Additional Voluntary Contribution Mechanics

This is an account of what is done with your AVC money.  It is not financial advice and you should not take any action based on what is here without independently checking.  You probably won't find any of it surprising but since our elected trustees did not know some of it when they started, it may be informative.

Stage One - Getting Started. 

Consider a hypothetical Julia Bloggs who is an IBM UK employee considering whether to save more for her potential retirement.  There will be many factors to her decision.  How damaging to her current standard of living will putting money aside be?  Will she live to enjoy her pension, and for how long?   Will means-testing and her tax position eventually compromise the return from saving now?  Would paying off the credit card bill or some mortgage represent a better investment?  Perhaps she will seek advice from an Independent Financial Adviser (IFA).  But that will cost and will it be worthwhile when the IFA will necessarily be vague about future governments' policies, about future rates of return, and future annuity prices?  Julia may be able to get generic pensions advice from her manager or from IBM's pensions administration but she won't get free personal financial advice that way - those folk are not IFAs; IFAs are controlled by the Financial Services Authority.

Let us suppose Julia decides to do an AVC.   She will probably action that at her work screen, filling in a Lotus Notes form.   (AVC's have to be earned money, so retirees would take a different approach and deferreds will not be eligible to make AVC's to the IBM scheme.   These folk might consider Stakeholder pensions http://www.thepensionservice.gov.uk/pdf/pm8oct03.pdf or Individual Savings Accounts or something else.  The Financial Services Authority provides "decision trees" that are relevant. http://www.fsa.gov.uk/consumer/decision_trees/index.html )

The Lotus Notes form has plenty of choices.   It allows for single contribution, for regular contributions of a fixed amount, and for regular contributions that are a percentage of her salary.  Here we assume Julia opts for a percentage of salary.  There is a choice of start date for the contributing.  There is a choice of where these contributions are to be invested.  That choice has a Friends Provident (With Profits) and seven varieties of Legal and General investments.  (No Equitable for new AVCs these days!)   Let us assume Julia has done her homework on what these choices imply and for some reason she chooses to put half with Friends Provident and half with Legal and General.  When Julia dispatches the form it gets electronically copied to Pensions Administration in North Harbour.

Largely automatically, receipt of the form at North Harbour triggers the arrangements for the regular deduction of the amounts to be invested from salary.   Both salary calculations and pension calculations are managed at North Harbour and there is electronic interfacing so that pension administration can have monthly data on amounts, addresses, etc for all the AVC contributors.   From this they can aggregate up the amount that should be sent that month to each of Equitable, Friends Provident, and Legal and General.

Stage Two - Monitoring.

Julia will receive regular statements of how her AVC investments are doing.  There are minor differences in how this is done.   Legal and General don't keep information on individuals and our Pensions Administration produces a statement for each individual, at six monthly intervals.  Friends Provident and Equitable produce reports for each individual at yearly intervals. 

Julia might just scan these numbers when she gets them, and do nothing else, but she might choose to be more active.  All the decisions she made initially, about amounts and which insurance company scheme, can be remade for future investments.   The AVC money accumulated with the initially chosen insurance company can be moved to one of the other companies.  However, these moves are only allowed between the insurers associated with our scheme; the money cannot be moved out to, for example, Standard Life.  This restriction to the insurers associated with the company pension scheme is imposed by the Inland Revenue.   (Although our Trust might at some time add other companies like Standard Life to its portfolio, in which case Julia could consider these as well.)    (If Julia wanted more flexibility she could have avoided making AVCs via IBM in the first place, perhaps choosing a Free Standing Additional Voluntary Contribution.)

Conceivably, there might be a crisis with one of the insurance companies, as there was with Equitable.  At such times either the insurance company or the Trust might put extra constraints on what Julia can do.  Although IBM and the Trust cannot give financial advice, they can (and probably would) pay for advice from professional advisers and make the advice available to members.  Julia will have to decide how much effort she is willing to put into understanding enough to make the best decision for her. 

The Trust is required to make decisions in the interests of scheme members generally and if Julia loses out during an insurance company crisis, she might want to consider whether she can recover money personally by proving the trustees got it wrong.  There are a couple of things that lessen the likelihood that she can: 

- Trust law does not use a test like "balance of probabilities" or "beyond reasonable doubt".  To prove the trustees were unreasonable Julia might have to demonstrate that no reasonable set of trustees could have, in the circumstances, felt they had good reason to do what the actual trustees did. 

