More Sand(ers) In The Pension Machinery

Not content to rest on his dubious laurels in having initiated last year’s Congressional action resulting in the shackling of Treasury’s attempt to promulgate its regulation proposed in 2002 to free cash balance plans from vulnerability to charges of age discrimination – by a bill barring Treasury from spending any of it 2004 appropriation to that end — Rep. Bernard Sanders (I-VT) has renewed his tactics in connection with this year’s appropriation bill. On September 21st he won approval from his House colleagues for his amendments to the current appropriation bill, H.R. 5025, preventing Treasury’s expenditures to overturn the trial court decision against IBM in Cooper v. IBM Personal Pension Plan. In fact, his amendments go beyond the expected IBM appeal to include appeals in any judicial proceedings implicating the age discrimination statutes, and, further still, to bar Treasury’s arguing in any other court proceedings against alleged age discrimination violations.

One might have expected Sanders to have been satisfied that he had been most instrumental in getting Treasury to voluntarily (?) withdraw the proposed 2002 regulations, deferring to a legislative solution, notwithstanding its repeated expressions that the cash balance format did not offend age discrimination rules and was, in fact, an important plan design for furthering the retirement security of employees. But having drawn blood, the congressman from Vermont apparently will now be satisfied with nothing less than the complete retirement of Treasury and IRS from the cash balance fray.

The mere announcement of his intentions drew the strong opposition of a powerful colleague in the House, committee chairman John Boehner (R-OH), of the Committee on Education and The Workforce, who with chairs of two subcommittees of that body has circulated a pair of Dear Colleague letters, urging rejection of the “harmful” Sanders amendments, as damaging the pension security of workers and especially harmful to women, low-income workers, older employees, and those who change jobs during their careers. So the battle lines are drawn within the Congress, no less than in the private sector, where fierce objection to Sanders’ proposals – one might say, resistance to the throwing of more Sand(ers) in the pension machinery – has been sounded in the U.S. Chamber of Commerce and other influential groups. Sanders’ success last year in winning a sleeper vote of 381 to 49 in the House was not repeated this time around. The winning margin was still a respectable 237 to 162, with 185 of the ayes coming from a near unanimous Democratic bloc and Sanders himself; but 25 percent of the Republicans also voted for the amendment

In point of fact, Sanders’ actual amendment last year did not carry the Congress. Like his current proposal, it would have denied Treasury’s use of any of its appropriation to overturn the trial decision in IBM. The final bill – less offensive to the separation of legislative and judicial powers – followed the Senate version, only barring finalization of the proposed regulations, and, under a compromise engineered in the conference on the appropriations bill, curtailed the regulations halt upon Treasury’s submitting proposed legislation addressing the widely reported problems on companies’ conversions of their traditional defined benefit plans to cash balance plans.

Rep. Sanders has now gone back to his own model, but, as noted, extending its reach well beyond the IBM matter to encompass any litigation implicating the age discrimination issue. The reality is no age discrimination inheres in the basic cash balance design (putting aside special problems that have been identified in some individual company conversions). So, in basing his attack on age discrimination, as the way to extinguish the cash balance movement, the congressman is grasping at a soggy straw. This is not just a matter of reasonable minds differing in their assessment of the impact on age discrimination. The contention of the discrimination arguers is that the federal age discrimination statutes prohibit the working of the interest-crediting feature of the cash balance design because of the effect of the forward projection of interest to retirement age that is arguably a necessary component of the “accrued benefit” concept.

The contention is palpably specious. It rests on the fact that a forward projection of interest to, say, age 65 will result in a steadily declining number of interest units as a participant approaches age 65; so the older the participant, the lower the interest projection, and, consequently, the lower the rate of accrual of total benefits as a function of the interest component of the accrual. Of course that is true, because that is precisely what the time value of money principle dictates. It is as true for a 23 year old participant versus a 22 year old participant. Any other formula would turn the interest crediting mechanism into a preposterous windfall for older participants, presumably requiring that the interest projection for every participant would equal that of the youngest participant in the plan! Congress obviously did not intend that, and, equally obviously, did not intend to outlaw cash balance plans, which had not even come into usage until after the age discrimination statutes were enacted in 1986.

The technical age discrimination argument, it is argued by its advocates, is posited on a supposedly literal reading of the statutes that is unavoidable. Even that is specious. As we have seen, the forward interest projection to retirement age is strictly limited to the “accrued benefit” concept; and, arguably, it is not even a necessary property of that concept, having been introduced by the Treasury, in the 1991 regulations under IRC section 401(a)(4), only as a safe harbor method of satisfying the general antidiscrimination prohibition against favoring highly compensated employees. More on point, the relevant age discrimination statutes, where the “rate of accrual” concept is stated, do not speak of the rate of accrued benefits, but rather “the rate of an employee’s benefit accrual”.

The accrued benefit in a cash balance plan, even accepting the Treasury’s safe-harbor as determinative, does not govern the benefit a participant will receive. It is only a projection of the interest credits that would be earned if the benefit were not paid before “normal retirement age”; so the answer to the question of what pension benefit a participant will in fact receive must await the actual time of distribution of benefits. The pension a participant earns each year and will walk away with upon separation from employment before normal retirement age, if the pension were paid at that time, is the aggregate of pay credits and interest thereon through the time of payment. That is the participant’s account balance (or notional account balance in the lingo of cash balance plans, since cash balance plans, like defined benefit plans of which they are a subset, do not establish actual individual accounts). The post-payment interest projected as part of the accrued benefit disappears; in the same way that interest on a debt ends with satisfaction of the indebtedness. In fact, one of the great attractions of cash balance plans for participants is that pensions are payable on separation from employment, in distinction from the normal pattern of traditional defined benefit plans, that defer pensions until normal retirement age or later.

So much for the age discrimination charge. The wonder is that it has gotten this far, without its being generally recognized as naked as that immodest emperor of yore.

© A.D. Lurie 2004