The Treasury Department plans to propose new rules today that would allow employers to resume converting traditional pension plans to new "cash balance" plans that can lower benefits to long-serving workers.
Such conversions are highly controversial. Critics contend that they discriminate against older workers in violation of federal law. The Treasury Department and the Internal Revenue Service stopped approving employers' requests to convert their pension plans three years ago amid complaints from workers and some members of Congress.
That moratorium will remain in place until the regulations become final, probably next year.
The new regulations conclude that cash-balance plans are not inherently age-discriminatory, as long as pay credits earned by older workers are the same as or better than those earned by younger workers. But the rules would require that benefits earned by workers under the previous plan be protected.
There will be a 90-day comment period and an IRS hearing on the proposals.
In traditional "defined benefit" pension plans, workers' pensions are determined by a formula in which years of service are multiplied by average pay in the worker's last few years of employment and by a percentage, typically 1 to 2 percent. In such an arrangement workers earn benefits slowly at first, but the curve gets steeper as their tenure grows longer. Thus those who work many years at a company can earn substantial pensions, while those who work fewer years earn disproportionately less.
In a cash-balance plan, the employer sets up a hypothetical account for each worker and credits a percentage of pay to it every year. Under this formula, benefits accrue in a more linear pattern, so short-tenured workers end up with a better pension than they would under a traditional plan. At retirement, the worker can take the account balance as a lump sum or convert it into an annuity.
In past conversions, some companies have calculated benefits earned by workers under the old plan, and if they were higher than the worker would have earned under the new plan, the worker earned no new benefits until the new formula caught up.
The new rules would require employers to preserve the present value of any benefits earned under the old plan and require the crediting of interest in a way that would make this temporary pause in earning benefits less likely, though not impossible, Treasury officials and other experts said.
Rep. Bernard Sanders (I-Vt.), whose constituents include many IBM workers embittered over the computer giant's switch to a cash-balance plan in the late 1990s, called the new rules "a radical anti-worker action."
"Companies favor these plans because they can slash a worker's pension benefit by 20 to 50 percent in one fell swoop," Sanders said.
Defenders of cash-balance plans point to their better treatment of workers who do not have long careers at one company, a common situation today. They concede that some companies convert to save money, but in many cases they do not.
"When you establish a [pension] plan you allocate a limited number of dollars to people," said Kevin Wagner of benefits consultant Watson Wyatt Worldwide. "A lot of companies are saying 'We cannot have a reward pattern that just pays career employees.' "
Today, according to a Watson Wyatt survey, 33 percent of the companies in the Fortune 100 offer cash-balance pension plans, up from just one company in 1985.