IBM pension battles and your retirement

Marketplace Staff Jan 19, 2007

TESS VIGELAND: Computing behemoth IBM got the brush-off from the Supreme Court this week. And that’s just what big blue was hoping for. Last summer, a judge ruled against some 250,000 IBM workers who sued over changes to the company’s pension plan. The employees accused IBM of age discrimination. The Supreme Court refused to hear an appeal of the case, so the changes will stick. For an explanation of what all this means, we turn to Jeremy Gold of the Pension Finance Institute. Jeremy, what exactly is the difference between a traditional pension plan and these cash balance plans that IBM is now using?

DR. JEREMEY GOLD: A traditional pension plan tries to provide a benefit at the time you retire that recognizes your entire term of service and your pay at the time you retire.

A plan designed this way costs the company very little when you’re young and has a rapidly rising cost as the employee gets older. The cost to the company in the employee’s. The later part of an employee’s career accelerates.

VIGELAND: And that’s because it’s based on how long you’ve been at the company.

GOLD: And because you’re getting closer and closer to a retirement. The other kind of plan, the cash balance plan, is sort of like a savings account. The company puts in some amount of money, say 5 percent of your pay, every year and adds interest to that money. When you retire, you get a barrel of money or you get the pension that that barrel of money can buy.

VIGELAND: That sounds vaguely similar to, say, a 401k plan.

GOLD: It’s quite similar. 401k plans tend to offer employees choices. Most of the cash balance plans are very much one rate of interest for everybody and very few

VIGELAND: This court case that was not reviewed by the Supreme Court involved IBM switching from a traditional plan to this so-called cash balance plan. And older workers, as I understand it, were essentially saying look, by doing this, you are robbing us of some element of the benefit that we were expecting. And now some of them are no longer going to get that.

GOLD: That’s right. They would say that we worked our young years in a plan, which favored the older people. And when our turn came, when we were older, we suddenly find ourselves in a plan that favors younger people.

VIGELAND: So the fact that the Supreme Court has decided not to hear this case, does that make it more attractive for other employers that have traditional pensions to change their plans?

GOLD: It would have but in between Congress took action last summer, which has already made it somewhat more attractive for employers who want to move in that direction. And so if we do see such a move, it will be motivated much more by the congressional action than it will be by anything the Supreme Court does or doesn’t do or has or hasn’t done this week.

VIGELAND: But the upshot is that a lot of people who have known a pension system for along time. That’s really going the way of the dodo bird, isn’t it?

GOLD: I hope not. There are some very valuable features in the traditional pension plan. And these plans, in the private sector are in retreat. I think that that’s quite unfortunate. I’m not sure about the dodo bird.

VIGELAND: OK, fair enough. Well, Dr. Jeremy Gold is a fellow at the Pension Finance Institute. Thanks so much for coming in.

GOLD: Thank you very much, Tess.

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