The Pension Revolt

By Daniel Eisenberg

When Lou Gerstner, IBM's iron-willed CEO, makes a decision, he usually sticks by it. So how was it that 10 days ago he made an abrupt about-face, scaling back a change to the company's retirement plan that was supposed to save $200 million annually? And did Gerstner realize he was feeding a nationwide workplace riot among baby boomers, who are convinced their nest eggs are being plundered?

Granted, as TIME reported last April, numerous FORTUNE 500 firms, from Xerox to Kodak, have already made the big pension switch--moving millions of employees from the traditional system, which rewards longevity and piles up cash in a worker's last years of service, to more flexible, so-called cash-balance plans. The new model lets workers build up their nest eggs at a steadier pace and take the balance from job to job. It is more consistent with today's career cycle. But when IBM announced its conversion in May, thousands of middle-aged IBM workers, hardly known for their activism, began screaming that the switch promoted age discrimination.

Businesses are not required to provide pensions, but they are a given in most large companies. Though close to two-thirds of all workers actually do better under a cash-balance plan, 40- to 50-year-olds about to enter their peak earning years can lose up to half of their expected final payout. To drive that point home, some Big Blue employees flew a banner over the Minnesota state fair that read, IBM'S PENSION THEFT COULD HAPPEN TO YOU.

That message quickly found a receptive audience in Washington. Both the Equal Employment Opportunity Commission and the IRS are investigating cash balances' legality. And last week Representative Bernie Sanders, an independent from Vermont, introduced a bill that would hit companies with tax penalties if they switched to a cash-balance plan without giving all workers the option of staying in the old one. "Millions of Americans are feeling 'pension anxiety' because under current law there is no guarantee that their pension benefits will not be cut tomorrow," says Sanders.

Just as Congress was gearing up to hold hearings on the issue, IBM announced it would change the eligibility rules to double the number of workers--to 65,000--who would be able to keep their old pensions. Still, IBM senior vice president J. Thomas Bouchard, testifying before the Senate last week, said firms like his need the allure of cash balances to attract young, mobile high-tech workers in a tight talent market: "There just isn't enough money to go around to give a choice to everybody." Many employer groups warn that onerous restrictions could do more harm than good. "These well-meaning changes could actually create fewer defined-benefit plans," says Eric Lofgren, director of benefits consulting at Watson, Wyatt Worldwide.

The battle is raging in the courts too. An age-discrimination lawsuit pending in federal district court in New Jersey charges AT&T with "wearaway," which leaves older workers caught in a cash-balance conversion toiling for years before they start earning new benefits. (The company denies the charges.) A similar case is set to go to trial next spring against Onan Corp., a subsidiary of Cummins Engine Co. Says William Carr, an attorney representing workers in the case: "These plans are a profit center." Only now, considering the outcry, companies like IBM will start to wonder whether the costs outweigh the benefits.