Supreme Court decision on conversions

[could be me maybe not]

Did something recently happen that I missed about DB conversions to CB plans?

[could be me maybe not]

Apparently the question that I am asking that was asked of me relates to Wednesday's Supreme Court decison, but that does not appear on the surfact to impact cash balance conversions, does it>

[WDIK]

If you are referring to the decision in Smith v. City of Jackson, the decision made it easier for older workers to make a case for discrimination under the ADEA. Employees do not need to show that the age discrimination was intentional only that something in practice was more detrimental to older employees.

One of the major issues surrounding conversions to cash balance plans has to do with age discrimination.

[mbozek]

The CB age discrimination litigation is under ERISA 204(b)(1)(G) which prohibits reduction in accrued benefits on account of age, not the ADEA. The Smith case was brought under the ADEA on the theory of discriminatory impact, i.e., a facially neutral policy adversely affects older employees in practice. The policy was to give larger raises to those police officers with the fewest years of service, which while neutral on its face gave the lowest raises to older officers who had the greatest years of service. The CB litigation is based on discriminatory treatment, which has an adverse impact directly on older employees, i.e., CB plans discriminate against older participants because the use of the time value of money to determine the benefit accrued at NRA results in a lower benefit at NRA for any employee who is older than any other employee who participates in the plan.

[SoCalActuary]

The age discrimination alleged against cash balance plans is that pensions payable monthly must not decrease by age. The counter argument is that cash balance plans provide exactly the same current market value of pension by age. Will the court decide this issue on pension value or on the monthly benefit? We'll see.

[mbozek]

The problem with your argument is that, as the court noted in the IBM case, the accrued benefit under ERISA is determined as of the NRA, not at any relative age, which reduces a benefit accrual based on the time value of money for any employee who is one year older than any other employee who participates in the plan. Under ERISA age discrimination applies to all participants, not just those 40 and older.

[SoCalActuary]

We've had this discussion before. One district court does not make a precedent when other courts have disagreed. That's why it is still in litigation.

Sadly, IBM won't be offering anyone DB benefits in the future, because of that one case.

[mbozek]

These cases are never decided on the merits but on the need to settle the case for the least exposure. Onan settled the claims of its ees for 20M even though it prevailed in the dist ct. rather than risk an adverse judgment on appeal. Xerox settled its liability for 238M after losing on appeal instead of appealing a 300M judgment to the Sup ct. IBM will probably settle out for less than the 1.4B exposure rather than risk losing the case in the Sup ct. Settling a bad case is cheaper than paying good lawyers.

[SoCalActuary]

Cash balance plans still provide employer-paid benefits with controllable costs, that provide employees with protected benefits. They just don't look like the DB plans that were in existence when that old (and in my opinion, bad) regulation was written. Instead, they provide a level cost benefit, much like fully insured pension plans with accrued benefits based on the reserves from the level cost policies. Have you every tracked the accrued benefit provided by those plans? They decrease by age also.

Treasury wants to write the rules that provide these plans, but politicians won't let them.

[Blinky the 3-eyed Fish]

Did anyone hear about the recent judgment that deemed all profit sharing plans with guaranteed allocations each year discriminatory? Oh wait, that's a cash balance plan; nevermind.

Every time I see talk that cash balance plans themselves, not conversions to cash balance plans, are age discriminatory, I laugh and laugh at the absurdity, the absolute utter absurdity. But this discussion has been hashed and re-hashed, so let's all wait and see what happens.

[could be me maybe not]

Don't laugh at me, fishy. Laugh at my client that asked me the question. I cannot do that. It is not a pleasant thought to think that one hears of major pension developments from one's client, especially when one gets the Benefitslink newsletter, TAG, et al daily.

Thanks for the comments. Guess nothing's new on point.

p.s. nice first 1/3 of an inning by your pitcher yesterday fishy. Makes one want to get Wild Thing back.

[Blinky the 3-eyed Fish]

Not laughing at you or anyone here, just the concept. Go Suns!

[WDIK]

"The Court’s ruling, which is consistent with the Equal Employment Opportunity Commission’s interpretation of the ADEA, makes it easier for older workers to bring federal age discrimination claims against their employers, and this could include offering new grounds for challenges to the adoption of cash balance plans."

(Click above for the link.)

[mbozek]

ADEA does not have any impact on age discrimination in retirement plans because age discrimination in retirement plans is subject to ERISA rules (e.g., age discrimination is not limited to ees 40 and over and formula cannot reduce benefit accrual on account of increase in age). Second, age discrimination in CB plans is based upon disparate treatment not disparate impact. Disparate treatment is direct discrimination based upon age, e.g., plan formula provides a lower level of benefit accrual at NRA for ee at age 22 than a participant age 21. Disparate impact is indirect discrimination of a facially neutral policy (e.g., greater salary increases for employees with less than 10 years of service discriminates against those employees 40 and older who are more likely to have 10 yrs of service).

[WDIK]

mbozek:

I can certainly see your point, but is it so far fetched that some enterprising attorney will try to make such a connection as implied in the Deloitte article?

[mbozek]

I dont know why a competent attorney would need to make an argument on disparate impact (which is subject to the defense that the discrimination is based on reasonable factors other than age) when the CB formula itself demonstrates disparate treatment of every employee over 21 because the accrued benefit at NRA is reduced on account of an increase in age. Counsel can include disparate impact as separate claim in the event that disparate treatement is denied but the claim can be rejected by demonstrating non age factors (e.g., the need to reduce costs for the plan). Also I dont know whther a claim of age discrimination in a pension plan can be brought under the ADEA. The CB claims of older workers in Onan and IBM have been made under ERISA.

[WDIK]

I didn't say competent, I said enterprising.

[SoCalActuary]

Attached is a benefit calculation spreadsheet for a fully insured plan.

In this plan, the accrual is the cash value of the policy.

My example shows that benefit accrual rates decrease by age.

I guess some not-too-caring attorney will now have grounds to sue on behalf of these participants too.

insured_accrual.xls