. had paid out too-small lump sums to participants in its cash-balance plan. A Wall Street Journal article reports: "Treasury to Issue Guides On Cash-Balance Payouts." The article reports a Xerox spokeswoman as saying that the company is "disappointed" by Monday's appeals court's decision and is considering a further appeal.
Yesterday's Wall Street Journal carried these articles on pensions:
During the nine months ended June 30, Siemens' pension plans earned an annualized 6.9% on its German plan and 14% for its main foreign plans, and its pension deficit shrunk. The Dow Jones Stoxx 600 index rose an annualized 5.6% and Merrill Lynch global broad bond-market index fell an annualized 5.8% during the same period. . . To achieve those results, simians' pension plan changed the weighting of stocks in its portfolio from 21% at the end of last year, to 8% at the end of March, and back to 23% at the end of June. Those moves followed a cut to 33% as of Sept. 30, 2002, from a weighting of 61% Sept. 30, 2001.
Today's Wall Street Journal reports: "Streamlined Pension Legislation Is to Be Introduced in the House." The article discusses two bills in Congress which are the most likely candidates for addressing the pension crisis. The New York Times also reports: "Senate Panel Expected to Vote on Bill to Aid Pension Plans."
In preparation for the Senate Finance Committee’s mark-up today of Chairman Charles Grassley’s (R.) latest revision of the National Employee Savings and Trust Equity Guarantee Act, the American Benefits Council released the following statement concerning the legislation’s use of the Bush Administration’s yield curve proposal to replace the current 30-year Treasury rate for making calculations for funding defined benefit pension plans: "Senate yield curve proposal could drive more companies from the pension system."
In a previous post here this week, I discussed the Sanders amendment which was passed by the House on Tuesday and added to the Fiscal 2004 Transportation-Treasury Appropriations Bill. The Amendment would prohibit any funds in the bill from being used to assist in overturning the IBM cash balance plan decision handed down by the federal district court of Southern Illinois last summer. One comment made on the House floor in support of the amendment: " . . we should not mess with this. . . I do not think the Congress should be messing with this. I do not think the administration should be messing with this. I think this should be left to the courts." (The House member quoted also called the cash balance plan controversy an "explosive political issue.")
Ironically, in a CNBC interview with Seventh Circuit Judge Richard Posner entitled "Richard Posner discusses his position on law, pragmatism and democracy" on Monday, July 28th (prior to the issuance of the opinion in the Xerox case, Berger et al. v. Xerox, which was written by Judge Posner) Mario Bartiromo for CNBC asked Judge Posner about his views regarding employees suing pension funds over reduced payments. His response was that with all of the litigation and all of the "detailed regulations of pension funds," Congress might have to "step in at some point and change the rules." Interestingly enough, as mentioned here before, Judge Posner may end up being one of the judges who will decide the appeal in Cooper et al. v. IBM Personal Pension Plan et al. since the case will go to the Seventh Circuit on appeal.
Well, it seems that Congress would like the courts to unravel the mess, and perhaps the feeling of some judges is that Congress should unravel the mess . . .
Towers Perrin has called on Congress to unravel it in this press release: "Towers Perrin Calls for Legislative Clarity for Cash Balance Plans." Quote of Note:"It is in everyone's interest for there to be clarity with respect to the rules governing cash balance plans. For years, the private pension system in the U.S. has been a key pillar of retirement security for millions of Americans. Confusion around the appropriate guidelines for the design of cash balance plans can only undermine private pensions and threaten this security . . .We believe that Congress should act immediately to clarify the past and future status of these plans."
In this article from the Wall Street Journal yesterday, it was reported that on Monday, an IBM lobbyist sent a document called the "Treasury's statement of opposition" to various lawmakers' staffs. The document, allegedly "on official Treasury letterhead," noted "Treasury Strongly Opposes the Sanders Amendment" and advised lawmakers to oppose the amendment, which it said "will weaken the defined benefit system." The Treasury department has denied that they issued the document. Today the Wall Street Journal is reporting: "Inspector General To Look at Reports On IBM Lobbyist." The article states that the "Treasury Department asked its Office of Inspector General to look into reports that an International Business Machines Corp. lobbyist distributed a document that may have been doctored to show Treasury opposed controversial pension regulations." More reports:
An IBM spokesperson is saying, "we believed that we were redistributing a public document that we had understood was widely distributed by Treasury."
You can read more about the Sanders amendment, approved by the House on Tuesday, which would bar the Treasury department from writing regulations that are contrary to the finding of a federal judge that cash-balance plans violate age-discrimination laws in this previous post.
I was out with illness yesterday, so that is why there were no posts here. Today is full of so much news that I'm afraid I cannot do it all justice.
The Wall Street Journal today is reporting: "House Moves to Prevent Proposed Pension Rules." Other reports:
The Wall Street Journal gives a full account of what has been transpiring. The amendment, which was tacked on to the Fiscal 2004 Transportation-Treasury Appropriations Bill, would prohibit any funds in the bill from being used to assist in overturning the ruling of a federal court that a corporation using cash balance pension conversions would be in violation of federal law. The amendment is, of course, aimed at the Treasury which is apparently poised to issue regulations regarding cash balance plans. The amendment is also referring to this case which was handed down this summer by a federal district court of Southern Illinois holding that IBM's cash balance plan violated ERISA.
Text of the Amendment from the Congressional Record:
Amendment offered by Mr. Sanders:
At the end of the bill, insert after the last section (preceding the short title) the following new section:
SEC. 742. None of the funds appropriated by this Act may be used to assist in overturning the judicial ruling contained in the Memorandum and Order of the United States District Court for the Southern District of Illinois entered on July 31, 2003, in the action entitled Kathi Cooper, Beth Harrington, and Matthew Hillesheim, Individually and on Behalf of All Those Similarly Situated vs. IBM Personal Pension Plan and IBM Corporation (Civil No. 99-829-GPM).
