Let's say you work for the greatest corporation on earth. You've devoted your career to developing its products, promoting its values, and helping it to achieve its goals. And let's say that the company has reciprocated with good pay, substantial incentives to remain within the organization, and promises of excellent health and retirement benefits. Does that sound like a recipe for success? Well, a lot of employees at IBM believed it was.
But then a little accounting change by Big Blue--a change that was destined to save the corporation billions of dollars--suddenly poisoned the brew for many within IBM, and the atmosphere has never been the same.
Pension Fund Switched; Employees Hurt
On July 31, Judge G. Patrick Murphy of the U.S. District Court in the Southern District of Illinois ruled that IBM had discriminated against its older workers in several ways when it converted its pension plan. Why? Because the changes left these employees with smaller benefits at retirement than younger workers would get when they eventually retired.
In 1995 and 1999, IBM switched its pension plan for employees. First, it switched the plan to a hybrid called a "pension equity plan," and then it converted to what is called a "cash-balance plan." The cash-balance plan combined some features of traditional pensions, but it melted many older workers' benefits (some employees claim as much as 50% while revoking lifetime medical insurance). The net effect was to provide older workers with less time than their younger colleagues to build up equity in the retirement scheme.
IEBAC Formed to Protest Actions
As a result of the employee uproar, the IBM Employee Benefits Action Coalition (IEBAC) was formed in June 1999. On November 1, 1999, IEBAC filed a class-action lawsuit against IBM, representing 130,000 current and former IBM employees. Then, in February 2000, IEBAC sent an open letter to SEC Active Chairman Laura Simone Unger, detailing how IBM was using the pension fund savings to bolster its annual report of financial earnings before shareholders. According to the allegations, IBM showed the profits accruing in the employee pension fund as corporate profits, while neglecting to show that the pension actually belonged to the employees and retirees.
IEBAC's actions led to an email campaign in May 2001 to encourage congressmen to co-sponsor HR 1322: Emergency Retiree Health Benefits Protection Act, proposed by Congressman John Tierney (D-Massachusetts). The bill was designed to restrict corporations from using pension funds in unethical ways. This bill was reintroduced in 2003 and is currently in committee. Since then, several other bills have been introduced to restrict the ways by which pension funds can be manipulated. Also, the uproar has forced the Internal Revenue Service to impose a moratorium on new conversions of pension funds to cash-balance plans.
Corporate Pension Fund Practices
IBM's accounting of pension funds in its annual report is not an unusual practice by large corporations, and--in response to IEBAC's open letter--IBM said that it needed to include the earnings of the pension fund in its report in order to maintain its competitive stance in the valuation of its stock. However, without also indicating the lien against the pension by current employees and retirees, the net effect is to inflate earnings. Senior executive bonuses and stock options--such as those earned by Lou Gerstner during his tenure as CEO and Chairman--are directly tied to the performance of IBM stock on an annual basis. By inflating the annual report and meeting or exceeding analyst expectations, stock prices will rise, making the executives stock options more valuable. By changing the extent of pension liabilities through a cash-balance plan, the corporation also increases its projected long-term profitability, thereby increasing its stock value.
Ruling Impacts All Cash-Balance Pensions
If the ruling of Judge Murphy is upheld, many legal scholars believe that all cash-balance plans will be viewed as age discrimination. However, the IRS is already writing guidelines for cash-balance conversions. According to analysts who have been following the case, the IRS believes that cash-balance pension plans are not inherently discriminatory and can be designed to treat older workers fairly.
During the ongoing IT recession, concerns about pension and retirement have weighed heavily upon IT professionals, and older IBM employees are not the only ones: The actions of IEBAC fostered the support of the Association of Bell Retirees as well. Meanwhile, a bill that would allow corporations to legally under-fund pensions (HR 1776: Pension Preservation and Savings Expansion Act of 2003) has also been introduced into the house.
IBM Pension Fails the Test
Judge Murphy, in his ruling, considered whether IBM's actions in changing its pension plan treated employees equitably by looking at the amount of benefits older and younger workers would have earned by the time they retired. According to Judge Murphy, both the cash-balance model and the pension equity plan failed in this regard.
In both of IBM's plans, younger employees have many years to build up their benefits, according to the judge. But employees who are close to retirement age when the pension plan is converted have only a few years and therefore cannot earn as much. In addition, Judge Murphy disclosed that IBM's calculations had either worsened the effect on older workers or given advantages to younger employees. One of the problems noted by the Judge was the calculation of the benefit amount each worker had earned under the traditional pension plan at the time it was converted. Judge Murphy said that IBM dealt with the period of time when the new pension plan had been adopted, but some employees, in effect, earned no new benefits.
Janet Krueger, an organizer of IEBAC, a former IBM employee, current treasurer of the COMMON user group, and recognized expert in IBM iSeries computing, was quoted after Judge Murphy's ruling: "In some ways, I feel exonerated because I've had so many people telling me that IBM didn't really do anything wrong, and you shouldn't be wasting your time."
IBM Will Appeal
Meanwhile, IBM has announced that it will appeal Judge Murphy's ruling. In a press release on July 31, 2003, IBM said: "Under the court's interpretation of the law, every cash-balance plan in the country is illegal. Scores of Fortune 500 companies have such plans.... The court's reasoning...is contrary to the decision of two other district courts which uphold cash-balance plans as lawful."
What's Fair and What's Business as Usual
At the heart of the dispute, however, is not what is legal under the law but what's fair to employees who made plans based upon promises that IBM made to their employees. Common wisdom credits the leadership of former CEO and Chairman Lou Gerstner in the turnaround of IBM's fortunes during the 1990s.
However, during that period, great numbers of IBM employees left the organization, and IBM was faced with a daunting challenge: save the sinking ship or save the crew on board. IBM went through a number of reorganizations designed to winnow out which positions within the corporation would be saved and which positions would be eliminated. For those who were faced with "early retirement," part of their decision whether to stay or go included the benefits they had accrued. When IBM subsequently changed the value of those benefits, many IBMers who chose to stay felt betrayed.
In addition, while the Chairman/CEO's fortunes--along with other IBM executives'--were raised in proportion to the corporation's stock recovery, IBM employees and line managers suddenly saw their retirement pensions recast as "cash assets" on the company's books. Documents released during the trial showed that some of the assets of the employee pension fund were actually reassigned to fund a separate executive pension plan.
IBM's current leadership, under Sam Palmisano, has attempted to change this executive culture. Palmisano recently cut the executive committees within IBM and has asked the corporation's board to reallocate his potential multi-million dollar bonus to be divided among the working team of executives that he has assembled. His goal is to re-invigorate the sense of teamwork that once typified IBM.
But for former IBM employees who have retired or left the company, the new spirit within IBM is not about "business as usual" today but what was promised to them in the past and what is fair and right.
MC Press Online