IBM Adds Its Name to List Of Firms Freezing Pensions

IBM over the past 15 years has revamped its pension offerings several times, most recently converting a number of workers to a hybrid "cash-balance" plan, which is operated by the company but delivers benefits in a form that resembles a 401(k).

Unhappy workers sued the company over the cash-balance conversion, charging that such plans violate federal age-discrimination laws. A federal judge in Illinois agreed with the workers. That decision is now on appeal. MacDonald said that suit was not a factor in IBM's decision to freeze its pensions.

The move also comes as members of Congress struggle to rewrite the rules to tighten the funding requirements for traditional "defined-benefit" pension plans, possibly raising costs further. However, MacDonald said the pending bills, like the lawsuit, played no role in IBM's shift.

IBM said its traditional pension plans are fully funded, with assets of more than $48 billion at the end of last year.

The change means that some 80,000 IBM employees under the cash-balance plan, as well as 30,000 who were grandfathered into an older plan, will earn no new benefits under those plans after 2007, regardless of how much longer they remain with the company. Typically, benefits under pension plans increase as the number of years worked accumulates and as salaries rise.

Instead, IBM employees will be eligible for a 401(k) plan that IBM called "one of the richest in U.S. business." Under it, the company will contribute as much as 10 percent of pay annually to the accounts of some current pension-plan participants. To accomplish this, IBM said, it plans to double the current company match to dollar-for-dollar on up to 6 percent of salary deferrals, and to make additional contributions of up to 4 percent in some cases.

The company will also open accounts for workers who have not elected to participate in the 401(k) plan and will contribute 1 to 4 percent of pay to those accounts.

The changes to the traditional plans will not affect IBM's 125,000 current U.S. retirees, former employees with vested benefits or workers who retire before Jan. 1, 2008, IBM said.

MacDonald said the full benefits of the new 401(k) plan will closely match those that employees would have gotten under the cash-balance plan.

However, Shaun O'Brien, assistant policy director with the AFL-CIO, said a consequence of dropping the plans is less guaranteed money for all workers.

Under a traditional pension, including cash-balance plans, the employer bears the investment risk, and the pension, up to a point, is insured by the PBGC. With 401(k) plans, no matter how generous the company match, the worker's ultimate benefit depends substantially on the performance of his or her investments.

"We're looking at very large companies who have had traditional pension plans for a very long time getting rid of them," O'Brien said. "This is corporate America getting out of the pension game and saying to workers 'you're on your own.' "

Staff writer Ellen McCarthy contributed to this report.