To learn more about what was said on the House Floor regarding the amendment, continue reading . . .
AMENDMENT OFFERED BY MR. SANDERS
Mr. SANDERS. Mr. Chairman, I offer an amendment.
The CHAIRMAN pro tempore. The Clerk will designate the amendment.
The text of the amendment is as follows:
Amendment offered by Mr. Sanders:
At the end of the bill, insert after the last section (preceding the short title) the following new section:
SEC. 742. None of the funds appropriated by this Act may be used to assist in overturning the judicial ruling contained in the Memorandum and Order of the United States District Court for the Southern District of Illinois entered on July 31, 2003, in the action entitled Kathi Cooper, Beth Harrington, and Matthew Hillesheim, Individually and on Behalf of All Those Similarly Situated vs. IBM Personal Pension Plan and IBM Corporation (Civil No. 99-829-GPM).
[Page H8040]
The CHAIRMAN pro tempore. Pursuant to the order of the House of September 4, 2003, the gentleman from Vermont (Mr. Sanders) and a Member opposed each will control 30 minutes.
The Chair recognizes the gentleman from Vermont (Mr. Sanders).
Mr. SANDERS. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, this tripartisan amendment is cosponsored by the gentleman from California (Mr. George Miller) who is the ranking member of the Committee on Education and the Workforce, the gentleman from New York (Mr. Hinchey), the gentleman from Illinois (Mr. Emanuel) and the gentleman from Minnesota (Mr. Gutknecht). This amendment also has the strong support of the AARP, the largest senior citizen group in this country representing over 35 million Americans, it has the support of the Pension Right Centers, and the IBM Employees Benefit Action Coalition.
This amendment is simple and straightforward. Five weeks ago, the Federal District Court for the Southern District of Illinois ruled that IBM’s cash balance pension conversion violates Federal age discrimination law. The conversion, Judge Murphy found, violated the age discrimination provisions of ERISA because it discriminates against older workers.
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This court decision confirms what millions of American workers have been saying for years and what hundreds of Members of Congress have also gone on record as stating. Conversions to cash balance pension plans discriminate against older workers, are illegal and must not be allowed to happen. This amendment would simply prevent the Federal Government from using any funding to assist in overturning the Federal district court ruling. That is what this amendment does.
By passing this amendment, we would not only be upholding the law, which is the least we can do, but we will also be standing with millions of workers who have lost, and are in danger of losing, 20, 30, 40, 50 percent of the pensions that they have been promised by their employers.
Mr. Chairman, why did Judge Murphy rule against the company and decide in favor of IBM employees? Let me just read a brief excerpt of what he wrote:
“In 1999, IBM opted for a ‘cash balance formula.’ The plan’s actuaries projected that this would produce annual savings of almost $500 million by 2009. These savings would result from reductions of up to 47 percent in future benefits that would be earned by older IBM employees. The 1999 cash balance formula violates the literal terms of the Employee Retirement Income Security Act, that is, ERISA. IBM’s own age discrimination analysis illustrates the problem.” That is from Judge Murphy.
Mr. Chairman, I became involved in this issue several years ago when many hundreds of IBM employees in Vermont contacted my office and told me that the pensions they had been promised by the company had been cut by 30 to 50 percent. Imagine that. Workers staying at a company through good times and bad times, providing loyalty to their employers, and then one day the company sends out a message which says, in so many words, thank you for your years of dedicated service, but forget about the promises that we made to you regarding the retirement that you and your family were anticipating. Thank you very much, but we’ve changed our minds, we’ve pulled the rug out from underneath you, we’re cutting your pensions by up to 50 percent.
Yes, IBM had enough money to pay out a $260 million compensation package to former CEO Lou Gerstner, $260 million to one man, but they just could not keep their word to their long-term, dedicated employees. And, of course, it is not just IBM that we are talking about today. It is hundreds of companies that have done exactly the same thing. It is companies that have broken the law, discriminated against older American workers and slashed the pensions that those workers were promised.
Mr. Chairman, it is no secret that the middle class in this country is hurting. Americans are working longer hours for lower wages. Their health benefits are being cut. Corporate America has thrown millions of American workers out on the street as they move our manufacturing sector to China, to Mexico and anyplace that they can find where they hire people for pennies an hour. Meanwhile, in many instances, the CEOs of these very same companies make out like bandits.
Mr. Chairman, a segment of corporate America have destroyed American jobs, destroyed health care benefits and now they want to destroy the pension benefits that were promised to their workers. We must not allow that to happen. Even corporate America, even major campaign contributors, even folks who can spend huge sums of money by placing full-page ads in the New York Times and elsewhere, even those people have got to obey the law. That is what this amendment is about. It is about obeying the law and not engaging in actions that violate Federal age discrimination statutes. In our country, we have come a long way by ending discrimination based on race, gender and disabilities. And today we have got to make it crystal clear that we will not allow discrimination against older American workers. We will not allow the Treasury Department to use taxpayer dollars to support age discrimination.
Mr. Chairman, let us not forget that companies with defined benefit pension plans receive $89 billion a year in tax breaks to set up pension plans for their workers. Out of all of the tax breaks that companies in America receive, the tax break for pension plans is far and away the most generous. Congress and the Federal Government should not be providing taxpayer dollars for companies to commit age discrimination against its workers.
Mr. Chairman, it is very important for the House to support this amendment today. It is important, Mr. Chairman, because despite the fact that cash balance conversions have been found to be illegal in the courts, the Treasury Department is still pushing proposed regulations that, if enacted, would give the green light to these very same cash balance pension plans that the Federal court has ruled are illegal. Clearly, the Treasury Department is intent on pushing these illegal conversions by all means at its disposal, and we must not allow that to happen.
