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Highlights for week ending August 9, 2003
- Wall Street Journal: Memos
Sent to IBM Show Awareness Of Pension Moves. Excerpts: E-mails from benefits consultants
to top human-resources executives at International Business Machines Corp. in 1999 give a detailed
look at how some of the company's pension changes would affect younger versus older workers
and perhaps cause thousands of employees to stop building a new benefit for several years. ...
The e-mails provide a rare glimpse into the detailed calculations benefits consultants provide
employers who are changing their pension plans, and these kinds of calculations could draw scrutiny
at a time when the U.S. Treasury is expected to issue regulations that say whether cash-balance
plans violate age-discrimination rules in pension law. ... "As you can see," the memo
continued, the enhancement "is directly related to age. Young employees get the benefit,"
he said, and "old employees do not." The e-mail was dated May 4, 1999, about two months
before the company changed to the new cash-balance pension plan.
Another consultant, Scot Martin, a principal at Mercer Human Resource Consulting, prepared tables
that showed estimates by Mercer and Watson Wyatt of how many employees would cease to build
a pension temporarily after the new cash-balance plan formula was adopted. In one table, Mercer
estimated that out of a total of 138,600 participants, 28,300 employees would cease to earn
a benefit for one to five years following the conversion. Older employees at many companies
have complained that after a change to a cash-balance plan, they stop building a benefit for
a period of time -- a situation called "wearaway" -- because their opening account
balance is worth less than the benefit they have already earned. As a result, their pension
doesn't grow in value until their account grows with pay credits and interest.
A Jan. 10, 2000, memo written by Kathleen Roin, director, IBM world-wide retirement programs,
describes ways that wearaway can happen in IBM's plan, even though employees' account balances
grow with pay credit, interest credits and, if applicable, transition credits. In one example,
"Meg," a 44-year-old employee with 14 years of service, will have a benefit that is
reduced by 47%, because she loses the value of an early-retirement subsidy existing in the prior
plan, but unavailable to her in the new plan under certain conditions. Her initial account balance
would purchase an annuity of only $3,112 a year, rather than an annuity of $5,795 under the
old formula. If link is broken, view
Adobe Acrobat version [PDF-- 52 KB].
- Business Week Commentary: Pensions
That Discriminate against Older Workers. Excerpt: Kathi Cooper is something of a rarity
in America these days. She has spent her entire career with a single company. For the past 24
years, Cooper has thrived at IBM, first in finance and planning and now working in internal
controls. "I absolutely adore that company," she says. Yet that didn't stop Cooper,
53, from taking IBM to court over changes it made to its traditional defined-benefit pension
fund in 1995 and '99. She and thousands of other employees had tallied up their payouts under
the newest plan, a so-called cash balance plan, and compared them with the old one. Younger
workers with shorter tenure at Big Blue would make out better under the new plan, but to veterans
like Cooper, the math didn't look right. And on July 31, Federal Judge G. Patrick Murphy of
the Southern District of Illinois agreed. He concluded that the plan was indeed unfair, and
in fact illegal.
If link is broken, view Adobe Acrobat version
- CBS MarketWatch: IBM
ruling turns promising pension move into headache. Excerpt: The latest salvo over controversial
"cash balance" pension plans came on Thursday, when a federal judge in Illinois ruled
that International Business Machines Corp.'s (IBM) switch to such a pension plan in the 1990s
discriminated against older employees. That is in direct contrast to proposed rules by the Internal
Revenue Service that argue that cash balance plans do not discriminate against older employees,
said Dallas Salisbury, president of the Employee Benefits Research Institute. If link is broken,
Adobe Acrobat version [PDF--91 KB].
- CBS MarketWatch: Ruling
on IBM's Pension Plan Raises More Questions Than It Answers, According to Towers Perrin.
Excerpt: "The extent of the migration to these hybrid pension plans shows that the business
and legal communities firmly believe that the current U.S. legal and regulatory environment
supports these types of plans," said Steve Kerstein, leader of the Global Retirement practice
for Towers Perrin. "Nevertheless, we support and encourage the efforts of Congress and
federal agencies to clarify the hybrid plan issue. These efforts should discourage wasteful
lawsuits so that plan sponsors are more secure in establishing and maintaining these plans."
If link is broken, view
Adobe Acrobat version [PDF--78 KB].
