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A US appeals court on Monday found in favour of IBM in a pension case in which it had been accused of age discrimination. The decision, in the first case of its kind to reach the appeals stage, has been closely watched by other US companies that had wanted to make similar changes to their existing pension arrangements.

IBM said the decision removed a potential liability of $1.4bn, though it had already agreed to pay $320m to settle part of the case.

“The implications would have been extraordinary had the case gone the other way,” said Jim Klein, president of the American Benefits Council, a Washington lobby group for large US employers. Along with the adoption of new US pensions legislation last week, the ruling will instead leave companies freer to choose the design of their pension plans, he added.

The case was prompted by IBM’s decision to turn its plan for US workers into a so-called “cash-balance” arrangement. Though still technically a defined benefits plan, under which retirees are paid benefits according to a formula based on their length of service, a cash-balance arrangement also shares some of the characteristics of a defined contribution plan. Companies make a contribution to the plan for each year of a worker’s service, and those payments immediately start to accrue interest.

For younger workers not due to retire for many years, the compounding effect of the interest payments can result in a far larger pension entitlement than for workers who start their service at a later stage. That has led to lawsuits against IBM and a number of other US companies alleging age discrimination, resulting in a slowdown in the adoption of such plans.

In its opinion, the appeals court overturned an earlier district ruling against IBM and said that cash-balance arrangements were “age-neutral”.

“Older workers [accurately] perceive that they are worse off under a cash-balance approach than under a traditional years-of-service-times-final-salary plan,” the judges wrote. “But removing a feature that gave extra benefits to the old differs from discriminating against them.”

Welcoming the ruling, IBM said in a statement: “Today’s decision confirms the legality of cash balance plans in general and the fact that IBM’s plan does not discriminate on the basis of age … The Court’s decision gives much needed certainty to employers and employees alike in this important area of employee benefits.”

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