Mr. Chairman, just last year, over 300 Members of the House voted to require the Treasury Department to protect older workers in cash balance pension conversions. I thank all of them for their support for older American workers. In addition, over 200 Members of Congress recently wrote a letter to urge President Bush to withdraw the proposed cash balance regulations that are at issue here. Today we have the opportunity to once again show our support for American workers and oppose a plan which is unfair, immoral and illegal. I urge strong support for this amendment.
Mr. Chairman, I reserve the balance of my time.
Mr. ISTOOK. Mr. Chairman, knowing no other Member to do so, I will claim the time in opposition, although I do not intend to speak on the amendment myself, but I will claim it for the purpose of yielding to any other Members that may wish to do so.
The CHAIRMAN pro tempore (Mr. Sessions). Is the gentleman seeking time in opposition?
Mr. ISTOOK. I claim the time in opposition.
The CHAIRMAN pro tempore. The gentleman reserves the balance of his time.
Mr. SANDERS. Mr. Chairman, I yield myself such time as I may consume.
Let me just tell my colleagues how I came into this issue in the State of Vermont. I came into this issue when, several years ago, my phone lines bounced off the hook because large numbers of workers at the Vermont IBM plant in Essex Junction, Vermont, suddenly learned for the first time that the pensions that had been promised to them were going to be cut substantially and in some cases by up to 50 percent.
I became involved with these workers who stood up and said to the company, you made us a promise and when times were bad, we stayed with you, we didn’t go someplace else. One of the reasons that we stayed with you is because you had promised us a certain pension that we were basing our family retirement on. That is the promise that had been made. What these workers did is stood up, talked to their fellow IBM workers all over America and they fought back and they won some partial benefits as IBM made some rescissions in what they did, but they continued the fight. What they have said, and workers all over America have said, is we cannot discriminate against workers simply because they are old and move to cash balance.
[Page H8041]
Mr. Chairman, I yield 5 minutes to the gentleman from California (Mr. George Miller).
Mr. GEORGE MILLER of California. Mr. Chairman, I thank the gentleman for yielding me this time. I want to thank him so much for his battle on behalf of American working families and retirees for pension protection and safety that he has led in this Congress now for a number of years.
Mr. Chairman, we are here again because of the relentless effort of this administration to empower corporations to cut the pensions of older workers in this country. If this amendment does not pass, the Treasury Department will go forward and provide a ruling that will make it safe for corporations to cut the pensions, the defined pension plans of older workers. Hundreds of corporations already have filed notice that they want to do this, they are simply waiting for the Treasury Department to make the ruling. We were here once before, and the Congress made a determination that this was unfair, it was inequitable, it was mean-spirited and it was damaging the economics of retirees and their ability to provide for their retirement.
The last time the gentleman led this effort, the General Accounting Office came forward and studied the impact of that effort and found that, in fact, many of these pensioners risked losing half of their pension. So the situation today is much the same as when the gentleman from Vermont first sounded the alarm a couple of years ago. But what has changed is, in fact, we now have a court opinion from the Federal District Court in the Southern District of Illinois that ruled, in fact, that IBM had violated the age discrimination protections when it changed its pension plan to accept a cash balance plan. What they did there was they ruled against older workers. They were going to deny older workers the pension benefits that they were entitled to, and they were going to get far less than younger workers were going to get, and that is age discrimination, because that is what they are doing. They are discriminating against older workers, 50, 55 years old, who have 15, 20 years at a company. Now, all of a sudden, they are going to find out that their pension plans have been cut in half.
What does that mean? That means that those people who have worked hard, made their plans for retirement, tried to develop their retirement nest egg so they could have a standard of living to carry them through their retirement years. All that is now threatened, and, essentially, it is gone. Because where does an older worker go to get back that pension benefit when they are 50, 55 years old with that company? They cannot do that. They cannot do that. That is the unfairness of this. That is why AARP, the American Association of Retired Persons, supports our amendment. That is why the Pension Rights Center supports the Sanders-Miller amendment. That is why they support this effort to bring equity to this effort.
What are we trying to say? Let the worker make a choice. Let the worker choose which benefit would help them the most. Companies under our legislation would still be allowed to convert to cash balances, but what they would not be allowed to do is to harm older workers and their families in the effort to do that. That is a significant amount of money to these workers. We have heard from workers all over the country who have e-mailed our office because they have heard that their company is thinking about this. We have heard from people in the financial industry, in the airline industry that have been through this, the telecommunications industry, industrial companies from all over the country who are now being made aware of the fact that they may lose their pensions.
Mr. Chairman, American families are reeling in this economic downturn. They are reeling from long-term unemployment, from rising health care premiums, from steep declines in their savings and the 401(k) investments that were lost in the bursting of the stock market bubble. These people are scrambling to keep their health care benefits, to keep their pension benefits and to keep their jobs. This Congress should not now come along and tell them that we are going to put their pensions at risk. We know that Americans, the baby boomers, people my age and others, who are thinking about retirement over the next 10 or 15 years are now starting to focus on whether or not they will be able to do that. The pension plans that the administration has in order, that the Treasury Department is trying to put in place, put all that at risk.
I would urge my colleagues, as they have in the past on a bipartisan basis, to support the Sanders-Miller-Emanuel-Gutknecht amendment to make sure that, in fact, those pension plans are not put at risk and those families are not put in that economic difficulty.
Mr. ISTOOK. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, I certainly appreciate the great passion, and it is passion that is well-placed, when we talk about the issue of pension plans for workers and trying to make sure that there is stability and some surety in those plans.
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So I appreciate that, and I realize that this is an issue that is being hotly contested in court.
Now, I do not know enough about the intricacies of the argument to know whether I agree or disagree that the judge has properly followed the law or not. I do know, however, that it is really going to be questionable whether this amendment will accomplish the intended objective.