- CBS MarketWatch: Cash-balance
plans under fire. Court ruling against IBM could invalidate all such plans Excerpt: Like
others who are opposed to the age discrimination that's often found during conversions, Norman
Stein, a law professor at the University of Alabama, sees the ruling against cash-balance plans
as favorable to employees, though the technical basis of the court's finding doesn't necessarily
address the plans' real problems. "If you think of (cash-balance plans) as defined-contribution
plans, you'd think they're not age discrimination," Stein said. But, the judge found "they
violate an important technical requirement that all defined-benefit plans are required to satisfy,"
"What makes them bad is not what makes them illegal, and what makes them illegal is
not necessarily what makes them bad," he said. "But because they're bad for most
older employees, I don't think they should get a free pass. I think it should go back to Congress
and Congress should decide what are good cash-balance plans and what are bad ones. That can
happen if all cash-balance plans are illegal.
"They have caused tremendous, tremendous pain for older employees because these conversions
have really hurt them," Stein added. "These really are age discriminatory, they
really have hurt older employees, and for technical reason they also happen to be illegal."
If link is broken, view
Adobe Acrobat version [PDF--41 KB].
- iSeries Network: Judge
Rules Age Bias in IBM Pension Switch. Excerpts: IBM’s announcement of the switch back
in 1999 caused such a storm of protest from employees who saw their anticipated retirement dollars
evaporating that the company made a partial compromise and allowed employees age 40 and older
with 10 or more years of service to remain in the traditional plan. But that was clearly not
enough for many of the employees who went ahead with the suit. Thursday was their day to shine.
By noon on Friday, Cooper had received more than 1,000 phone calls and emails from fellow IBMers
thanking her for standing on the front line in this battle. The effort and the stress have been
worth it, she believes. “The train had to be stopped,” she says. “These pension
formulas are bad for America. It’s all part of the corporate greed that is left over from
Employees also received an internal memo from Randy MacDonald, IBM senior vice president of
human resources, which quickly found its way to a number of public and employee-based Web sites
and discussion group lists. The memo contained words that angered some IBMers even more: “IBM
has been defending this lawsuit to preserve our pension plan. Despite our efforts, earlier this
afternoon, the U.S. Federal District Court in Illinois ruled that IBM’s current pension
formulas violate the age discrimination provisions of federal pension law. We strongly disagree
with this ruling. IBM will appeal, and we will prevail.” Garrett Lanzy, vice president
of Alliance@IBM and a senior engineer at IBM in Rochester, notes that the “general feeling
of people in Rochester is that Randy MacDonald’s memo is trying to scare people that this
court decision will threaten people’s pension plans — but employees aren’t
Lanzy tells of a “company-wide ‘Values Jam’ — an electronic news group
— held by IBM last week. Sam Palmisano had asked all employees to contribute their ideas
about how IBM should focus on corporate values.” Some of the ideas discussed, says Lanzy,
were to return to respect for the individual and customer service. Then, Lanzy says, “late
Thursday, someone suggested that IBM not appeal this case and use this as a new starting point
to regain the trust of the employees. That idea resonated with a lot of people.” But it’s
not likely to happen. IBM’s press release and MacDonald’s memo were emphatic about
the company’s intention to appeal. And whether or not this ruling is overturned will mean
a lot to more than IBM and its employees. Analyst Bob Djurdjevic, president of Annex Research,
points out that “this ruling is not just about IBM, but about hundreds of other companies
as well.” If link is broken, view
Adobe Acrobat version [PDF--29 KB].
- Janet Krueger responds
to a message board post stating "Many of my coworkers are now suddenly worried about the
pension plan(s) being completely cancelled by IBM. That was the implied threat in Randy MacDonald's
memo to employees last week. (Editor's note: Mr. MacDonald's memo was posted in last
week's summary highlights). Full excerpt: You missed the biggest factor -- as long as IBM
is managing to significantly prop up their bottom line using vapor profits from the pension
plan, they won't terminate it -- quarterly earnings are just too important to them!
If they were to terminate the plan, then a number of federal protections would step in, protecting
all of the benefits everyone has accrued up through the date of the termination. Even those
who have not worked their for a full 5 years become vested, which provides another major disincentive
for IBM to terminate the plan.
Once enough money has been set aside to pay everyone's benefits in full, a 50% federal excise
tax is applied to the remaining funds. (Yes, that is another major disincentive -- and please
note that if there is a deficit, rather than a surplus, IBM would have to add in enough from
their operating funds to make up the difference.) Any funds left after the excise tax is paid
would then be transferred to the operating funds.