 - In the case of AVCs associated with IBM pensions, what is good for the scheme members is unlikely to be bad for IBM shareholders.  So there is no reason to suspect that conflict of interest for company appointed trustees had a bearing on decisions.

AVCs are part of financial planning and Julia might feel the need to consider her salary prospects.  Taking a deferred pension when changing jobs is described below, and it is allowed to take a deferred pension while continuing to work for IBM UK.   There are pros and cons.  The deferred pension will, by law, be subject to Limited Prices Indexation and thus tend to keep its value.  The deferred pension will not gain from Julia's subsequent years of service.  Deferral will save making further contributions. Deferral loses (minor?) privileges such as voting for elected directors and free entry to retiree clubs.  However, if Julia thinks her salary will fall well short of keeping place with inflation she might find the idea of taking a deferred pension and continuing to work attractive.

Let us suppose Julia decides just to let her original decisions ride on, and accepts whatever decisions the Trust makes on her behalf.  There is one other thing that Julia should be maintaining - her nomination of beneficiaries.  All the things that Julia owns will form part of her estate when she dies but she does not "own" her AVC pot in that sense.  (The actual arrangements, with the Trust having discretion, are more tax efficient.)   So Julia relying on her Will to dispense the AVC pot is not the best approach.  Telling pensions administration the name(s) of whom she wants to benefit will not guarantee that the AVC accumulated money retrieved from the insurance company goes to those people, but it will ensure that the Benefits Allocation Committee (which proposes to the full board of trustee directors what should be done in such cases) has strong guidance about what Julia wants.  (The Benefits Allocation Committee will take into account everything it considers relevant and that could include Julia's Will  - it is likely to include the Will if Julia failed to nominate any beneficiary).    

Stage Three - Conversion to some pension.

Dying is not the only way that Julia can terminate her AVC activities.  She might choose to leave IBM UK.  She would then have to choose between having a deferred pension (one that the IBM Trust will pay in the future if/when she can take it up) and taking a "Cash Equivalent Transfer Value" into a different pension scheme (leaving no connection with the IBM Trust).  The Inland Revenue would not allow Julia to do one thing with her AVC pot and the other thing with her entitlement to a pension earned by her work (and her non-AVC contributions), so the choice of defer-or-transfer applies to both bits together.  The calculation of the Transfer Value of the entitlement earned by work is complicated and strange but the augment to the Transfer Value from her AVC is simple - it is just the amount that her AVCs have built up with the insurer.  

Julia might retire.  Again she will have a pension-or-transfer decision to make.  The transfer option would entail the Transfer Value being sent from the IBM fund to a pension provider chosen by Julia.  Both options involve her AVC pot being brought back from the insurer that it was with, so that Julia would no longer be a client (via the IBM Trust) of Friends Provident or whoever was investing her AVC money.  

The AVC money brought into the IBM Trust funds on retirement will be used to augment Julia's benefits.  The rules about taking some of it as a lump sum are detailed, because when regulations change (as they did in 1987 for this aspect) the regulations usually leave what is already earned entitlement to be calculated in the old way and provide a new algorithm for what is earned later.   We don't try to summarise the rules here, but Julia might take some of the benefit as a lump sum at retirement.  (The rules are expected to change again in 2005)

Suppose Julia takes the pension-from-IBM option in preference to the take-transfer-value-elsewhere option, as most retirees do.  The AVC money, less any lump sum taken from it, then goes to providing extra pension.  The extra will be provided by the Trust along with the pension bargain that comes from her years of service.  The extra, in terms of monthly pounds, will be different according to decisions that Julia can make - whether there is a potential spouse pension and whether the extra is to the same in pounds each month, or changes with Limited Prices Indexation, or has discretionary changes.  In the latter case Julia will need to form a view on whether the discretion is uncontrolled (allowing Armonk to decide "no more increases" on the day after she makes her choice) or is more controlled than that.

The paragraph above assumes Julia is in the C-Plan; M-Planners have a different set of choices to make and their pension in retirement is not provided or delivered by IBM. 

Overall, there are many choices in the AVC mechanism.   You will have your own views about whether this is a good thing in allowing scheme members more control over their investments or is unnecessarily complicated.  You will have your own views on whether the Trust is offering the best selection of choices.

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