We have seen several amendments on this bill like that, Mr. Chairman, where people offer an amendment and they tell everybody this will be the effect of my amendment. But that does not make it so.
If you look at the text of the amendment actually offered, it says, and here we are talking about the Transportation and Treasury appropriation bill: “None of the funds appropriated by this act may be used to assist in overturning the judicial ruling contained,” and then it recites this court order that was issued out of the U.S. District Court for the Southern District of Illinois in this particular case regarding the pension plan of IBM.
Now, when the amendment says you cannot use funds from the Transportation-Treasury appropriation bill to assist in overturning the judicial ruling, what does that mean? Because, you see, Mr. Chairman, it is the Department of Justice that is involved in representing the government in this litigation.
The funds that are used to potentially file an appeal of this ruling are the funds of IBM, and they are the funds of the Justice Department. It is not the Treasury Department directly that is involved in this, although obviously anything that has to do with pension plans and tax rulings has implications for the Treasury Department.
But this amendment is not going to control what happens in that case. I realize it presents an opportunity for different Members to stand up and say what their position is about that particular ruling about pension plans, but I do not think this amendment is going to bring about the result that people desire.
This amendment does not control what the appellate court may or may not do with the order issued in this case. That is beyond us. We are not here to dictate to a court that this is what you must find. We are here to determine what the law is. The courts interpret the laws. If they do not do a good job, sometimes we will change the laws or do something related to that court.
But this bill is not ultimately going to control the disposition of that lawsuit. It ultimately will not control whether the underlying law is going to be changed or not. As the Committee on Appropriations, we do not make the tax laws. We do not make the pension laws. We have other committees in this Congress, the Committee on Ways and Means, the Committee on Education and the Workforce, the Committee on Energy and Commerce, have roles in part of this. But it is not going to be decided in this bill.
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So I think it is important for Members to understand that whether this amendment is adopted or not adopted is not going to control what the underlying pension law of the United States is. It is consuming time for the House to take up the debate, but we will take it as Members want to. There may be other Members who want to come down to the floor and talk about the amendment, to oppose it, just as we have some Members that have come to the floor to speak in favor of it. But I would not want anyone to think that we are actually deciding what will be the pension laws or the outcome of that particular litigation when we vote on what will happen with this amendment.
Mr. Chairman, having said that by way of explanation, I reserve the balance of my time.
Mr. SANDERS. Mr. Chairman, I yield 3¼ minutes to the gentleman from Illinois (Mr. Emanuel), who has played a very active role in this issue.
Mr. EMANUEL. Mr. Chairman, just over a month ago, the Federal court ruled that IBM violated Federal anti-age discrimination laws when it converted from its traditional pension plan to a cash balance plan in the 1990s. As a result, over 130,000 of IBM’s longest-serving workers, including many in my home State of Illinois, moved one step closer to receiving the retirement benefits they rightfully earned. Despite the court’s decision, this administration is pushing regulations allowing companies to switch to cash balance.
Let us be honest: cash balance plans can work. We can create a win-win situation here just along the model that the Secretary of Treasury did at CSX, where you grandfather in older workers. We do not need to create a win-lose situation that only benefits employers and harms employees. There is a way to create a win-win situation that reflects the commitment of long-serving workers and older workers who are nearing retirement, and also gives younger workers a plan like a cash balance retirement plan that is a hybrid between both the defined benefit and the defined contribution plans.
When Secretary Snow was at his confirmation, he talked about what they had done at CSX when he was CEO and chairman. We always around here laud the private sector as a model. Well, I present to you a model, what CSX did for its own employees. It created a win-win situation for the company and for the individuals there, whether they were 58 and near retirement, or 38 and started as new workers. That should be the way we approach this situation.
I am a proud original cosponsor of this legislation. I think it reflects our values of rewarding work, loyalty, and taking responsibility. Thousands of companies are awaiting this decision.
I, along with the gentleman from Vermont (Mr. Sanders) and the gentleman from California (Mr. George Miller), my colleagues, went to testify when there were hearings for this rule change.
It would be wrong to pull the carpet from underneath employees who are nearing retirement, relying on that retirement, planning on that retirement. As we say in our own legislation, if this is good enough for the private sector, let us adopt it here in Congress. Let us have a cash balance plan.
We all know the study that was done. It would affect older-serving Members who have years of service here who have relied open that retirement plan. If it is good enough for people in the private sector who are older workers, should we try it here in Congress? The answer resoundingly would be “no.”
But, again, we are not going to debate today the principles underneath this bill. What we are going to say is while this decision is moving through the court, the funds through this appropriation process cannot be used to go around the court and implement this plan.
Yes, later on we will debate a pension plan and reform the system. We have the right values in this legislation. I believe it is correct to withhold the funds to ensure Treasury does not go around the court and have this decision work its way so we do not in any way send a signal to other employers to pull the rug out from underneath their employees. Let the court decision go its way. Do not allow them to fund this process and go around the court ruling.
Mr. ISTOOK. Mr. Chairman, I reserve the balance of my time.
Mr. SANDERS. Mr. Chairman, I yield 5 minutes to the gentleman from Minnesota (Mr. Gutknecht), who has been a very active leader on this issue.
Mr. GUTKNECHT. Mr. Chairman, I would like to thank the gentleman from Vermont for yielding me time.
Mr. Chairman, it has been my privilege since I have been in public life to represent thousands of IBM employees in Rochester, Minnesota. In fact, approximately 6,000. I do not know how much of the story has been told, but this is a serious subject.
Now, I come at this not only as a representative of over 6,000 IBMers, but I come at this as a former member of the Legislative Commission on Pensions and Retirement. So I am not saying I am an expert on pension policy, but this is something I probably know a little more about than the average Member of Congress.
