BERKELEY HEIGHTS, N.J. -- Five years ago when AT&T Co. offered union members a chance to convert their defined benefit pension plan to a cash balance plan, the idea was quickly rejected. Now, union negotiators have done an about-face and given the green light for a conversion, subject to a ratification vote by union members.
The switch to a cash balance plan is part of a four-year collective bargaining agreement between AT&T management and representatives of the Communications Workers of America and the International Brotherhood of Electrical Workers.
Alan Sefcik, consulting actuary at Actuarial Sciences Associates, a subsidiary of AT&T, said the unions were skeptical about a conversion when the idea was presented five years ago.
"They asked: If it was such a great plan, why didn't management have one?" he recalled.
On Jan. 1, AT&T management's switch to a cash balance plan from a traditional defined benefit plan became official, and that was a big factor in the unions' decision to approve a conversion, Mr. Sefcik said.
The union's cash balance plan, which will cover from 48,000 to 50,000 workers, will take effect July 1, 1999, but the cash balance accounts will be retroactive to July 1 of this year. A flat dollar amount will be deposited into each union worker's retirement account every year, based on years of service. The management plan, in contrast, calls for a certain percentage of pay, also based on years of service, to be deposited in each employee's account every year.
Both the union and management plans were designed by ASA, based in Somerset, N.J.
The presentation of the cash balance plan to union members in 1993 predated the 1995 spinoff of Lucent Technologies from AT&T. Lucent union members are still resisting converting to a cash balance plan, possibly because Lucent management hasn't converted to one, Mr. Sefcik said.
A major stumbling block to a conversion by the AT&T unions was the "30-and-out provision the union had in its old plan," he added. That meant if a union member put in 30 years of service, he or she was eligible to retire with a full pension, whatever the employee's age. Many plans reduce the retirement benefits for people who leave before reaching age 65, but under the original plan, a worker could be 48 and leave with a full pension. The management plan, meanwhile, reduces a person's pension by 3% for every year under age 55.
The union wanted the 30 option included in any new plan, because it had bargained hard for it in previous contract negotiations. So to protect members close to retirement, it worked out a deal by which all union employees who have worked at the company for 15 years will have both a defined benefit and a cash balance plan. When they retire, they will have a choice of taking a monthly annuity payment or the full lump sum. If the annuity option is chosen, the payments will come out of whichever account can provide a higher income.
Under the management plan, retirees can't take more than one year's salary if they elect lump-sum payouts. However, under the terms of a voluntary buyout package announced earlier this year, management and union employees who accept it can choose between full lump-sum payouts or monthly annuities.
Steve Mirante, senior consultant, Kwasha Lipton Group at Coopers & Lybrand, Fort Lee, N.J., said the AT&T unions' decision to switch to a cash balance plan is typical of what is happening around the country.
"At least 20 companies now have collectively bargained cash balance plans for union members," he said.