THE WAY FORWARD

Address by Ian Murdoch, Member elected Trustee

We need to review briefly where we are since Roger and I met with a few pensioners some six years ago and founded the Action Group. We have consistently focused on "Good Governance" and increases in pensions in terms of the affordable returns of the Fund's investments.. In this process we uncovered a number of mal-administration issues and actions taken both by IBM and the Previous Board of Trustees to the detriment of the interests of the members. We have laid a number of complaints with the Pension Funds Adjudicator, the Registrar of Pensions and Financial Services Board. The Pension Funds Second Amendment Act has opened the door for the correction of the past injustices to the members, and we are continuing to focus on these matters and our responsibility to protect the interests of members.

Eventually the Company Appointed Trustees and IBM were persuaded to agree with your  elected Trustees, that a CPI catch up of 14.6 % increase to pensions be implemented and the annual CPI increases should be approved. Despite the statuary requirement, that  the Board of Trustees approve and communicate to the Members a formal Pension Increase Policy, this issue has been blocked by the Company Appointed Trustees. They also continue to block a number of important actions to bring the Rules into line with the Pension Funds Act.  At the last Board meting there were four important resolutions proposed by the Member elected Trustees, all of which were opposed by the Company Appointed Trustees.  The Company Appointed Trustees continue to act in contravention of their fiduciary duties as set out in the Pension Funds Act - to avoid conflicts of interests, to act with diligence and good faith, be impartial with regard to the award of benefits to members and beneficiaries and protect the rights of members at all times. In my opinion the successive Company Appointed Trustees since I left IBM  in 1986, on early retirement, have breached every one of these fiduciary duties, and continue to do so. They have mis-interpreted the Rules and ignored other rules that are designed to inform and protect the members They have allowed the Company to utilise millions of Rands from the Pension Fund, to enhance retrenchment programs without the approval of the Board or the payment of the cost to the Fund.  They have not complied with the Pension Funds Act with regard to transfers made to the Provident fund and transferred over R45 million illegally to an Employer reserve in the Provident Fund. Illegal enhanced payments were paid to former Directors of the Company. False reports were made to the Registrar of Pensions. IBM has not contributed a cent to the Fund since 1996, without proper approval by the Board of Trustees and acting on the biased advice of the Fund's Actuary and contrary to the Rules of the Fund.

The key issue remains the fact that IBM, not the Trustees, exercises the control of the Fund and the Company Appointed Trustees act in full support of the Company's interests, and against the interests of the members. Unfortunately our perception is that that Alexander Forbes, has consistently supported the interests of IBM and not those of the members. The issue of mal-administration which runs into millions of Rand must be addressed.

The Board did obtain a legal Opinion from an independent Attorney from Werksmans, and a Senior Legal Counsel Advocate Gauntlett,  confirming that IBM had no authority to Veto the approval of  pension increases  by the Board of Trustees. This ruling would entitle every pensioner to "back pay" equal to 6 months pension. However IBM has opposed that opinion and has obtained a contrary opinion, which is fully supported by the Company Appointed Trustees. The Board of Trustees  have been advised that  they should seek a declaratory order from the High Court, which the Company Appointed Trustees oppose.  This leaves the Member elected Trustees and or the Pension Fund Action Group, the responsibility to take this action or "surrender"to IBM.  If we take the case on and win, we will all benefit.

To protect your interests we need the financial resources. If every member is willing to contribute in relation to his or her pension, we can raise the funds to take this action. I suggest a contribution of half a month's net after tax pension, or 10% for 5 months, and we will have sufficient funds. If we are successful in recovering the funds illegally used by IBM , which are in excess of R200 million and this is added to the share of surplus to be used for the exclusive benefit of the members, this could mean an additional years pension to every pensioner. I am specifically appealing to those pensioners whose pension is above R5000 per month, but all contributions are acceptable and valued. I am confident that with your support we can achieve a fair deal for all.