As the gentleman from Illinois just said, the concept of these cash balance plans or defined contribution plans, modified defined contribution plans, is not necessarily a bad idea. For many younger employees who are going to change careers and jobs throughout their careers, this probably makes some sense. But the bottom line for older workers, workers who have been with a company for perhaps 20 years, this is a shameless attempt to try and steal pension money. Part of the reason that IBM lost that lawsuit in southern Illinois is because the facts did not support their position.
I want to talk a little bit about a different dimension to this, because I do also agree with the gentleman from Illinois; we can craft a plan that is a win-win situation, that would allow companies to convert their pension plans, with one caveat: that you give vested employees a choice.
Let me just read from the dictionary the definition of the term “vested.” The definition is “settled, fixed or absolute; being without contingency, as in a vested right.”
The way you do this, Mr. Chairman, is you literally say to those employees who have been vested that you get a choice. The companies can make a conversion, if they want, for any new hires. They can even make a conversion for those employees who have not vested. But at the least, we ought to agree with this amendment that the Federal Government and its resources should not be used to appeal this particular case. This is a very important case.
Let me just talk to the Republicans for a minute. Understand, I am not sure that Republicans understand what is at stake here and who really is involved. We are not just talking about 6,000 IBMers; we are talking about literally hundreds of thousands of other people, most of them who are 45 years of age or older, who have been with a company for a very long time, many of them what we would call professional people, college-educated, technically trained people. Let me be very blunt: 75 percent of them vote Republican. They understand this issue, if it has happened to them or if they are afraid that it will happen to them.
In fact, go back to the issue of vested. TIAA-KREFF, when they put out a questionnaire or they put out some questions and answers when people sign up for their various pension plans, let me read Question 7 and the answer. I do not have to read the answer.
The question is, “When do my plan contributions become vested?” And then in parentheses it says “i.e., owned by me.”
Now, what 6,000 IBMers found out, I should say probably 5,000 of them at least who were vested, what they found out is there is no legal definition of the word “vested.”
They came into work one day and they had calculators. As part of their computer tool kit on their computers, they had pension calculators which would literally calculate for them how much their pension would be worth if they stayed with the company until they retired at age 65 or 66, whatever the age was. They could do their little calculation of how much their pension was worth.
All of a sudden they came in one day and IBM changed the pension plan. For a few days IBM made a huge mistake. They left the calculators on the employees’ computer screens. They could very quickly do the calculations in terms of how much the old pension plan was worth to them and then how much the new pension plan was worth to them.
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They did not have to be computer experts to begin to figure out that all of a sudden they had lost, in some cases, hundreds of thousands of dollars’ worth of pension benefits that they thought were vested.
Mr. Chairman, we should not mess with this. I agree with the chairman from Oklahoma. I do not think the Congress should be messing with this. I do not think the administration should be messing with this. I think this should be left to the courts.
He said, well, this is not pension law. But, understand, and I hope the gentleman from Oklahoma is paying attention here, because pension law is set in several different ways. First of all, it is what is in statute. It is also what is in rule. That is what we are concerned about.
The other thing we are concerned about that is really at issue today is in terms of precedent in the courts. In some respects, this administration is taking a wrong turn by getting involved in this issue. This is an explosive political issue. If you do not believe it, I would ask you to come to my hometown and have a town hall meeting, or have a committee meeting, if you want to hear from 6,000 IBMers.
This is a good amendment. This is the right thing to do. It ought to be included in this bill.
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Mr. ISTOOK. Mr. Chairman, I yield 2 minutes to the gentleman from New York (Mr. Houghton).
Mr. HOUGHTON. Mr. Chairman, I thank the gentleman for yielding me this time.
Mr. Chairman, I would say to the gentleman from Vermont (Mr. Sanders), wherever he is, I am going to suggest a vote against his amendment. I have been around business many years, and I have been in and out of pension plans in many different corporations, and this is a dangerous amendment. I am not going to talk a long time on this thing; I just have to tell my colleagues how I feel.
Also, I am on the Committee on Ways and Means, and I would like to feel that we would have an opportunity to understand this and look at it. There has been no notice on this thing whatsoever.
But the bottom line is this: the Cooper ruling threatens to drive employers out of the pension system. Pension plans nationwide will be burdened with huge additional liabilities, leaving workers worse off. Is that what we want?
As a result of the Cooper decision, we understand the voluntary pension system itself would be in danger. Is this the protection workers need? I do not think so.
Frankly, I would urge people to vote against the Sanders amendment. It is not going to help the people I know, the people I have worked with, particularly the senior employees of various corporations who are so dependent upon our defined benefit plan.
Mr. SANDERS. Mr. Chairman, I yield 2 minutes to the gentleman from Minnesota (Mr. Gutknecht).
Mr. GUTKNECHT. Mr. Chairman, I thank the gentleman for yielding me this time.
This is an ad, I say to my colleagues, that ran in today’s New York Times and it ran in some other newspapers I think here on Capitol Hill as well. It says, “Don’t destroy America’s pension system. Vote no on the Sanders amendment.” It says, the Sanders amendment to the Treasury Appropriation bill threatens to outlaw vast numbers of pension plans.” Well, that is just outrageous. That is simply not true. We do not outlaw any pension plans.
It goes on to say, “Prevent pension plans from protecting employees’ pensions against inflation while they wait to receive their benefits.” That is not true. The Sanders amendment does not do that.
All this amendment does, I say to my colleagues, is it says the Federal Government, the Federal taxpayers should not join in this lawsuit against workers. I mean, these workers literally have had pension benefits stolen from them and we are saying, at least the administration should be kept from joining sides with the company. This is the most outrageous ad since the prescription drug ads that they were running a few weeks ago.
Now, the gentleman from Vermont (Mr. Sanders) and I agree on almost nothing, but twice a year we agree on two things. One is the prescription drug prices and the other is pension policy.
This is a good amendment. It ought to be included in this bill. It is outrageous for the administration to join sides with companies that are trying to steal from pensions.
