In the debate now raging over many companies' shift from traditional pensions to "cash balance" plans, a switch that older workers say treats them unfairly, a question recurs:

Why not simply give the workers the option of staying in the old plan or going into the new one as they see fit?

Some companies have done that--indeed, the government gave its employees a choice in the 1980s, when it refashioned federal workers' pensions--and it avoids a lot of grief.

But different companies' work forces have different characteristics, and they interact with pensions in different ways. While choice may be a painless strategy for some firms, it could be quite expensive for others. And in some cases it may not match the company's goals of attracting new workers and keeping older ones on the job.

Here's why:

Traditional pensions generally employ a formula that relates benefits to years of service and average pay in the final few years of employment. This formula results in backloading of benefits--that is, the size of the worker's pension escalates rapidly in the last years of a long career. But the formula also causes a worker to accrue very limited benefits in the early years of work.

And this is one of the raps on traditional pensions. While they are very good for employees who spend 30 years or more with one company, they shortchange workers who change jobs many times. Leave after 10 years and you're likely to have the right to collect only a very small annuity from that employer at retirement.

A cash-balance pension plan works differently. The company sets up a hypothetical account for each worker and contributes to it a fixed percentage--such as 5 percent--of pay every year. And the employer guarantees that the account will earn a certain rate of interest over the years.

This means that benefits accrue in a much more linear fashion than in a traditional plan. Thus, a worker who changes jobs after, say, eight or 10 years will have accumulated significantly greater benefits than would have been the case with a traditional plan. And these benefits are portable. The departing worker can take the cash and roll it over into an individual retirement account or, if allowed, into the new employer's plan.

Now think about what this means for a company's work force.

If the work force is stable and most employees spend their careers there, the company could structure its cash-balance plan so that workers end up with the same benefit as in the traditional plan. In such a situation, there would be little overall financial impact from allowing choice.

But suppose there is a lot of turnover. A cash-balance plan is appealing to the young workers whom the company is trying to hire, because they know they will accumulate more benefits by the time they leave. And they do expect to leave.

This means that the company will be providing higher benefits to a large group of former workers as well as to the workers it hires to replace them. Thus, the cash-balance plan could become much more expensive--unless benefits to long-term employees are reduced.

And indeed many companies converting to cash-balance plans do reduce benefits for long-term employees, compared with what they would have received under the old plan. Often, the firm will bite the bullet and allow a group of the most senior workers to remain in the old plan, but allowing everyone to choose would enable workers to pick the plan most beneficial to them and most expensive to the company.

Benefits experts say they doubt workers are generally that analytical. And even if they were, it may not be easy to predict whether they will stay with the company or not.

But there is likely to be a tendency among those who expect to stay with the company to remain inthe old plan--which is likely to be the right decision for them, and more expensive for the company. Likewise, more venturesome workers, who are more likely to leave, generally will opt for the new plan, and that, too, will be right for them and more expensive for the company.

Thus, companies are confronted with a choice of their own: Spend more money or give long-term workers a raw deal. Many choose the latter.

Although many employers' pension funds are brimming with money, they prefer to shift pay and benefits in such a way that enhances their hiring strategy but doesn't raise costs.

Typically this means implementing a cash-balance plan while giving workers little information on how their new benefits would compare to their old ones. Pension benefit formulas are difficult to decipher, so switching to a cash-balance plan is an ideal way to cut benefits for some workers in a way that is not obvious to them.

Most experts say companies don't go into their benefits planning aiming to cut pensions.

"I've asked a lot of companies about what they are trying to do. Many say they are comfortable with the total dollars they are spending on retirement," said one expert, who asked not to be identified. (Cash-balance plans are now so controversial, many consultants don't want to be identified with them in any way.)

"They don't go in thinking, 'Can I cut?' but they do go into the discussions talking about the mix, for example, the 401(k), maybe [increasing the] match. Where do you get the resources? They talk about the visibility or value to employees of the old pension arrangement. Almost without exception, the original intent is to provide roughly the same career retirement income," he said.

What often emerges from these discussions is often a sense that traditional pensions are not appreciated by workers, and a realization that sweetening other benefits--including implementing a cash-balance plan, with its better upfront benefits--requires cutting someplace. Reducing pension benefits to long-term workers is often viewed as the least visible way to do it.

Other factors also are at work.

On top of that, many companies have gone from trying to rid themselves of "excess" workers in the downsizing 1980s to trying to hang on to skilled older workers in the labor-short 1990s.

Generous pensions, especially those with features left over from the '80s that encourage early retirement, help get older workers out the door. Cutting back on these benefits can make retirement less appealing and persuade them to work a few more years.

There are several lessons to be learned from the cash-balance controversy.

For companies, using benefits, such as pensions, that have very long time horizons in order to solve short-term problems doesn't work very well. A company's labor needs are likely to change a lot faster than it can alter its benefit structure, and when it does make changes, workers may feel betrayed.

For employees, understanding the true value of benefits is vital in today's world. For long-term workers, a well-funded traditional pension is one of the finest benefits you can have. It's government-insured, it will last your lifetime, and all the risk and investment work is borne by the company. The fact that it's largely invisible leads some workers to undervalue it. Don't make that mistake.

And for employees, labor unions can be valuable after all. After years of being off the radar of many workers, especially younger ones and those in the technology sector, unions are looking a lot better to a lot of workers who have had their pensions whacked.

Whereas companies are free to make changes in benefits of nonunion workers, they must bargain when they want to change benefits of unionized employees.

Morton Bahr, president of the Communications Workers of America, told a Senate hearing on cash-balance plans last week that it took CBS from 1992 to 1998 to negotiate a cash-balance plan with the CWA, and got it only after the company improved benefits for workers at every stage of their careers.

Pensions in the Balance

These companies are a sampling of more than 300 firms that have implemented "cash balance" pension plans.

Conversion Fortune 500 Defined Employees

Company year rank benefit assets

in 1998

(in billions)

IBM 1999 6 $37.69 291,067

Citigroup 2000 7 6.80 173,700

AT&T 1998 10 18.45 107,800

Bell Atlantic1996 25 33.89 140,000

SBC

Communications1998 35 22.15 129,850

Cigna 1998 57 2.4 149,900

Aetna 1999 61 3.46 33,500

Eastman Kodak 1999 121 7.83 86,200

CBS 1999 172 4.13 46,189

Totals $136.79 1,058,206

NOTE: Defined benefit assets taken from Pensions & Investments issue of Jan. 25; numbers have been rounded. Employee numbers are from Hoover's Online.

SOURCE: Office of Sen. Patrick J. Leahy (D -- Vt.)