The Annual General Meeting of the IBM Pension Fund Action Group was held on Tuesday 29th July 2003 at the Old Parktonians Sports club (Johannesburg)

1.. Welcome and apologies - noted

2.. Minutes of the previous AGM held on 29th August 2002 - approved

3.. Matters arising from previous minutes - none

4.. The meeting was chaired by the PFAG Chairman (Eric Glover)

There were 29 attendees and 28 proxies = 57

Reports presented were:

Chairman (Eric Glover)

Overview & Pension Increase Policy (Bruno Ganter )

EROs, additional service, surplus implementation (Peter Mengel)

Maladministration (transfers) (Ian Murdoch)

Governance & Rules (Roger Hull)

Deferreds/former deferred members/Fund Finances (Rudi Goldschmidt)

The way forward (Ian Murdoch)

PFAG Finances (Mike Perry)

Summaries or copies of the reports are set out below.(item 7)

5.. Resolutions passed (unanimously)

5.1 " expression of member support for the incoming PFAG "

5.2    " support for the PFAG to launch a fund raising drive"

5.3 " approval to amend the constitution to accept 2 additional members"

6.. Election of new PFAG committee.

All current elected members (except Mike Perry who declined to be nominated) were re-elected along with one new elected member (Richard de Oude). NB . There is now provision for 10 elected members (in addition to the 5 Elected Trustees (4 plus Alternate) who are ex-officio members)

7.. Reports presented (as set out in item 4 above)

7.1      Chairman

The turnout at the meeting and the large number of proxies were welcomed as sign of interest. Special thanks were conveyed to the PFAG members and to the Elected Trustees in particular.  The work involved is time consuming and very frustrating. More than ever the  IBM pensioners need to have representatives who are determined to obtain fairness in the entire range of pension matters. The AGM is not a "good news " meeting as will become clear from the reports that follow.

7.2      Overview and Pension Increase Policy (Bruno Ganter)

Overview

Over the last four years the Fund has gone through four phases and we presently find ourselves in a fifth one.

(1)     When first elected we faced a hostile group of appointed trustees on the Board. They openly represented IBM and conflicts of interest were apparent. Relations were confrontational and destructive. The Board of  Trustees was totally ineffective.

(2)     IBM changed its trustees to ease tensions on the Board. The possibility of a negotiated settlement was raised. Elected trustees did an enormous amount of work developing proposals that were fair and beneficial to both parties. IBM gave undertakings to examine the proposals and then did not bother to respond.

(3)     The next period was the "doldrums". We routinely put forward proposals to correct past inequities, improve pensions, make Rule changes etc but to no avail.

(4)     Talk of amendments to the Pension Funds Act had been circulating for some time. During 2001 it seemed likely to happen. Based on what we knew of the probable changes, we became optimistic that they would provide a framework for securing a better deal for pensioners.

 (5)     We are now in the fifth phase. Having had time to fully understand the implications of the new legislation (effective from Dec 2001), IBM is taking every legal step available to minimise or avoid the letter and the intent of the amended Act. Their objective is to retain control of the Fund as it is today. As a result the Board is deadlocked on all of the major issues before us.

These issues are:

·         Development of a Pension Increase Policy

·         Rule Changes, especially removal of IBM's veto.

·         Funding for Early Retirement Offers of waiver of penalties

·         Additional Service selectively granted in contravention of the  Rules

·         Transfers of monies to the Provident Fund

As we look ahead, submission of a Surplus Distribution Scheme by June 2004 - which will require that all of the above issues be resolved - will be the next item to become deadlocked. It is likely that by default, the matter will be taken over by a Special Tribunal (per the process) and resolution thereof will be out of our hands.

Pension Increase Policy

A reality is that after correction of inequities for deferred pensioners and payment to former members (those who left IBM and are no longer members of  the pension or provident funds), most of the surplus will have been spent.