I say to my colleagues, we have to understand, pensions are in trust. We had this when I was on the pension commission back in Minnesota. One year there was a firefighter from Winona who embezzled something like $200,000 from the Winona Firefighters Pension Fund. And both sides came in and said, it is not my money. It is not my money. The money that was embezzled belonged to the city, or it was not our money that was embezzled. And then, when the pension fund started to get better rates of return and they were making more money than they needed, then the groups were coming in and saying, wait a second. That is our money.
The fact of the matter is pension money does not belong to the company and it does not belong to the employees. It is in trust. And when they make these conversions, the real purpose is to take that money, in effect, out of the trust and put it on to the bottom line of the companies.
This is a good idea. This amendment should be added to this bill.
Mr. BACA. Mr. Chairman, I rise in support of the Sanders Amendment.
This amendment is simple and straightforward. It would simply prevent the Federal Government from using any funding to assist in overturning the federal district court ruling that declared IBM’s cash balance pension conversion to be in violation of the pension age discrimination laws that are on the books.
This amendment would protect millions of American workers throughout the country who have been negatively impacted by illegal age discriminatory cash balance pension conversions.
This amendment has the strong support of the AARP, the largest senior citizen group in this country representing over 35 million Americans, the Pension Rights Center and the IBM Employees’ Benefits Action Coalition.
A federal district court in Illinois has already ruled this practice as illegal. In the case of IBM, 130,000 employees have seen their pensions slashed as a result of IBM’s cash balance scheme. The message was clear. These cash balance plans—which slash the pension benefits of older workers by as much as 50%—are illegal.
Despite this court ruling, it appears that the Treasury Department is still moving ahead with proposed regulations that would give the green light to the very cash balance pension plans that the federal court ruled are illegal. This is wrong.
Just last year, over 300 Members of the House voted to require the Treasury Department to protect older workers in cash balance pension conversions, and over 200 Members of Congress recently wrote a letter to urge President Bush to withdraw the proposed cash balance regulations that are at issue here. Congressional intent is clear—these conversions hurt our nation’s pensioners and this practice must stop.
But, there are some in Congress who may believe that cash balance plans are good for American workers. Well, according to a CRS report the Speaker of the House, the distinguished Majority Leader and others would see their pensions slashed by as much as 69% under a cash balance plan.
We do not tolerate discrimination against workers based on race, based on gender and based on other criteria, and we must not tolerate discrimination based on age.
I urge my colleagues to support the Sanders Amendment.
Mr. SANDERS. Mr. Chairman, I yield back the balance of my time.
Mr. ISTOOK. Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN pro tempore (Mr. Terry). The question is on the amendment offered by the gentleman from Vermont (Mr. Sanders).
The question was taken; and the Chairman announced that the ayes appeared to have it.
Mr. SANDERS. Mr. Chairman, I demand a recorded vote.
The CHAIRMAN. Pursuant to clause 6 of rule XVIII, further proceedings on the amendment offered by the gentleman from Vermont (Mr. Sanders) will be postponed.
Today's edition of the Wall Street Journal contains this op-ed: "Not Your Father's Pension." The article discusses the recent cash balance plan decisions and expresses the concern that has been stated by so many that, with all of the litigation over cash balance plans, employers may decide to terminate these plans for less costly plans which will be a loss to those who want them.
Proskauer Rose has posted on their website a very useful review and analysis of the IBM and Xerox cash balance plan cases handed down last week: "Cash Balance Plans: The Debate Continues."
Seyfarth Shaw has posted these helpful items as well:
You can access this transcript of a CNBC interview with Seventh Circuit Judge Richard Posner entitled "Richard Posner discusses his position on law, pragmatism and democracy" at this link. (Thanks to Howard and JD2B for the link.) The interview occured Monday, July 28th, prior to the issuance of the opinion in the Xerox case, Berger et al. v. Xerox, which was written by Judge Posner. Mario Bartiromo for CNBC asked Judge Posner about how he views cases involving employees who are suing pension funds over reduced payments. You can read his response at the link above. Interestingly enough, as mentioned here before, Judge Posner may also be one of the judges who will decide the appeal in Cooper et al. v. IBM Personal Pension Plan et al. since that case will go to the Seventh Circuit as well.
Today's Federal Register.
Today's edition of the Wall Street Journal (subscription required) is reporting that the Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JAGTRRA") will put about $46.7 billion in investors' pockets this year through the dividend tax cut: "Dividend Tax Cut Pleases Firms More Than Investors." A slew of companies have increased their dividends since the bill was passed. The article reports that, according to Standard & Poor, 44 companies in the S&P 500-stock Index raised their dividends this month, and six initiated new dividends. In addition, the article quotes Howard Silverblatt, an analyst at S&P who tracks dividend activity, as saying that there has not been this kind of dividend activity since the 1970's: "It's at a point where, if you're a company whose competitors are raising their dividends, the question is, why aren't you?"
"Judge Gives Initial Approval To Medco Settlement": the Journal reports in this article that a federal court judge has given preliminary approval to an agreement to settle a series of ERISA-related class action lawsuits against pharmacy benefit manager Medco Health Solutions for $42.5 million." (Subscription required.) FT.com also reports: "Medco wins tentative approval for settlement." However, this article--Federal Judge Grants Preliminary Approval to Medco Health Class-Action Settlement"--at Stock World (Germany) provides the most detailed coverage of the settlement.