If the economic disincentives aren't enough, IBM would likely also have to face another sizable
chunk of public employee discontent and negative media exposure.
Net: I think the Randy McDonald's threats are empty, purely intended to instill fear and doubt
in the employee population, as well as to prop up their lobbying investment on Capitol Hill
and with the Treasury, where they are asking for all of their actions to be retroactively legalized.
- Ms. Krueger adds one more
reason to the above list. Full excerpt: If IBM terminates the plan, then as part of the
termination, they would have to pay off or purchase annuities for everyone currently covered
under the plan, both those who are still working and those who are retired. Consequently, they
would have to disburse close to $40 billion dollars in assets, which they would no longer have
control over. This is yet another bit time disincentive for termination, as they could no longer
use pension funds to help pay for controlling interests in companies like Red Hat!
- Don't trust Randy MacDonald to look out for your pension? Are you interested in seeing what
your pension would be under the 1991, 1995, and cash balance (1999) IBM pension plans? David
Finlay, a retired IBM Boulder employee, has created a spreadsheet that calculates these figures
for you. Download it, fill in your salary history and see for yourself what your retirement
benefits would have been under the three plans. We highly recommend the exercise if you haven't
done it yet --it will be enlightening! Download Lotus 1,2,3
version [ZIP--1.0 MB]. Download
Microsoft Excel version [ZIP--1.0 MB].
- Janet Krueger: "The article below provides a good overview of the legal issues involved
in Cooper v IBM. Note especially the discussion about what might happen if Treasury proceeds
with issuing their heavily protested regulations from last December: 'The courts generally defer
to "reasonable" regulations, but a protracted court battle over whether deference
is due these regulations could ensue if Treasury issues them in final form'." Courtesy
of Benefits Link, from the August 4, 2003 issue of Deloitte & Touche's Washington
Bulletin, a periodic update of legal and regulatory developments relating to employee benefits:
IBM's Cash Balance and Pension
Equity Formulas Violate ERISA, District Court Rules. If link is broken, view
Adobe Acrobat version [PDF--85 KB].
- From Kathi Cooper, the lead plaintiff in Cooper v. IBM. Excerpt: This is to everyone that
has contacted me since Thursday. I am overwhelmed with calls (both my IBM line and my private
line) and with e-mail (both my IBM ID and my personal ID). I am quite comfortable in saying
I have heard from at least 1,000 of you. Read
more... If link is broken, view Adobe Acrobat version
- From Janet Krueger: I've seen a LOT of assumptions being made over the last several days about
what the settlement might be, and who might be helped by it. Speculation can be fun, but it
should not be confused with fact. Here
are the facts...
- "cityfarmer51" supplies the
"Pension Ruling: Frequently Asked Questions & Answers" as posted on the IBM Intranet
"W3 News" page. Excerpt from "cityfarmer51's" Yahoo! message board post:
Q: How will this ruling affect employees? Will my benefit be decreased
A: The ruling addresses a complex and technical area of pension law, and
more study is needed to determine all ramifications. Plus the judge has not addressed any
remedy prospectively or retroactively.
Q: Won't this ruling force IBM to offer choice of pension plans to all employees?
A: No. Keep in mind the ruling, if it stands, would invalidate not only the
more recent cash balance formula but also the prior formula that employees were choosing to
keep in `99. Under the court's ruling, there is nothing to choose between -- both formulas
would be considered invalid.
Q: Is IBM's pension plan unique? If not, why aren't other companies being
A: IBM's pension formulas are not unique, and we expect that hundreds of
other employers and pension plans will face similar suits if the judge's decision is not overturned
on appeal. While at least two other employers - AT&T and Onan - had been previously sued
on grounds similar to the IBM case, in those cases, the courts rejected the plaintiffs' claims
and affirmed that cash balance plans were lawful.
Q: How are executives affected by this?
A: This situation affects executives in the same way; executives and employees
participate in the same pension plan as well as health, dental and other employee plans.
Q. Where does the case go from here? How long will it take?
A: IBM will appeal the lower court ruling.
