Last year IBM had revised its intention to switch employees from a traditional defined benefit pension plan to the newer and more controversial cash balance system. IBM's action was provoked by massive and very public protests from older employees who claimed that the move to cash balance accounts would mean a loss in the value of their pensions. By adopting a pension system that benefits young workers at the expense of older ones, these employees said, IBM was guilty of age discrimination. A cash balance pension plan is one where participants are told how much will be contributed to the plan each year of their employment and the employer provides a guaranteed rate of return on that contribution.
Employees thus accumulate a steady 'cash balance' as they go along.
Under U.S. law this is considered a defined benefit plan. The traditional defined benefit plan, unlike the cash balance plan, is somewhat backloaded. By that I mean the value of the pension rises quickly when an employee is five to 10 years from retirement, as opposed to rising smoothly over the employee's whole career. In a cash balance plan, by contrast, benefit values rise gradually over the worklife. Each year the employee's contribution goes into the plan and each year the funds earn a guaranteed rate of return.