NEW YORK (CNNMoney.com) -- In a victory for IBM, an appeals court on Monday ruled that IBM's conversion of its traditional pension plan to a cash-balance plan did not discriminate against older workers.

A traditional defined benefit plan favors older workers with longer tenure at a company, since the greatest portion of one's pension benefit accrues in the last years of service. The accrual formula is based on one's salary in the last few years of service multiplied by the number of years of service.

A cash-balance plan, by contrast, treats workers of all ages the same, with their benefits accruing at the same rate during each year of service. Currently, there are more than 1,500 cash-balance plans covering over 8.5 million workers, according to the American Benefits Council, the trade association of companies offering pensions.

In a conversion to a cash-balance plan, the benefits an older worker accrued under the old plan fully vest. But the total pension he can expect to receive in retirement is likely to be less, in some cases as much as 50 percent less, according to a spokesperson for the Pension Rights Center.

In its ruling on Monday, the Seventh Circuit Court of Appeals said, "that the change disappointed expectations is not material. An employer is free to move from one legal plan to another plan, provided that it does not diminish vested interests -- and this (IBM's) transition did not."

And, it further stated, "(r)emoving a feature that gave extra benefits to the old differs from discriminating against them.''

The appeals court ruling reverses a 2003 decision by the U.S. District Court for the Southern District of Illinois, which ruled that IBM's cash-balance plan discriminated against older workers.

The appeals court decision, coupled with the passage of the Pension Protection Act last week -- which set guidelines for the design of cash-balance plans going forward -- is likely to give companies the green light to implement cash-balance plans without fear of litigation.

"This should settle this matter once and for all: cash balance and other hybrid plans are - and have always been - perfectly legal and not age discriminatory," said James A. Klein, president of the American Benefits Council in a statement.

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