IBM SA Pension Fund Action Group (PFAG)

This Newsletter is to update you on the developments since our last Newsletter No 8. The particular focus in the letter will be the status of negotiations with IBM on the future of the Fund and the status of forthcoming legislation. All of these developments are positive for our cause,

AGM: We held our AGM on 5 May 2000 at the Old Parks Sports Club. R Hull chaired the AGM and addresses were given by P G Mengel (for R Maclay) -Chairman's Report, B Ganter-Trustees Report, M Perry- Treasurer's Report, R Goldschmidt- The financial position of the Fund and DIG Murdoch-Pension Fund issues. The minutes of the meeting, which are attached, will give an overview of the addresses and the status of the Fund. The new office bearers of the PFAG committee were unanimously elected. They are : Peter Mengel, Mike Perry, Leon Uys, Carolyn Tyutu and Joe Marolen. The elected trustees, Ian Murdoch, Bruno Ganter, Roger Hull, Rudi Goldschmidt and Olev Taim, make up the full PFAG committee. Peter Mengel was elected Chairman of the committee. The new committee would like to thank the members for the confidence they have shown in electing them.

Financial position of the Fund: The Fund has had excellent investment returns and capital gains in 1999 with assets increasing by 33% to R 493 Million as at Dec31 1999. This means that the surplus after the reserve has reached R 170 Million. The annual investment returns alone, are more than double the pensions paid. Expressed differently, since 1995 the surplus grew threefold, by more than 20% per annum. Pension increases July 1995 to July 2000 have averaged 5.5% per annum, resulting in a loss of purchasing power of approximately 20%. Pension increases since the last inflation catch up are now 20% below the inflation index, which amounts to a pension decrease.

PFAG Queries / Complaints: The PFAG submitted three complaints/queries to the Fund in the last quarter of 1999. According to the Rules of the Fund the Pension Fund has to respond within 30 days. If no response is received within this period any complainant has the option to go to the Adjudicator. In light of the large backlog of complaints we decided to pursue this with the Fund, rather than with the Adjudicators office. Some of the IBM-appointed trustees, together with the Actuary, put every obstacle in our way to delay and avoid a response. The Fund used Attorneys and Senior Counsel at high cost to the Fund while in our view all three complaints address simple issues. But they are also very important, each in their own right. We are persisting and are able to report the following progress:

1. The first complaint deals with the implementation of the 1995 pension increase. In a letter of August 1998 the Fund's Actuary confirmed that the inflation increase approved by the Trustees and consented to by the company was not fully implemented for the pensioners who retired between 1986 and 1989. We would have expected the Board of Trustees to correct this post haste. The contrary happened and the former Board did not respond. The PFAG finally put in a complaint to the Fund in September 1999. The Elected Trustees tried to resolve it - without success. The company-appointed Trustees and the Actuary, we can only assume on a brief by the company, put every conceivable hurdle in the way to delay the response so that the error was not corrected. The intention of the former Board was questioned. Peter Mengel addressed the Board in February, advising that he had reviewed the case with Jack Clarke, and that Jack and some other former trustees were prepared to sign an affidavit making clear their intentions at the time, if necessary. Jack was a Trustee and the Chairman of the Fund's Board for 24 years. The Board ignored this and rather went to Counsel and later to Senior Legal Counsel to get an opinion on what the former Board approved. We finally received a letter from the Board on 27 June 2000 advising us that an error had been made, and that the Actuary had been asked to correct the mistake. We expected the error to be corrected by the Administrators with the July pension payment to the affected pensioners (those who retired between 1986 and 1989). The impact depends on the date of retirement in that period. A one-time adjustment of between 7% and 0.2% , and a one-time lump-sum payment of between 4 times and 0.1 times the monthly pension for the backdating. Those who retired early in 1986 will receive higher amounts, while those who retired in late 1989 will receive relatively small amounts. This adjustment will cost the Fund a few million rand. We have asked the Board to confirm that this amount will be paid with the August pensions at the latest. From start to finish, it will have taken the Board two years to correct a simple error.
   Since this will be an unplanned additional payment for the affected pensioners, we are appealing to you for a contribution of up to 5% of the additional lump-sum payment you receive to cover some of the PFAG cost, but only if you can truly afford it without undue personal hardship.