Brian Tumulty for the Journal Washington bureau via the Poughkeepsie Journal reports on the IBM and Xerox cash balance plan cases recently handed down: "Pension rulings put pressure on fed officials: IBM says it will appeal decision." The article provides an interesting view of how some plaintiffs' lawyers are viewing the decision and quotes Eva Cantarella, a Michigan-based lawyer who represents Georgia Pacific employees in a pension case pending before the 11th U.S. Circuit Court of Appeals in Atlanta, as saying:
[M]any employers have amended their plans to avoid the deficiencies that occurred in the IBM and Xerox plans. A lot of them have done a pretty good job or come so close that we wouldn't even bother bringing a suit. . .We have looked at over 40 plans and only felt compelled to file lawsuits in two.Apparently, Cantarella also represents employees challenging the legality of pension plan changes at another paper company, Bowater.
The U.S. Department of Labor's Employee Benefits Security Administration (EBSA) today announced a new compliance assistance guide to help employers, plan sponsors, service providers and state officials understand the federal health benefits law regarding qualified medical child support orders. You can access the Compliance Guide for Qualified Medical Child Support Orders here.
KaiserNetwork.org is reporting in the Daily Health Policy Report that payment of health care premiums are a big issue in the contract negotiations with two unions representing 78,000 employees of Verizon Communications. The union is claiming that "none of the unionized telecommunications companies ... require employees to share the cost of insurance premiums."
"Pricey perk lets executives fly high": USA Today reports.
Today's Federal Register contains the final regulations relating to golden parachute payments under section 280G of the Internal Revenue Code. The regulations which were mentioned here last Friday incorporate changes and clarifications to reflect comments received concerning the proposed regulations, primarily in these areas: the small corporation exemption, repayment of the excise tax, and the definition of change in ownership or control.
News regarding the IBM and Xerox cash balance plan decisions:
"Pension Rulings Roil Hundreds of Businesses: Companies Seek U.S. Role In Cash-Balance Plans.": Ellen E. Schultz for the Wall Street Journal reports today. The article discusses both the IBM and Xerox cash balance plan decisions handed down late last week. (You can access previous discussions on the IBM case here and previous discussions on the Xerox case here). With respect to IBM's plans to appeal, the article makes the point that employers will have reason to worry since the IBM appeal "will be heard in the Seventh Circuit, where it may be decided by one or more of the judges who just ruled against Xerox on appeal. These include Judge Posner, a highly regarded judge whose opinions have been cited by the Supreme Court, and a prolific writer of Erisa decisions that have had substantial impact."
Deepa Babington for Reuters has this: "IBM ruling turns promising pension move into headache."
Milliman USA has issued this Client Action Bulletin: "Emerging Developments for Cash Balance Plans."
Stephen Taub for CFO.com also reports: "Court Decision Big Blow to Cash-Balance Plans."
News regarding pension funding and accounting:
David Reilly discusses pension accounting and pension deficits in the U.K. in today's Wall Street Journal: "'How Much?' Is Just First Issue On Companies' Pension Deficits."
Dennis Cauchon reports for USA Today in an article entitled: "Pension peril hits W.Va. hardest." The article states that "the West Virginia teachers retirement system is the worst-funded public pension fund in the nation" and that it "has only 19% of the assets needed to pay current and future benefits." Another article for USA Today reports: "State pensions face loss of billions."
Lawrence B. Lindsey and Marc Sumerlin for the Washington Post make some very interesting comments regarding the pension funding crisis in this op-ed: "Herbert Hoover Pension Rules." The article makes the point that "[j]ust as the government works to discourage contributions during good times, it also forces companies to make excessive payments during bad times." Regarding fixes to the problem, the article states: "The best way to get out of any hole is to stop digging. Proposals in this area must specifically preempt collective bargaining contracts that allow pension benefits to rise automatically, even though the plan is underfunded and the company is in trouble."
"The Next Scrambled Nest Egg? Companies are struggling to meet their pension-plan obligations, and Washington is starting to worry. How your retirement plan could be at risk": Jyoti Thottam for Time Online reports.
News regarding health care:
Finally, "Mandated employer health insurance gains support" in California, reports Kathy Robertson for the Sacramento Business Journal via MSNBC.com. Richard Costigan, a lobbyist for the California Chamber of Commerce, states that if the legislation is passed it will create a Pandora's box on many levels, one of which is ERISA which makes self-insured plans exempt from state insurance laws.
More on the IBM Cash Balance Plan Case:
Ellen E. Schultz and William M. Bulkeley for the Wall Street Journal report: "IBM Pension-Plan Changes Are Ruled Discriminatory: Finding Is Viewed as Boon To Older Workers in U.S." (Subscription required.)
Reuters has this: "IBM ruling turns promising pension move into headache."
The Times Argus Online also has an article entitled: "IBM workers in Vermont welcome ruling on pension plan."
"IBM pension move penalizes older workers, U.S. court says": Mary Williams March for the New York Times reports (via the International Herald Tribune.)
Friday brought more cash balance plan news, with a federal appeals court ordering Xerox Corp. to pay $300 million to former employees who the court determined were shortchanged when Xerox calculated lump-sum pension benefits due them when they left the company. You can access the opinion by Circuit Judge Richard A. Posner of the U.S. Court of Appeals for the Seventh Circuit at this link. The following news sources are reporting:
Albert B. Crenshaw for the Washington Post reports: "Court Backs Workers In Xerox Pension Fight."
Bloomberg.com has an article entitled: "Xerox Must Pay $300 Mln Judgment Over Pension Dispute."
"Xerox to Pay $300 Million In Suit Over Pension Plan": the Wall Street Journal reports. (Subscription required.)
PR Newswire has this regarding the case: "Cash Balance Court Ruling Could Harm U.S. Pension System, According to Watson Wyattt." From the news release:
"This ruling has the potential to cause great harm to the U.S. private pension system," said Eric Lofgren, Global Director of the Benefit Consulting Group of Watson Wyatt Worldwide. "Moreover, two other district courts and the U.S. Treasury Department have previously reached the opposite conclusion concerning the validity of cash balance plans."
