WASHINGTON, August 1, 2003 – Yesterdayfs ruling by the United States District Court for the Southern District of Illinois against IBM and its cash balance pension plan in an age discrimination class action suit could severely undermine the U.S. pension system, according to experts at Watson Wyatt.

"This ruling has the potential to cause great harm to the U.S. private pension system," said Eric Lofgren, Global Director of the Benefit Consulting Group of Watson Wyatt Worldwide. "Moreover, two other district courts and the U.S. Treasury Department have previously reached the opposite conclusion concerning the validity of cash balance plans."

According to Watson Wyatt, the courtfs 24-page decision was based on surprising and partly contradictory conclusions.

1. The IBM cash balance formula, which provides a 5 percent account addition for each year of service, was deemed age discriminatory because a 5 percent balance addition for a 25 year old will be larger at age 65 with the addition of 40 years of interest than a 5 percent contribution for a 60 year old which will grow with interest for 5 years until 65. gThe court proclaimed in effect that $5 for a 25 year old is worth more than $5 for a 60 year old,h explained Lofgren. The same type of formula is common and legal not only in 401(k) plans, but also in many traditional defined benefit plans that accept employee contributions.
   
   
2. The ruling concluded that the IBM planfs alternative pension equity formula is also age discriminatory because the planfs 7 percent credit for a 25 year old was viewed as being worth more than a 16 percent credit for a 60 year old, again because the 7 percent credit could grow larger with 35 years of extra increases from the passage of time. Lofgren said, gThis same formula would be universally regarded as contributing more than twice as much to the older employee in an equivalent 401(k) plan.h
   
   
3. The ruling also stated that gthere is a triable issue of fact regarding Plaintifffs anti-backloading claim.h This claim argued that benefit accruals were impermissibly high for later accruals at older ages with longer service than at younger ages with lesser service. gWe are perplexed that the court could simultaneously rule that benefits impermissibly enrich the young relative to the old in age discrimination and may also overly benefit the old at the expense of the young in backloading,h said Lofgren.

Interestingly, this ruling is in direct contradiction to recently proposed IRS regulations that address the issue of age discrimination in cash balance plans. These proposed regulations specifically concluded that cash balance plans do not inherently discriminate against older employees.

According to Watson Wyatt, one of two possible scenarios will likely occur. Either the Appeals Court will reverse the ruling or a large number of plan sponsors will freeze their defined benefit plans and offer their employees only a 401(k) plan. A mass movement to defined contribution plans would shift all of the investment risk onto employees.

"Tens of millions of employees could ultimately have reduced benefit security if this verdict isnft corrected," concluded Lofgren. "Employers with defined benefit plans need to evaluate the effect of this unexpected ruling on their plans, their employees and their businesses. However, Watson Wyatt has every expectation that IBM will win its inevitable appeal conclusively.

"This is the sad result of a tort system that allows plaintiffs to jurisdiction shop, where a high percentage of class action suits are concentrated in a few plaintiff-friendly jurisdictions," continued Lofgren.

Watson Wyatt will work closely with its clients and other plan sponsors to evaluate the implications for their plans and will join the employer community in taking the necessary steps to reverse this development.

About Watson Wyatt Worldwide

Watson Wyatt & Company, the primary subsidiary of Watson Wyatt & Company Holdings (NYSE: WW), is an international human capital consulting firm that provides services in the areas of employee benefits, human capital strategies, and related technology solutions. The firm is headquartered in Washington, D.C., and has more than 4,200 associates in 62 offices in the Americas and Asia-Pacific. Together with Watson Wyatt LLP, a leading European-based consulting partnership, the firm operates globally as Watson Wyatt Worldwide. Watson Wyatt Worldwide has more than 6,200 associates in 88 offices in 30 countries.

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