Cash Balance Hearing

HELP Subcommittee on Retirement Security and Aging

Source: AARP Press Center |  | June 7, 2005

Chairman Dewine, Senator Mikulski, and Members of the Subcommittee, I am David Certner, Director of Federal Affairs, of AARP. Thank you for the opportunity to testify on the important legal and policy issues surrounding older workers and cash balance plans.

While cash balance plans are called hybrid plans, they are defined benefit plans under the law, and must therefore follow all the rules for DB plans. AARP has long questioned the legal basis for cash balance plans because these plans cannot fit within all the DB rules. Also, there are additional significant age discrimination issues that arise when employers convert a defined benefit pension plan to a cash balance formula.

We believe—regardless of what one thinks of the cash balance design—which a careful review of the legal distinction between defined benefit and defined contribution plans makes clear that hybrid cash balance plans do not fit within the current legal framework. The recent court decision in Cooper v. IBM agreed that cash balance plans do not fit within current law. We urge the Committee to address the legal framework for cash balance plans, and at the same time, provide strong and effective protections for older workers involved in cash balance pension plan conversions.

Traditional defined benefit plans typically provide only small benefits early in a worker’s career, and larger benefits later in the career for those who devote much of their working lives to the company. It is therefore unfair for employers that have sponsored this type of plan to eliminate these promised larger, late-career benefits just when long-serving workers are about to obtain them. Yet that is precisely the damage caused by conversions of traditional pensions to cash balance plans – unless older workers are given appropriate transition relief to address the “pension pay cut” brought about by conversions.

Plan conversions change the rules in the middle of the game – and older, longer-service workers have the most to lose. They generally lose out on the larger late career benefits, they have less time to accumulate benefits under the new cash balance formula, and they are less able to leave their current job if benefits are cut because they typically have fewer job prospects.

Worker outrage, adverse publicity and legal concerns have increasingly caused plan sponsors converting to cash balance plans to recognize the harm to older workers and to put in place protective transition provisions. We urge Congress to, in effect, codify the better practices many employers have already adopted in order to protect older workers in a cash balance conversion.

AARP believes cash balance plans can have a role to play in the private pension system if – and only if – they are designed and adopted in a manner that protects the millions of older workers who have given up wages in exchange for traditional defined benefit pensions.

Provided that protections for older and longer-service workers can be adopted, AARP could support the enactment of a reasonable legislative solution that would provide legal certainty for cash balance plans.

However, Congress should not legitimize conversions that many employers have themselves found to be unfair and harmful to older employees. One such unfair – and we believe illegal practice because it is based on age – is the so called “wearway.” Wearaway simply means the time it takes for the new plan formula to catch up to the guaranteed benefits that have already been earned under the old plan formula. A wearaway is in effect a period of time when no new benefits are earned, and can last over 10 years. Employers have recognized this problem, and many have taken steps to preclude wearaway. AARP commends the most recent Treasury proposal to ban any type of wearaway, and we urge Congress to do the same.

Many employers have also sought to address the large future pension cut experienced by older workers by giving them “choice,” or “grandfathering” them in the traditional plan formula. These and other protections have raised the bar with respect to cash balance conversions. In any effort to clarify the law, Congress should not now lower the bar by enacting weakening legislation that invites the market to return to the lower standards of the 1990s. Instead, Congress needs to hold all companies that voluntarily choose to convert to a cash balance plan to a standard that many companies have been willing and able to meet on their own.

The cash balance format deserves protection from legal challenge only if it protects older workers from the harm caused by moving to that structure. We look forward to finally resolving this issue through legislation that will strengthen defined benefit pension plans, protect older workers, and address the legal uncertainty surrounding cash balance plans.

Letter from AARP Group Executive Officer Chris Hansen to the Hon. John Boehner, Chairman for the Committee on Education and the Workforce

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