Insider

More Background • Watson Wyatt Coverage of the Cash Balance Controversy

On September 29, 2004, IBM announced that it agreed in principle to settle all claims in the Cooper v. IBM class-action lawsuit except claims that the IBM cash balance pension design and the “always cash balance” transition benefit are inherently age discriminatory. Last year, the U.S. District Court for the Southern District of Illinois ruled in Cooper v. IBM that any defined benefit plan with a compound interest feature is age discriminatory because older workers have less time to earn interest than younger workers.

Under the settlement agreement, which is still subject to court approval, IBM would provide an incremental pension benefit to plaintiffs, while stipulating in advance the maximum remedy IBM might have to provide in the future if its appeal on the cash balance claims is unsuccessful. In addition, the District Court will issue no rulings on damages. The cost associated with the incremental benefit is approximately $300 million, and IBM's potential liability for the claims being appealed is capped at $1.4 billion. Under various theories being argued by plaintiffs, IBM was facing potential damages as high as approximately $6 billion.

IBM will proceed with an appeal on the cash balance and transition age discrimination claims once the settlement terms have been approved by the district court, but that process could take up to six months or more as class members must receive formal notice of the settlement and the court will hold a fairness hearing on the settlement terms.

All other federal courts that have addressed the hybrid plan age discrimination issue, including cases decided both prior and subsequent to Cooper, have concluded that the cash balance pension design is age appropriate. Legislative action on hybrid plans is possible during the 2005-2006 legislative session. For more background about the Cooper case and the controversy surrounding hybrid pensions, click here.