Opinion ID: 3016466
Heading Depth: 2
Heading Rank: 1

Heading: Special Update and the change in pension plans

Text: In 1997, AT&T made the decision to change the method by which it calculated pension benefits for its management employees. Before that time, AT&T used a traditional or “defined benefit” approach. Under this approach, AT&T used a formula that incorporated four factors: (1) the participant’s average compensation during the “base pay averaging period” (prior to 1997, that period was 1987-1992); (2) the participant’s annual compensation for each year after the base pay averaging period; (3) the participant’s length of service; and (4) a specified percentage multiplier. At a certain point during an employee’s service at AT&T (around 25 years) employees would reach a “cliff” where their years of service would cause pension benefits to increase dramatically. Under this traditional plan, the pensions were not very portable, and unlike other types of plans it was difficult for an employee to know what their pension was worth at any given 3 time. The plan was also costly to administer and encouraged early retirements. As a result of the disadvantages of the traditional plan, AT&T decided to switch to a cash balance plan. Under this plan, AT&T “credits” an employee’s hypothetical pension account with a certain amount of “pay” and “interest” for each year of service. This plan is less costly to administer and virtually eliminates early retirement subsidies. By converting to this system, AT&T expected to decrease its annual pension accounting expenses by $40 million. When AT&T decided to switch to a cash balance plan, it faced a problem with what to do with employees approaching the “cliff” within the next few years under the traditional plan. These employees were unlikely to work long enough to accumulate an amount in their cash balance account equal to what they would have received under the traditional plan. To solve this problem AT&T offered what it termed, “Special Update.” Special Update enhanced the old formula by: (1) moving the base pay averaging period from 1987-1992 to 1994-1996; (2) increasing a participant’s total years of service by 5% up to a maximum of one year; and (3) eliminating age and service requirements for taking early retirement. Special Update then “froze” the traditional pension plan. Thus, continued service for AT&T would have no impact on an employee’s retirement under the traditional plan. Consequently, employees could retire at the same pension benefits in 1997 when Special Update was offered as they could for the next several years. AT&T gave employees the option of either (1) taking Special Update and having their benefits 4 under the traditional plan “frozen,” or (2) switching to the cash balance option. AT&T offered literature, call centers, web sites, and workshops regarding the switch from the traditional plan to the cash balance plan. AT&T told employees that, in most cases, if they were going to retire within the next 4–7 years, Special Update would provide better retirement benefits. If an employee planned on working for AT&T for longer than seven years, however, the cash balance plan would provide better benefits. The Appellant-Retirees are all former AT&T employees who chose to accept Special Update for their retirement pensions. Furthermore, given that they planned to retire in the near future and that under Special Update, their benefits were “frozen,” they also chose to retire from AT&T. They contend that luring employees, such as themselves, into early retirement was the goal of Special Update. They believe that AT&T was using the over funded Management Pension Plan to induce middle managers to retire in order to fulfill a long-standing AT&T goal of reducing the work force.1 Some evidence in the record supports the view that at least one benefit of the switch in plans was “restructuring” of AT&T’s workforce.2 1 In fact, the Retirees contend that AT&T had been pursuing a three year plan to reduce the work force by 40,000 employees under CEO Robert Allen. The Retiree’s general contention that AT&T wished to reduce its workforce is undisputed. Their broader claim, however, that this “master plan” to reduce the workforce proves that AT&T breached its duty in this case, was rejected by the District Court. As will be explained below, we reject this contention as well. 2 The Retirees rely heavily on an article co-authored by Harold Burlingame (AT&T’s Executive Vice President of Human Resources) and Michael Gulotta (President and CEO of AT&T subsidiary Actuarial Sciences Associates (ASA), which was the company that 5 B. Downsizing and the Voluntary Retirement Incentive Program In November 1997 Michael Armstrong replaced Robert Allen as CEO of AT&T. Between the time Armstrong became CEO and March 18, 1998, AT&T developed, and the Board of Directors approved, a plan known as the Voluntary Retirement Incentive Program (VRIP). Beginning in early-to-mid November, Armstrong began to outline “broad strokes” to redefine AT&T’s business and reduce costs. Accordingly, employees in human resources and actuarial services began to think of ways to reduce the workforce. The specific type of plan ultimately used by AT&T began to take shape on January 7, 1998, when Burlingame introduced the idea of a voluntary workforce reduction to the Operations Group (OG). At that time, the OG rejected the idea of a voluntary retirement program because they were concerned that such a program risked losing too many members of senior management. Following that meeting, members of AT&T’s Human Resources, Benefits and Legal Organizations, and ASA met and developed three downsizing options: (1) temporary enhancements to induce voluntary departures; (2) involuntary force reduction; and (3) a combined plan. After extensive discussions on the benefits and disadvantages of each option, on January 19, 1998, the OG agreed to recommend the VRIP concept to the Compensation and Employee Benefits Committee (CEBC)—the subcommittee of the Board of Directors responsible for reviewing and making recommendations to the Board for proposed amendments to the Plan. The CEBC designed AT&T’s new retirement program). 6 agreed to recommend the plan to the Board on January 20, 1998, and after some additional changes, the Board approved the final version of VRIP. Once the changes to the retirement plan were announced, the Retirees filed this suit. Essentially, they claim that AT&T lured them into retiring by promising that Special Update was the last increase in the deferred benefit retirement plan and that it was the “best they were going to get.” Then, they claim, when Special Update did not produce enough retirees, AT&T offered a new retirement incentive—VRIP. The Retirees allege that this was part of AT&T’s “master plan” to eliminate approximately 40,000 workers at AT&T. They claim that AT&T knew all along that it would need to offer VRIP because Special Update was not producing enough retirements, and therefore AT&T breached its fiduciary duties by not informing the Retirees of the impending VRIP and by misleading them about Special Update.