Our concern is that before the surplus for distribution becomes fixed, we need to secure adequate assets to back pensioner liabilities and to have adequate investment and contingency reserves in place to ensure that the Fund remains viable for the future. A key component in arriving at these numbers is the Pension Increase Policy that has to be defined. Based on that, the Actuary is then able to do the Statutory Valuation that will define the surplus.

Simplistically stated, the more generous the increase policy is, the more assets must first be set aside and the smaller the surplus will be. Likewise, the less generous the policy, the fewer assets need be set aside and the larger the surplus will be. Of course, other factors will also affect the size of the surplus.

We favour the former approach and IBM the latter. As a result we are deadlocked on defining an increase policy. The matter is presently with a Mediator. We are not very hopeful as even if the Mediator favours our position, his recommendation is not binding on IBM and the appointed trustees will therefore vote against it.

The amended Act states that an increase policy must be based on affordability. Where investment returns exceed the rise in CPI, then CPI can be given. Where investment returns are less that CPI, investment returns can be given. Regardless of what happens, CPI must be given every third year. Within this broad framework, trustees are free to define whatever specific policy they like.

Our proposal is intended to preserve the purchasing power of pensions. Assuming higher investment returns, we will pay CPI. Any excess of investment returns will be retained in an "increase reserve" and used to smooth increases so as to pay CPI in years where returns are less than CPI.

Based on historical performance, the "increase reserve" will grow. Given this, trustees will have the discretion each year to do one of three things:

·         Award a mid-year CPI increase (in addition to the annual CPI increase) if inflation rises dramatically

·         Award a higher than CPI increase at the beginning of the year

·         Award periodic lump sum payments to pensioners

The purpose is to apply the investment returns for the benefit of pensioners and to avoid the build up of a significant surplus in future.

IBM's approach is to build up a surplus for them to draw on in future.

They intend to do this by continuing to give increases of 2/3rds of CPI (as in the past), and only pay CPI every third year as the law requires.

A reasonable increase policy is a non-negotiable item for us. This issue, along with the others mentioned above, will only be resolved in a High Court. We are presently awaiting an opinion from the Fund's attorney on whether the Fund must pay should a group of trustees (acting individually) take the matter to Court. We cannot accept the financial risk of doing so in our personal capacity

General Comment

If the attorney's opinion is unfavourable, the only options left to us are to file a series of complaints with the Pension Funds Adjudicator (as an interim measure) and seek the appointment of a Curator to take over the Fund, or wait for the Special Tribunal to rule on matters. In all these cases, matters will be out of our hands. While progress will be made where none occurs today, there is no guarantee that these official bodies will act, as we do, in the best interests of members.

Bruno Ganter

7.3      ERO's, Additional Service, Surplus Implementation. (Peter Mengel)

This was a flip chart presentation which outlined  the "battlefield environment" within which the PFAG  and Elected Trustees work. No report> > was distributed.

7.4      Maladministration (transfers ) (Ian Murdoch)

Report to follow.

7.5      Governance & Rules (Roger Hull)

You have heard from Peter about the various battlefields on which we are fighting. While these battles are about issues involving specific monetary matters where IBM has sought to enrich itself at the expense of pensioners, my subject addresses issues that do not directly result in a financial benefit to the members, but, possibly more important, the issue of who governs the fund and who controls the operation of it.

The governance of a pension fund is directed by the Rules of the Fund and the Act. The former are drawn up by the trustees, the latter by the Registrar of Pensions under the Financial Services Board. In 1996 the FSB announced changes to the Act which stated that all funds must be governed by a board of trustees "of which at least 50% must be elected by the members"

This was a strong directive to funds that employers were no longer entitled to manage or control their funds, and that this should be done by the trustees for the benefit of the members. IBM ignored this legislation, and were intending to merge our fund with the Provident Fund, when in 1998, the PFAG stopped the merger and forced them to hold an election. A week after the election results were known, they called a trustee meeting, excluding the elected trustees, and changed the Rules of the Fund  to keep control in their hands. Seven key Rules were amended - one the voting rule which stated that no decision would be taken unless 7 of the 8 trustees agreed to it, and the other seven rules stated that  decisions regarding benefits and Rule changes had to be approved by IBM.  At the time, we failed to realise the dire implications of the changes, but over the last 5 years we have found that these rules have prevented the elected trustees from performing our duties and we have been unable to effect any benefit improvements, or even to bring the  Rules into line with the Act. With IBM's grip on the reins the fund is effectively ungovernable.