2. In our next complaint we challenged the company position that the Actuary can determine a contribution holiday for the company without the approval of the Board of Trustees; ie ignoring the powers and duties of the Board. The company has been enjoying a contribution holiday without Board approval from March 1997, this while withholding increases. The Actuary told the FSB in the 1998 inspection report that the contribution holiday was approved by the Board. The issue went to Counsel and Senior counsel who both supported the company position. Based on the opinion received, we believe that Senior Counsel was not properly briefed and have asked for a review which should take place before the next Board meeting.

3. Our next query related to the increase policy of the Board of Trustees as stated by the Actuary. By early 1998 all of the former trustees like J F Clarke, B D Mehl, T Burger, R Lailvaux, some of whom had served on the Board for up to 26 years, had been replaced. Ian Murdoch submitted a complaint, which was answered by the Actuary on behalf of the Board. The Actuary was in our view working to a brief by the company. In his response the Actuary stated that the former trustees had adopted a low pension increase policy and he built up a defense for this position. In our view, there were many inconsistencies and factually wrong statements in his response on which we were seeking clarification. We also do not believe that the former trustees had adopted such a policy. Based on Senior Counsel advice, the Board refused to answer our letter. We have asked for a meeting with the Actuary on this matter, together with one trustee from each group. After this meeting we will decide on a course of action. In the meantime we have asked the Adjudicator to clarify whether the company has an obligation to respond.

J F Clarke: We have been consulting with Jack regularly on the issues faced by our pension fund. He has assisted us with calls on the FSB and with other issues. Jack is perturbed by the way the company is acting towards the pensioners. His position is in line with what was told to the employees over the years from 1970 to 1990. The assets of the Fund and the growth on these assets are only for the benefit of the members. That is why IBM stated in the employee handbook : "The company has created an irrevocable fund for the exclusive benefit of employees, which can never be used for any other purpose." In a later communication they restated this intent by stating that the company does not want to make a profit from the Fund. We will stay close to Jack and some of the other senior former executives for their advice and guidance.

Survey: In order to determine your wishes and to represent them in the negotiations with IBM, we sent out PAG Questionnaire No2. We have received 91 responses to-date. The results are as follows:

The results speak for themselves. 96% of the respondents want the Fund outsourced and 78% of the respondents do not trust IBM any more to manage the Fund in the best interest of the members. It is extremely important that we get as many responses as possible. We will shortly resend the survey, initially on the internet and later on through the mail. Could those members who have not yet responded please return the completed survey. Once we have received your input, we will update the table.

Press Coverage/Legislation: Some of you might have followed the extensive press coverage of late on the surplus in pension funds and related pension fund issues. Some R 80 Billion is sitting as surplus in mostly closed defined benefit funds countrywide. Many employers are trying to repatriate this surplus or most of it, and to use it for their own benefit. Their arguments are that they have over-contributed; that the Actuary was too conservative in his assumptions; and that they "carry the risk". Therefore it is theirs. When some of the more fair-minded actuaries looked at it they came to a different conclusion. They found that much, if not most of the surplus, has arisen due investment performance; to past inequities like not granting increases which the fund could afford; and transfers to a provident fund while leaving the reserves behind in the pension fund. In our Fund, for example, approximately R 40 Million of the surplus is due to not giving pensioners inflation related increases since 1995. In some cases the actuaries worked with the companies to plan ways for the companies to repatriate this surplus. In the view of many industry observers the practices used by some of these actuaries were fraudulent. They succeeded because the Financial Services Board (FSB) was not strict enough in enforcing the regulations which were in place.
Earlier this year the FSB did not approve the repatriation of part of the surplus to an employer, but it was overruled by the FSB Appeal Court on legal technical grounds. The FSB was concerned that they would receive a flood of applications for rule changes allowing repatriation, while existing legislation and regulations were not clear enough. They therefore put all applications for repatriation of surplus on hold. They agreed with government that legislation was urgently required. Business and Labor could not agree to the first draft prepared by the FSB earlier this year. Labor took the position that none of the surplus should go to the employer, while Business wanted the lion's share. Government then instructed the FSB to try and get agreement on the matter in NEDLAC, the negotiation Forum between Labor, Business and Government. Full agreement is however not necessary, but preferable to Government, before the draft is submitted to parliament. The key issue from Business' point is redressing the past, which would result in many funds becoming under funded. The key thrust of the legislation is the following:

• to investigate and redress past inequities including past transfers, retrenchments, and increases that may have been unfair, with these to be treated as a prior charge against surplus.
• To give all stakeholders a right to an equitable share of the residual surplus
• To establish a process for future surplus distribution that will ensure that all parties are treated fairly
• To define and prescribe fair value practices for the future regarding transfer values and increases.

