The Xerox Corporation said yesterday that it had agreed to settle a lawsuit over the way it calculated pension benefits by paying an additional $239 million to thousands of employees who retired from 1990 to 1999.
The proposed settlement, which is contingent on court approval, calls for Xerox to make the payment out of its pension plan for salaried employees. Xerox said it would not have to contribute additional money to the plan to cover the payout until at least 2005.
Xerox reported earlier this year that it had taken a pretax charge of $300 million to cover possible damages owed in the case. In August, the United States Court of Appeals for the Seventh Circuit made a different calculation showing that the company owed the retirees about $256 million.
Xerox had said it might appeal the case to the Supreme Court but acknowledged with the settlement that it had abandoned that idea. A spokeswoman, Christa Carone, said the company wanted "to avoid any further uncertainty or legal expenses" stemming from the dispute.
Ms. Carone also said that Xerox would put $61 million back into its pretax earnings, either in the fourth quarter of this year or the first quarter of 2004, depending on when the settlement is made final.
The dispute centered on Xerox's cash-balance pension plan, a type of plan that became controversial in the late 1990's. Cash-balance plans first appeared in the late 1980's and proliferated in the 1990's, billed as a modern, worker-friendly arrangement that combined certain features of traditional pension plans with other features of 401(k) plans.
Typically, employees who participate in cash-balance pension plans receive regular statements showing their benefit as a hypothetical sum of money that grows over time. Workers covered by traditional plans do not receive such statements because their benefits are calculated differently, usually as a percentage of their pay just before they retire. Such pensions are usually paid as an annuity, a stream of monthly checks from retirement to death.
The controversy started when some workers discovered, after their companies switched to cash-balance plans, that they had been stripped of their ability to earn valuable benefits that the earlier pension plan had offered. Such losses were mostly among older workers, who had been poised to earn the biggest share of their benefit because they were approaching retirement.
Their anger led to accusations that companies were discriminating on the basis of age in converting their plans, and to lawsuits. In July, a federal judge hearing one such case, against I.B.M.'s cash-balance plan, issued a ruling suggesting that the vast majority of all cash-balance pension plans discriminate illegally against older workers simply because of the way they build benefits. That ruling applies only to I.B.M.'s plan, but most other cash-balance plans accrue benefits in the same way.
More than a thousand American companies already have cash-balance pension plans in place, and the I.B.M. ruling has cast considerable doubt on the future of such plans. In the months since the I.B.M. ruling, companies have been waiting for the Treasury Department to issue regulations on the age-discrimination issue, hoping that the department would propose standards which, if met, would immunize a cash-balance plan from legal trouble.
But the Treasury's work has been slowed by the extreme sensitivity of the issue. Earlier this week, both houses of Congress agreed upon a measure that would block financing for any work by the Treasury on regulations that would help companies convert to cash-balance pension plans.
The Xerox case has involved a different cash-balance pension issue and offers little guidance on the age-discrimination question. It has dealt instead with the way companies with cash-balance plans must calculate the benefits they pay retirees.
Most cash-balance plans allow retirees to take their benefits as lump-sum payments. But the fundamental principles of pension law were enacted before cash-balance pensions were devised, when traditional pension plans were the norm, so the law holds companies to standards based on the expectation that retirees will be paid an annuity, beginning at age 65.
When Xerox's employees retired, it paid them the lump-sum amount shown on their statements. But the courts found that if an employee retired before turning 65, the law required the company to take the amount shown on the worker's statement, convert it to what it would be worth as an annuity payable at age 65, and then turn it back into a lump sum.
At Xerox, performing those calculations showed that the employees should have received larger lump sums than the amount on their statements. This resulted from certain features built into the Xerox plan, however; not all cash-balance pension plans have such features or are vulnerable to Xerox's legal problem.