Everybody is entitled to their special interests, however strange, and I have recently taken an interest in the regulations about occupational pensions, and their application.

This led me to being present at an oral hearing conducted by OPRA, the Occupational Pensions Regulatory Authority.  Some of you may be interested in this account.  Bits that might be relevant to IBM are in this colour.

The Background

The Thorn pensions fund had a statutory surplus calculated at more than 105%.  The statutory surplus is not what is usually referred to as "surplus".  Usually "surplus" means the result of a calculation agreed by the actuary and the trustees.  The calculation for the statutory surplus is laid down in the regulations, and always gives a much lower figure for the surplus.  IBM complainants think their statutory surplus was wrongly calculated because the phrase "from time to time" in the deeds was taken as meaning the same as "regular" in the regulations (about when potential increases should be reviewed).  

The regulations require that when there is such a statutory surplus,  the trustees have to do something about it.  One of the things they wanted to do was to pay £50M of it to the company.  The regulations allow for that, provided the retirees were already being provided with some protection, called Limited Price Indexation, against the erosion of their income by inflation.  That LPI, on pension derived from all service, was being provided.  IBM doesn't provide it and could not be paid in corresponding circumstances.   

The snag to paying the company was that the deeds prohibited the trust funds being used in that way, and prevented the trustees amending the deeds to allow it.  The trustees applied to OPRA, which had a power to allow them to amend their deeds to allow the payment.  This is known as a modification order.  The Ombudsman does not have this power, which is a reason why this was an OPRA matter rather than an Ombudsman matter. 

Any granting of this modification order application is being contested by some Thorn retirees.  The hearing that I went to was not to do with the modification order itself, but about the process in applying for it.

The regulations require that when the trustees try to go down this route they keep the members informed so that they can comment/protest to the trust and to OPRA. The hearing I went to was about whether that was done properly, and the ramifications if it was not.

The Location

The hearing was held at "The Duke of York's Headquarters", near Sloane Square in London.  This is an old barracks now given over largely to being the headquarters for various government institutions.   Quiet, spacious, big rooms with high ceilings - a good atmosphere for a serious meeting.  The hearing was legal in approach but there were few formalities - no wigs, although we were required to stand when the decision makers came in to the room.  Attendance was by invitation; I got in through my COPAS associations with the Thorn pensioners.

The Parties

OPRA splits itself into a judicial part, that can actually make modification orders and the like, and a regulatory part.  The regulator is there to make sure that the proper process and regulations are followed.  The Ombudsman's Office splits internally into administration, which is before an investigation actually happens, and investigation.  Neither activity has an accountable organisation monitoring how they do their thing.   

The trust was represented because they were being accused of a shoddy job.  The company was represented because they wanted to avoid delay and risk in getting the money.  The retirees were represented via the Thorn and EMI Pensioners Association (TEPA).  TEPA wanted the modification order review set back to stage zero on the grounds that necessary notifications to members had not been made.

So five parties with OPRA-Regulatory (which raised the concern about notification) and TEPA somewhat aligned on the one hand, the trust and the company aligned on the other, and OPRA-Judicial to decide the outcome.

What Happened

There was a raised dais at the front for the three from OPRA-Judicial.  (Two male, one female.  Basically they listened, with very few questions, and their leader decided when the breaks should be.)   Facing that a long bench with the other parties.  It looked like the QC's for company and trust had two assistants each, as did the regulator, but the QC for TEPA was unassisted.  (The TEPA QC was not being paid.  I presume he was willing to work on the basis that if the bigger issue of the £50M ever came to court, he would get that well-paid job.)  Anyway, only the QCs and Regulator spoke.  Three female at that bench.  Behind that about 60 in the audience, almost all elderly men.      

 First to speak was the regulator, who first went through the relevant regulations, crucially section  69(3)(a)  which requires the trustees to take "all reasonable steps to ensure" that the members got timely notification.   He explained what powers the judicial trio had, and went through the common ground (which included the fact that not all members would have received the notice in time).  Obviously, most of this wasn't new to the primary participants but the regulator was good about saying things, and reading from textbooks, for the benefit of the "people behind", i.e. the audience.  (later the TEPA QC was also good in this respect.)