- Wall Street Journal: The
Erisa Trap: Workers Find Limited Rights to Sue Insurers. Excerpt: In 1997, when Donya Anderson
decided to deduct $7.36 a month from her paycheck to pay for disability-income insurance, she
thought it was worth it for peace of mind. Her decision seemed vindicated three years later,
when, three months pregnant with her fourth child, she submitted a claim with the insurer, UnumProvident
Corp. Citing complications with Ms. Anderson's previous pregnancies and a job at a carpet factory
that required lifting 50-pound bales of fabric and pushing 1,000-pound carts, her obstetrician
had told her she should stop working. But UnumProvident denied the claim, leaving Ms. Anderson,
36 years old, no choice but to quit her job in the Andalusia, Ala., factory and apply for government
assistance. Then, when she tried to sue in state court, the insurer successfully argued the
case should be heard in federal court -- and she wasn't eligible to seek punitive damages. An
UnumProvident spokesman said the company couldn't discuss the case in detail "because we
do not have a signed authorization from Ms. Anderson to discuss the claim and it's our policy
to protect the privacy of our policyholders."
- "ibmmike2006", a retired
IBM manager, explains why he joined the Alliance@IBM. (Editor's note: We highly recommend
reading this post). Excerpt: The coupe of Gerstner, in 1993, with the help of board insiders
changed all that. Gerstner wound up as the 364th Richest American in 2002 with a net worth of
$630 million. The pension eroded, there were no contributions and no COLA's. Much of Gerstner's
wealth did not come from increased sales, from innovation, or invention, oh no. It came from
Assets that thousands of IBMers worked their butts off for 75 years. The buildings, the plants,
and the forcing out of those who never saw the maximum accumulation of their pensions in their
Call for Action, Courtesy of Janet Krueger
On Wednesday, August 13, 2003 Reps. Bernie Sanders (I-VT), Gil Gutknecht (R-MN), George
Miller (D-CA), Maurice Hinchey (D-NY), Dave Obey (D-WI), and Rahm Emanuel (D-IL) will be
sending the following letter to President Bush renewing our call for the immediate withdrawal
of the proposed cash balance pension regulations in light of the positive court ruling in
Cooper v. IBM.
Our goal is to get an equal number of Republicans and Democrats to co-sign the letter.
On January 30, 2003 we sent a letter with 8 R's urging the President to immediately withdraw
the proposed cash balance regulations. We are asking that they co-sign our new letter.
Here's who we need:
- Rep. John McHugh (R-NY) representing Platsburgh, Watertown and Oswego, NY.
- Rep. James Walsh (R-NY) representing Elmira, NY.
- Rep. Rob Simmons (R-CT) representing the eastern half of Connecticut
- Rep. Jack Quinn (R-NY) representing Jamestown, NY
- Rep. Virgil Goode (R-VA) representing Charlottesville and Danville, Virginia
- Rep. Chris Smith (R-NJ) representing parts of Trenton, NJ
- Rep. Sherwood Boehlert (R-NY) representing Utica, Auburn and Oneonta, NY
Any help we could get in securing those signatures or any other likely Republicans before
Wednesday, August 13, 2003 would be most appreciated. As we are trying to get a balanced
letter, for this letter we are not asking anymore Democrats to co-sign at this time. Thanks!
Rep. Bernie Sanders
to President Bush [PDF--3640 KB].
Coverage on H1-B and L1 Visa and Outsourcing Issues
This week on the Alliance@IBM
- Fact sheet: U.S.
Tech Jobs Moving Offshore. Excerpt: Recent reports indicate that U.S. employers will
move about 3.3 million white-collar service jobs and $136 billion in wages overseas in
the next 15 years. IT giants such as Microsoft, HP and IBM are leading the way. The results
are clear for U.S. technology workers — increased job insecurity, lower wages and
fewer benefits. Some Facts Behind IT Offshoring...
- A new page with information
about the Cooper vs. IBM lawsuit has been added. Content on this page includes:
- Summary of Judge Murphy's ruling
- Full text of Judge Murphy's ruling
- Who is included in the class action?
- Excellent article in the NY Times
- IBM's Press Release in response to the ruling
- Letter from J.R. MacDonald, Sr. VP of Human Resources, to employees
- Consultant Watson Wyatt, not surprisingly, takes IBM's side.
- Sample Letters for you
to send your elected officials about Off Shoring.
- IBM Pension Lawsuit
FAQ. A list of frequently asked questions about the class action lawsuit against IBM's
1995 and 1999 pension plans. On July 31, 2003, a federal district court judge ruled in
favor of the employees in this case. IBM has said it will appeal the judge's decision.