News from South Africa

We have received the following item from the "Pension Funds Action Group" (PFAG):

Here is a brief summary of developments on the "Pension Front" in South Africa.

1. Newsletter 12 provides details of pension increases announced by IBM on Oct.18. This increase "catch-up" results in pensions being paid in line with those at time of retirement, based on CPI (cost performance index) increases. Whilst we welcomed these long overdue increases, including the minimum pensions (set at R 600 pm or approx $ 55) these were proposed by the trustees for years but rejected by the employer. It was yet another confirmation that the Fund is run by the Company and not the trustees!!

2. The elected trustees submitted a report by an independent actuary who was requested to investigate the history of the Fund with emphasis on reporting contentious items, such as transfer of members from the pension fund to the provident fund, the contribution holiday taken by the employer since 1996 without approval by the trustees, and - last not least - the "penalty waiver" i.r.o. retrenchments which should be paid by the Company but was paid by the Fund: 1n 1994/95 with approval by the nominated trustees, in 1998 without any approval at all! It was agreed with IBM that this report should form basis of negotiations between IBM and PFAG after new Legislation relating to Pension Funds has been promulgated.

3. The new legislation has been promulgated with effective date of Dec.7, 2001. Whilst there are still many unanswered questions (which might be resolved in subsequent updates or regulations) it provides a framework to which pension funds have to adhere. It provides:
   • Minimum pension increases to amount to the lower of earnings of the fund or CPI
   • Deferred pensioners entitlement to be increased by CPI (Note: IBM rules "froze" the AV until commencement of pension)
   • Former members to be entitled to a minimum payment based on the AV plus proportion of reserves and surplus at time of retrenchment or conversion to provident fund. This is retroactive to Jan 1980 and includes all former members even those who had no vested rights in the pension provided by the company. The task of tracing former members (dead or alive) appears enormous!
   • Employer to reimburse Fund with any illegal or improper utilisation of surplus, such as cost of differential benefits to executives or cost of bonus service granted to selected groups of members - both items applicable to our fund.
   • On completion of above, the surplus (if any!) to be divided between employer and members into employers and members reserves, with employer (or nominated trustees) having no say over members reserves.
   • Employers required to contribute to fund as from effective date. Alternatively, amount to be added to surplus.

   Needless to say, we welcome the new legislation as it will give the members their correct entitlement for which we have been fighting for almost 3 years It remains to be seen as what IBM is going to do.

4. We (the trustees) obtained a legal opinion which claims that, in terms of the rules of the Fund, the employer cannot veto Pension increases approved by the trustees. IBM is disputing this opinion and senior legal counsel advise has been requested. The key of the argument is the clause in (our) Rule 22, which relates to "bonus additions to pensions", which is subject to employers approval. It is claimed that pension increases do not fall under this rule

IBM SA Pension Fund Action Group (PFAG)

Newsletter 12

Dear Member

In our Newsletter 11, we told you that the issues surrounding our Pension Fund appear to be nearing resolution and that the meeting on 18 October 2001, to which all pensioners were invited, would hopefully mark the breakthrough we have all been waiting for.

In short, IBM agreed to release a CPI catch-up - approved by the Trustees numerous times over the years - and agreed to implement a minimum level of pension, which was likewise approved by the Trustees some time ago. Pensioners who retired after March 1995 will receive a proportionate adjustment to their increase.

Many of you will have received a letter from IBM in which they "recommend" to the Trustees that they grant an inflation catch-up increase of 14.6%, and introduce minimum pensions of R600, thereby giving the impression of being a generous employer, and raising the question of what the dispute with the Company was all about. ( Note: It appears that for some pensioners who retired in 1991/2, the 14.6% does not achieve an inflation increase. This is being investigated by the Administrators and if proven correct, the increase for those pensioners might be a few percentage points higher.)

Essentially, this was an attempt at "damage control" by IBM who wanted to be seen to offer the increase before the new legislation forced them to give it to pensioners.

On a technical level the company is partly correct. The last CPI catch-up approved by the Board earlier this year was based on December 2000. The CPI catch-up recommended by IBM is based on August 2001, and the minimum pension of R 600 is R 30 higher than the level of State pension approved by the Trustees. The representation in the letter nevertheless does not diminish the fact that the company implemented a strategy in 1996 to restrict increases to below inflation. Since then IBM has vetoed 4 CPI catch-up increases in order to force the members to accept a proposal which would mainly benefit IBM, while exposing the future viability of the fund and potentially limiting future increases.

A catch-up increase - while it positions your pension at an inflation related level now - does not take into account the income lost by over 6 years of lower than inflation increases. We estimate this to be about 5 to 6 months of pension at your current level. The shortfall can only be corrected by means of a lump sum payment, various Trustee requests for which were previously denied by IBM.

The letter also states that this increase means that your pension has kept up with inflation from the date of retirement. We do not believe that the measurement used, which is called Headline CPI, adequately measures the inflation in the expenditure applicable to pensioners. Many funds are using more appropriate measurements. This matter is presently being addressed by the Trustees.

IBM's statement that this increase will place us amongst the leading defined benefit funds in the country is not correct. Independent surveys by some of the leading insurers show that over the last 5 years, year by year, the pensions of DB funds on average have kept pace with inflation and the leading funds have outperformed inflation.

By comparison, before this increase, our Fund has consistently been in the bottom quartile of funds surveyed.

Lastly let me address IBM's statement that the PFAG has been in discussions on the restructuring of the fund and the sharing of the surplus. Following the submission of our proposal on 12 April 2001, and in spite of numerous follow-ups, the Company has refused to enter into any negotiations. It is however correct that the PFAG agreed in September that it is now too late to start negotiations, because we have been overtaken by the developments in legislation. The FSB told us that they would not approve any surplus distribution scheme unless all the provisions in the Bill, which has meanwhile been approved unopposed by Parliament, have been taken into account. We therefore told IBM that, to the exclusion of everything else, pensioners need to immediately receive an inflation catch-up increase and minimum pensions need to be implemented. The surplus distribution will take care of itself, once the legislation has been announced.

The PFAG views the release of the increase and the agreement to minimum pensions as a major step forward. For all intend and purpose the conflict with the company has come to an end. IBM has told the PFAG that they will scrupulously adhere to the legislation. This does not mean that we will not have some very tough debates, once the question of surplus distribution and the implementation of the various provisions of the Bill are tackled. But we are sure, once legislation is enacted, that IBM will never be able to withhold increases ever again and that the surplus will be distributed to all members incl. Pensioners and deferred pensioners, former members and the company following a fair process.

It is now important that we move forward and focus all our energies on the implementation of the Bill, once promulgated. Much of the activities will move in future to the Board of Trustees. It is also important, however difficult, that a relationship of mutual trust is reestablished.

Our next Trustee meeting will be on November 1. Legislation is planned for announcement before the end of the current parliamentary session. Our next Newsletter will be issued before the holiday period, covering in particular what you as a member and pensioner can expect from the surplus distribution Bill, the timing and implementation.

Best regards

PFAG Committee