The elected trustees have tried to break out of the deadlocks by seeking legal advice at the fund's expense. (Over R400 000 spent so far). The questions asked were: Is there a conflict of interest on the Board?, Are our Rules in line with the Act? Do our Rules allow IBM to veto unanimous Board decisions? Were 2 former IBM executives entitled to the additional service granted to them in 1995 on their pensions, and did the Board approve IBM's non-contribution to the Early Retirement penalty waivers from 1992 to 99?

Our attorneys and Senior Counsels have consistently stated YES to the first question and NO to the others. An independent actuary has estimated that IBM has disadvantaged the Fund, over the last 10 years to the tune of R230million.

Awareness of the above issues has evolved over the past 5 1/2 years, since the formation of the PFAG in March 1998. None of them have any connection with the new legislation announced in December 2001. They are governance, ethical and mal-administration issues that have to be resolved before the trustee negotiations over the distribution of surplus takes place. There is a train of thought that suggests we wait until July 2004 when an FSB tribunal will rule on any issues prior to the surplus distribution. I believe we must deal with it now. Advice from our attorneys is that IBM will not react unless forced to do so by the Adjudicator, the FSB, the High Court, or a Curator, who could be appointed by the FSB. Our bitter experience has proved that IBM will not negotiate or compromise.

Ian Murdoch will present some ideas on our options for the future and the way forward.

Roger

7.6      Deferreds/former deferred members & Fund Finances (Rudi Goldschmidt)

1)                   Deferred Members  (Members who left the Company prior to reaching pensionable age, but remained members of the Fund).

During this year former deferred members received significant adjustments in their pensions including pensions paid as from Jan.1, 2002. These adjustments were brought about by changes in the legislation and not by any action of the trustees, although the elected trustees might have been instrumental to the changes through input to the Financial Services Board.

The elected trustees have been trying to change the rules of the Fund for the past 3 years to ensure that deferred members can claim a pension which has kept pace with inflation during the years between leaving the company and commencing their pension. These attempts were blocked by the nominated trustees and/or IBM.

The Pension Fund Amendment Act now prescribes that these members receive a pension which is in line with the "Cost Performance Index" (CPI), which means, at least in theory, that the pension has maintained the purchasing power at the time when the member left the company.

There are currently over 100 deferred members, of which many have reached pensionable age but have not claimed their pension. The Administrator informed us that a large percentage of these members can not be traced.

2)                   Financial Accounts for Year ending 12/2002.

Mr. Goldschmidt presented a summary of the financial performance of the Fund during 2002. He pointed out that every member is entitled to a copy of  these Accounts by writing to the Administrator (Alexander Forbes).

Whilst membership of pensioners increased slightly to 332,  the number of  "active members" (employees of IBM) and deferred members declined.

Investments by the Fund in terms of market value reflected a reduction of R46 mill, which is mainly attributable to the decline of world equities, incl. S.Africa's, during the year. The position deteriorated further during the first quarter of this year due to the appreciation of the Rand in terms of $, but these losses have been substantially recouped during the second quarter.  The elected trustees have been trying to get agreement from the nominated trustees and IBM  in order to increase the % of assets invested in cash, bonds and securities in order to protect these assets from the uncertainties of the stock market and have sufficient funds for distribution to former members in terms of the new legislation. However, no agreement could be reached at that time.