The legislation is scheduled to be drafted by mid-August and enacted before the end of October. Business will lobby vigorously to defer and water down the legislation.

PFAG Strategy: The PFAG has kept very close to the FSB, in particular Mr Jeremy Andrews the Chief Actuary, to make them aware of what can happen to a fund if there is a "predatory" employer (his words). Mr J Andrews is responsible for drafting the legislation. We held a number of meetings with the Chief Negotiator of COSATU, Mr Jan Mahlangu, and we are working closely with the Legal Advisor and the Actuary advising COSATU on the legislation. We will also present our case to the Business SA and Government representatives involved. In addition we will be focussing on some very specific issues pertaining to the Fund and will seek resolution either through the FSB or through the Adjudicator. We will be advising you once these actions have been taken. Following IBM's approach to us in January, we agreed that we would not take any actions outside the industry channels eg we would not use the press, TV etc, this in order to allow negotiation in an atmosphere of good faith. In the meeting with the IBM team we gave IBM the position under which we were prepared to negotiate. It was as follows. Any distribution of surplus needs to consider outsourcing, because there is very little trust left between the members and IBM. We want a transparent process, under the guidance of the FSB, to examine the financial history of the Fund, to determine and size past inequities. This will be followed by a proposal on the distribution of the residual surplus. We also asked for the Fund to pay for our consultants eg Legal, Actuarial etc. In return IBM asked for some of the benefit improvements eg CPI catch up, to be included in the negotiations. We agreed this subject to a speedy resolution. The IBM team needed to agree this with various functions in IBM Europe and the Corporate Head Office and promised a comeback by the end of February. We had a number of inconclusive teleconferences before Martin Jack, the Director for IBM Retirement Plans in Europe finally came to South Africa from June 5 to 9. Due to the excessive delay we asked our trustees to once again place the proposals for benefit improvements before the Board.

IBM talks/negotiations: The meeting of June 5-9 was attended by Martin Jack, Abdool Abram and Barry Ireland representing IBM, and the PFAG committee which includes our trustees. IBM opened the discussion by presenting a proposal which was based on the same proposal that we rejected last year, thereby clearly expressing their intent to keep control of the Fund. This was rejected unanimously by the PFAG committee. IBM agreed that the PFAG should be the negotiating party, as well as to provide us with funding for outside support. They also agreed that negotiations will be without a deadline and in the spirit of co-operation and compromise. On June 8 we reached a position where many points were not acceptable to the PFAG and we nearly broke off negotiations. That evening the PFAG Chairman prepared a position paper in response to the IBM Conceptual proposal, setting out the criteria under which we would be prepared to start negotiations in earnest. This was agreed to by the PFAG committee the next morning. Although there are many points which we do not like, we believed we owe it to you, the members, to make every effort to reach a settlement. We also asked IBM to show their good faith in the process by agreeing to approve the benefit improvements presently before the Board of Trustees.

In the following week we appointed our advisors. They are:

Peter Theunisson - An Actuary working for SANLAM, and presently advising COSATU in the negotiations on the legislation.

Our legal advisors are Nicollette Howard from Cheadle, Thompson and Haysom and for second opinions, Rosemary Hunter from Edward Nathan. Nicollette is also advising COSATU in the negotiations on the legislation.

Roger Wellsted. Roger is an independent management consultant on pension funds. Many of you may have seen Roger's articles in the financial press. Roger is advising NACTU in the negotiations on legislation.

The core PFAG negotiation team is Peter Mengel, Roger Hull, Bruno Ganter and Rudi Goldschmidt, led by Peter and assisted by the rest of the committee. We will also closely consult with J F Clarke and former senior company executives.

Summary: Developments in the industry, on legislation, and IBM's apparent willingness to negotiate openly and fairly, all look positive. We will judge IBM`s sincerity and good faith by the decisions taken on benefit improvements in the next (10th August) Board of Trustees meeting. We are cautiously optimistic that the situation is improving. If you have any questions, please contact any of your PFAG committee, or your Trustees.

PFAG Committee