Benefits January 24, 2005

SBC Takes a Step "Back" to Traditional Pension

January 24, 2005 (PLANSPONSOR.com) - In an unusual move, SBC Communications Inc. is reportedly phasing out its cash balance and another hybrid pension plan covering management employees in favor of a more traditional pension plan arrangement.
Reported by

SBC adopted the cash balance plan in 1997 following the acquisition of another telecommunications company already offering a cash balance plan, according to Business Insurance. The firm later continued another pension hybrid plan, this one a pension equity plan, when it acquired Chicago-based Ameritech in 1999.

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Now SBC is freezing those plans, and management employees’ future pension benefits will be earned under a more traditional plan design, according to the Business Insurance report. SBC decided to offer only that plan design because it “wants to focus the value of the management pension benefit toward long-service employees,” a spokeswoman told BI, according to the report.

Earlier this year IBM announced that it was closing off its controversial cash balance plan to new hires, offering them an enriched 401(k) instead (see “Blue” Moves” ). Cash balance designs were introduced in the 1980s as an alternative to traditional pension plans, which tend to use a final average pay formula in calculating benefits. Cash balance plans tend to use a career average pay formula which, in the absence of special adjustments, can hurt the retirement income of older workers who are close to retirement when their company makes the switch.

Issues related to the treatment of pension balances at conversion have proven to be controversial, especially the conversion experience of IBM (see also Off Balance ). More recently, Bank of America (BOA) employees sued the giant banking company over its cash-balance pension plan, in a lawsuit that alleged that BoA relied on the plan as part of an “arbitrage scheme” designed to boost the bank’s profits (see Bank of America Slapped with Cash Balance Lawsuit ).

However, the courts have been split on the issue – and by some measures, courts have supported the calculations employed in such programs more often than not (see Tootle Do? ). Moreover, the vast majority of employers that have embraced the design have done so in a way that has been well-received by most workers (see One Bad Apple ).

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