The total actuarial liabilities of the Fund, i.e. the cost to the Fund to pay pensions,  have not yet been established, mainly as a result of disagreement amongst the trustees on a "pension increase policy" which has to be re-established in terms of the new legislation, as well as the difficulty to access the cost to the Fund relating to former members.  However, excluding cost to former members, it is believed that the actuarial liability will be in the region of R 300 mill, thus leaving a surplus of approx. R 211 mill, excl. reserves.

Contributions to the Fund declined to R 466K. from members only. The employer has not contributed any contributions, which is in breach of current legislation.  The income of the Fund  increased by approx. 10%, mainly due to increase in interest rates, whilst expenditure reflected a significant increase, which can be attributed to higher costs to Investment Managers relating to fees attributable to previous years, higher legal- and consulting fees and costs relating to the Principal Officer and recovery of costs by the elected trustees. Benefits awarded increased by approx. 20% which is due to the increase in pensions announced during last quarter 2001, when pensions were adjusted to CPI as well as the increase announced in July 2002.

It is noteworthy, that in spite of these cost increases the Fund had an excess of income over expenditure.

The Financial Accounts do not make any provisions to the potential claims of the Fund against the employer, to which reference is made on page 7 and 8 under "Report of Trustees". 

                                 IBM SOUTH AFRICA PENSION FUND

                                            Financial Accounts for Year  Ending 31/12/02

                                                  2001                2002

A)     Membership

 Pensioner beginning of Year        336                   327

New                                              12                      5

Death                                            (11)                  (3)

Suspended                                   (10)                    3

Total                                            327                  332

Active Members beginning of Year 38                    35

Withdrawals, Retirements              (4)                    (6)

New Deferred Member                  1

Total                                           35                      29

Deferred Pensioners                  114                    103

                                                                             R 000's           R 000's

B)      Investments

 Equities - Local                                              269 951             269 299

 Foreign Investments                                         103804               60 996

 Bonds, Securities                                              76 567               73 002

 Deposits, Saving                                             105 234             112 519

 Total                                                              555 556             515 816

Net Current Assets                                             1 322                 4 847

Total Assets                                                   556 878             510 969

C)      Actuarial Liability ESTIMATE

Active Members                                                                        39 365

Pensioners                                                                               222 641

Deferred Members                                                                      6 360

Total                                                                                       268 366            300 000

D)  Surplus, prior to Reserves                        288 512            210 969

Income and Expenditure Accounts for Year Ending 31/12/02  (R000

s)                                                                     2001                2002

Contributions:

Members                                                          523                  466

                                                                          ---                   ---

Income

    Dividends                                                  9 743             11 336

    Interest                                                   16 607             19 139

    Total                                                       26 350            30 475

Expenditure

    Audit Fees                                                       63                  73

    Principal Officer & Trustees                           143                310

    Group Life Premium                                      232                207

    Investment Managers                                   1 620            2 792

    Westgate Refurbishing                                                            26

    Valuation, Administration                                 47                 407

    Consulting Fees                                             203                 320

     Legal Fees                                                     21                 108

     Levies                                                           99                   80

     Other                                                            34                    38

     Taxation                                                   1 530               2 680

Total                                                             4 423               7 041

Benefits Awarded

 Pensions                                                     17 635             19 923

 Lump Sums (Retirement, Death)                       761               2 665

 Withdrawals                                                    541

 Total                                                           18 937             22 588

 Excess Income and Contributions over

Expenditure and Benefits awarded                  3 531                  846

7.7      The way forward. (Ian Murdoch)

 This report is to follow.

7.8      PFAG finances (Mike Perry)

The PFAG  has approximately R 10 000,00 in the bank account. The costs of mailing (including to pensioners overseas) is heavy and contributions are welcomed. The new Treasurer will need to be appointed, as I am no longer available for re-election.

8.             Meeting closed . Pub opened.

Addendum.   When you change your address (e-mail or postal) please inform the PFAG.  Not doing so results in you getting lost. The search for 'lost' pensioners is not only costly, but time consuming. Success is not  guaranteed.

Hence:-     please keep the PFAG informed, it is in your own interest.

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