SmartMoney.com reports in an article by Arden Dale for the Dow Jones Newswires: "IBM Pension Ruling Stirs Debate." The article quotes J. Mark Iwry, a senior fellow at the Brookings Institution and the former benefits tax counsel at the Treasury Department as saying that it "is likely that the issue will ultimately be resolved neither by the appellate courts nor by the executive branch but by the Congress." The article also quotes William Sweetnam, benefits tax counsel at Treasury as saying that Judge Murphy's decision does not refer to the Treasury initiative. Mr. Sweetnam also commented that the agency would continue to go "forward with our reg writing process."
UPDATE: Another good article, this one by the Journal News.com: "Ruling on IBM pension plans causes stir"
Today's Federal Register.
More on the IBM Cash Balance Plan decision handed down yesterday and reported on here yesterday:
Albert B. Crenshaw for the WashingtonPost.com reports: "Judge Finds Age Bias in IBM Pensions: Experts Say Ruling Could End Other Employers' 'Cash Balance' Plans."
The American Benefits Council has issued a statement on the case. James Klein, ABC's President, states:
"Conversions to cash balance plans are currently the one good thing going on in the defined benefit pension plan system because they demonstrate a commitment by employers to remain within the defined benefit world. Other companies are exiting the system altogether. A decision like this sends one more negative signal to employers that 'no good deed goes unpunished' since it penalizes employers trying to provide their workers with a pension that is funded by the employer and guaranteed by the government, as opposed to requiring workers to rely solely on employee-funded retirement alternatives."You can also access a copy of the case on their website as well.
PlanSponsor.com reports: "Murphy’s Law: IBM Loses Cash Balance Ruling." (One time registration required.)
The Associated Press in this article--"IBM loses lawsuit over pensions: Federal judge rules firm discriminated against older workers at MSNBC.com quotes Mr. Klein as saying that "cash balance plans are 'currently the one good thing going' in an environment where many companies are dropping pension plans altogether and requiring employees to save for retirement on their own."
On other matters:
"FASB vetoes more disclosure on some pension changes.": Reuters reports. The article states that "FASB has agreed that companies do not need to disclose the impact of changes in assumptions used to calculate pension income or costs on earnings, arguing that existing and other proposed disclosure requirements are enough." You can also read about the decision at PlanSponsor.com in this article: "FASB Passes on Pension Assumption Change Reporting."
CFO.com has published this article: "Who Rules Accounting? Congress muscles in on FASB -- again." If you like charts, at the very end of the article is a chart showing the history of the debate over stock option accounting which you can access here.
Benefitslink.com has posted final Internal Revenue Code section 280G regulations (golden parachute). Benefitslink.com also reports the IRS has issued Revenue Procedure 2003-68 which provides guidance on the valuation of stock options solely for purposes of Internal Revenue Code sections 280G and 4999.
Chief United States District Judge G. Patrick Murphy for the Southern District of Illinois rendered an opinion in the IBM cash balance plan case, Cooper et al. vs. the IBM Personal Pension Plan and IBM Corporation. The following news sources are reporting on the case:
More to come on this . . . In the meantime, you can read previous posts about the case here.
Benefitslink points us to this Special Report which has it all when it comes to learning about the IBM cash balance plan conversion case to be decided soon and discussed here yesterday.
I guess none of us are really surprised at what this article at GreenvilleOnline.com by Brian Tumulty for the Gannett News Service reports on IBM's motives for converting to a cash balance pension plan in the 90's: "Documents reveal IBM's reason for pension-plan change: saving money." The U.S. District Court for the Southern District of Illinois is expected to issue a ruling within weeks on charges that the new pension plan, instituted in mid-1999, and an earlier one that took effect in 1994, discriminates against workers based on age. However, here's what U.S. District Judge G. Patrick Murphy is reported to have said at a hearing on the case: "I'm not a priest," the judge observed at one of the hearings. "I'm not here to look into the souls of the IBM people . . ."
Reuters just reported: "FASB to reconsider pension proposal under attack."
Today's Federal Register is here and contains the new proposed regulations implementing the notice requirements for the health care continuation coverage (COBRA) provisions of Part 6 of title I of ERISA. The new reg.'s, as mentioned in yesterday's post, set minimum standards for the timing and content of the notices required under COBRA and establish standards for administering the notice process. They also contain model forms for use by administrators of single-employer group health plans to satisfy their notice obligations.
This article by Reuters says Bush will sign the Jobs and Growth Tax Relief Reconciliation Act today and this article by MSNBC predicts that investors will benefit, particularly with respect to dividend-paying stocks and technology stocks.
FASB made some decisions about pension accounting yesterday. This excellent article--"FASB Names Key Pension Details Companies Should Disclose"--by Arden Dale for the Dow Jones Newswire at Yahoo! News.com provides a very good summary of the decisions affecting pensions. The article quotes FASB Chairman Robert H. Herz as saying that the Board chose "to propose a number of additional disclosures that could help users of financial statements better assess" the pension plan component and quotes Sherry Thompson, a FASB spokesperson, as saying more will be coming from FASB regarding pension disclosure by the end of the year. Today's edition of the Wall Street Journal has a very good article reviewing what's going on in the pension disclosure area. FASB is scheduled to make its decision regarding cash balance plan accounting today.
The SEC has issued proposed rules regarding disclosure required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002. This article by the American Institute of Certified Public Accountants reports on the rules. In addition, today's edition of the Wall Street Journal also has an article by Deborah Solomon: "Fraud Detector: SEC Sets a New Rule Aimed at Companies' Internal Controls."
The ERISA Industry Committee has written a letter urging FASB not to address the cash balance plan discount rate at this time. Read more about this here. (See a previous post regarding this issue here.)
Watson Wyatt discusses a new accounting approach proposed by FASB for determining liabilities in cash balance pension plans which could artificially drive up the liabilities for many of these plans on corporate balance sheets in this article.