US - Cash balance pension plans have again become a viable option for companies in the US after a series of appeals court rulings put an end to uncertainty surrounding their future.
Randy L. Gegelman, partner at law firm Faegre & Benson LLP, said the decisions, combined with provisions in US Pensions Protection Act and Internal Revenue Service guidance, meant companies were now likely to feel comfortable offering the plans to employers.
He said: "I would expect many more of those employers who have not yet converted their defined benefit (DB) pension plans into cash balance plans to do so, or at least give serious consideration to such a conversion. New cash balance plans also will be established in the smaller company arena -
most notably, with professional organisations who will find value in the additional retirement accumulation opportunity."
Cash balance plans are a hybrid of a defined benefit plan in that they still guarantee the benefit, but benefits are accrued over the course of the worker's career. They became popular in the mid-1980s and, according to Bureau of Labor Statistics data, by 2003 over 20% of workers with defined benefit plans were in cash balance plans.
Ethan Kra, chief actuary at Mercer, said the issue in the courts was that younger workers had more time to accrue benefits, compared to an older worker who would therefore end up with less when they retired.
However, the recent decisions meant the ongoing dispute had finally been put to bed.
Kra said: "There were a number of companies that exited the DB system because of the litigation risk. Had we had these decisions five years ago, there would be more DB schemes in existence today."
Kevin Wagner, senior retirement consultant at Watson Wyatt Worldwide in Atlanta, said while the cases should make companies feel more comfortable about offering cash balance plans, some may still choose to move to DC as a result of other pressures such as financial risk.
He said: "The regulatory risk is now gone, but for companies that believe their pension plan gives them too much financial risk, there is still a reason to move out of [cash balance plans]."
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