A recent working paper, "Why Do Firms Convert to Cash Balance Pension Plans? An Empirical Investigation," written by Julie D'Souza of Cornell University, John Jacob of the University of Colorado, and Barbara Lougee of Morgan Stanley found the timing of "cash balance" conversions "appears to be linked to incentive compensation and profitability." Critics of these pension fund changes have suggested that companies may be motivated by the desire to inflate their book profits with surpluses in their pension trust funds, which are freed up by the conversion.
It's important to note defined benefit plans reward employees for long service while cash-balance plans tend to treat all workers equally. A typical traditional plan accrues benefits based on a percentage factor, multiplied by the number of years of service, multiplied by the participant's final five-year average base pay. Cash balance plans instead annually reserve a fixed percentage of base salary, plus interest, and are portable.
The study also found those who made the conversions do not have greater employee turnover than firms that retained their traditional defined benefit-plans, a fact that countered the argument the changes were made for the benefit of a more mobile work force. Additionally, the conversions were more common when incentive compensation was a larger proportion of total compensation.
In 1999, when International Business Machines (IBM) shareholders converted its traditional defined benefit pension plan into a cash-balance, defined contribution plan, angry employees took the issue directly to the shareholders with a proposal that was subsequently filed at other firms.
The next year when over 300 IBM shareholders first co-filed the proposal, which sought to allow employees the choice between defined benefit pension plans and defined contribution pension plans, it faced a strong challenge at the SEC. The company attempted to exclude the proposal on the grounds that it dealt with a topic, which was part of the company's ordinary business.
The SEC ruled the public attention focused on the pension plan conversion means the matter no longer qualifies as ordinary business. In its decision to refuse the no-action request, SEC Special Counsel Carolyn Sherman said, "In view of the widespread public debate concerning the conversion from traditional defined benefit pension plans to cash-balance plans and the increasing recognition that this issue raises significant social and corporate policy issues, it is our view that proposals relating to the conversion from traditional defined pension plans to cash-balance plans cannot be considered matters relating to a registrant's ordinary business operations." The proposal won the support of 28.2 percent of the votes cast in that year. Though it was later filed at a range of companies, including Boeing and AT&T, it never received significantly higher support.
Opponents of conversions appear to have largely given up using the shareholder proposal venue as a way to publicize their concerns, but this study indicates that some of the concerns they raised years ago may have been on target.