Next up was the Pensions Manager.  The trustees had told him to send out the notices but without specific instructions or reporting back to ensure the dates were met.  The Pensions Manager had used an outside firm to do the actual envelope stuffing and mailing, again without as much monitoring and urgency as there could have been.  One thing new to me was how Thorn communicated with its deferred members.  They had lost track of many of these but they still had their National Insurance numbers.  It turns out the Department of Work and Pensions will contract to send out mail on that basis, since they can relate NI numbers to mailing addresses.  (Although the regulations didn't require the trustees to arrange notification of members they didn't have addresses for.)

After that came the TEPA QC and the others.  Since I was only there the one day, I don't know all that was said but the themes were straightforward - one side stressing the strength of what the regulations said the trustees must do, and the other side saying that they only missed by a bit and pragmatically it made no difference.

There were some complications in the usual lawyerish multi-level arguments, analogous to "You didn't lend me your vase; if you lent it to me I didn't break it; if I broke it, it wasn't worth anything; if it was worth anything the court has no power to order compensation etc".   These complications were well explained.

If you had been judging, what would you have decided?   Was it vital to uphold the letter of the law, avoiding the slippery slope of allowing trustees to say that they nearly met the requirements and that their reckless driving caused no accident?  Or should the pragmatic view be taken that if the purpose of the regulations was not seriously thwarted there was no point in restarting the notification process? 

OPRA decided on the latter view.   It is worth noting that even if the retirees had won, that would only have forced a re-notification to all the retirees of the proposal for the modification order.  It would not, by itself, have stopped the order.   Whoever won this particular day, the more important issue of whether the modification order (needed for the company to get the £50M) should be allowed would still have to be considered.

 My impressions of the day:

It was all very civilised and thoughtful, enough to make me feel good about living in the UK.   It must have been expensive, the issue wasn't that vital, but everybody was keen to do the right thing in a visible way.

This was a case where the provider was asking for purpose and pragmatism to be taken into account, and the consumer was stressing the words of the documents.  It is usually the other way round, e.g. in the Equitable case where nothing in the documents prevented the Equitable board from shafting the Guaranteed Annuity Rate consumers but even so the board's exercise of discretion was not allowed.  Another example from IBM:  the retirees want to stress that the originators of the trust arrangements, in 1957, could not conceivably have intended something as fundamentally different as a money-purchase plan to be grafted on without that money-purchase plan having its own funding.  The providers will want to stress that no words, in the documents that have been found, expressly constrain using the final salary funds for such a grafting.

The number of people complaining may be factor in decisions.   The QC for the Thorn company made a point of contrasting the number of retirees that complained with the much larger number that did not.  We can't know if this observation influenced OPRA's decision but clearly the QC thought it might.  In the IBM case many retirees agreed to withhold their complaints from the Ombudsman's Office because the complaints that did go forward were adequate.   We have to hope that if ever IBM tries to belittle the number of objections then the Ombudsman's Office won't be impressed.

Based on just this day with OPRA and on experience with the Ombudsman's Office, they are very different in approach.   OPRA is what one would like the Ombudsman's Office to be, in visibly taking all the necessary steps. (Whether you like the outcome is another matter).  (The IBM complainants' concerns about lack of comprehensive investigation and accountability in the Ombudsman's Office are discussed elsewhere.)

 Some groups have suggested to the Pickering Review that the Ombudsman's Office lacks resources.   The total levy to run OPRA, OPAS, and the Ombudsman's Office seems to be less than £15M, see  www.dwp.gov.uk/consultations/consult/2002/opra/opra.pdfThis seems a very small amount when the funds being protected run to £800 billion.  (The IBM Trust said it was a waste of time and money to explain a £31M "miscellaneous" cost to members because it was so small.) The levy is collected by OPRA but presumably the amount is decided by the Department of Work and Pensions. 

I expect this website will pick up the Thorn story again when it comes to the main event - whether to allow a modification order.  The central issue then is likely to be the statutory surplus calculation.  The intention of the regulations is to specify how this calculation should be done, and to leave little to the choices of the trustees and the actuary, so that the result is a reflection of actual assets and liabilities rather than of choices made.  However, this is not watertight.   The TEPA members will argue that the company set out to over-estimate the strength of the fund so it would appear that the company could take the £50M without unduly harming the members.  This is the opposite of one claim by the IBM retirees.  They think IBM wrongly under-calculated the surplus to avoid bringing into play regulations that require consideration of possible extra benefits to members.  Although in the opposite direction, this is like the TEPA consideration insofar as it concerns the question of the latitude that the institutions have to manipulate the statutory surplus result.

This report by Brian Marks, May 2002