A Cogent Explanation of Age Discrimination Claims in Cash Balance Plan Conversion Cases

Mary Williams Walsh, of the New York Times, wrote an article earlier this week about a lawsuit filed by employees of the Southern California Gas Company challenging the 1998 conversion of their traditional pension plan to a cash balance pension. Conversions of pension plans to cash balance plans raise many thorny issues, with "wearaway" at the top of the list. As with other cash balance plan conversions, older employees claim that the conversion deprives them of benefits in violation of age discrimination laws. Ms. Walsh nicely captured the essence of these claims in her article. She wrote:

The legal problems have generally come up at companies that converted their pension plans when older workers were about to enter the final years of their careers, when they expected to build up their pensions at the fastest rate. The conversions deprived them of their chance to earn the biggest part of their pensions. Younger workers lose this high-earning phase as well, but for them it does not matter because they are likely to have more years in the new plan, and thus will have the chance to offset the loss of the late-career pension increases.

This difference in the way older and younger workers fare in a conversion is the source of the age-discrimination claims. The wearaway effect makes the discrepancy even greater. Wearaway happens in cases where some employees - usually people in their 40's and 50's - have already earned bigger benefits under the old plan than they would have earned, in theory, if the new plan had been in place throughout their careers. The employer stops their accruals for several years, until the theoretical amount they would have earned catches up with the amount they actually did earn. This period of zero accruals is called wearaway.

Janell Grenier's ERISABlog has additional links for information on cash balance plan issues, including pending legislation in Congress.