Date: 4 March 2002

The Pensions Ombudsman's Office
11 Belgrave Road 
London
SW1V 1RB

Complaints against IBM UK and IBM UK Pensions Trust - Your references L00144, L00556

Please add this letter to the file, for eventual investigation.

Recently, the Trust Management has told a group of retirees [1] that Management Information Letter 785 [2] should not be given its most obvious interpretation. That makes it necessary for me to provide the following lengthy analysis.

Companies provide benefit packages in order to recruit and retain employees. MIL 785 specifies a part of IBM UK's 1986 benefit package. Part of MIL 785 is in the form of Question and Answer. There is no suggestion that particular employees asked these particular questions; Q&A is used as a manner of exposition.

Question 7 is:

Why do pensions in payment increases not reflect the full RPI?

The subject of this question is pensions in payment (PIP). PIP policy is an important component in a benefit package. Question 7 is one of twelve questions in MIL 785. The subject of Question 7 is PIP and only PIP.

The first statement in the answer is:

As in all compensation and benefit matters, we aim to compete favourably with the practice of other leading companies.

The initial subject of this answer is PIP, the subject of the question. Hence the phrase "As in all compensation and benefit matters,..." has the meaning "For pensions in payment, as in all compensation and benefit matters,...".

The "we" in the statement is IBM UK management. "we aim to compete favourably with the practice of other leading companies" is a statement of company policy.

The "leading companies" refers to UK companies; this is apparent from the document as a whole which, for example, refers to the Inland Revenue and to the UK Retail Price Index.

The phrase "all compensation and benefit matters" addresses more than PIP, although it includes PIP. If we remove the information about matters other than PIP, the assertion is "For pensions in payment, IBM UK aims to compete favourably with the practice of other leading UK companies".

There can be no doubt about the grammatical construction of the answer. This can be illustrated by considering a hypothetical Q&A with only the subject changed. Suppose the question had been "What is IBM's policy about recruiting Pakistanis?" and the answer had been "As in all ethnic minority recruiting matters, we aim for equality of opportunity". That answer would have specified an aim about the recruitment of Pakistanis and emphasised it by adding that the aim applied to all ethnic minorities.

In the actual Q&A 7, the aim for PIP is emphasised by adding that the same aim applied to all compensation and benefit matters. This is significant, as it emphasises that in 1986 IBM UK did not trade-off one benefit against another; it did not say that employees should accept low job security as a trade-off for better salaries (as some contractors find they must do) or accept lower salaries as a trade-off for job security (as some civil servants have). The IBM employer-employee relationship was that all compensation and benefit matters would be good, in order to recruit and retain the best staff, who were loyal and not unionised.

The second sentence of the answer is:

It is common among private companies to provide increases that largely, but not wholly, mitigate the effects of inflation as it affects the pensioner.

This statement adds information about the companies to be included in "leading companies". It excludes government owned companies. It describes, approximately, how the included companies behave. It does not contradict the first sentence.

The third sentence of the answer is:

It should be recognised that for any pension plan, a balance must be struck between the level of benefits provided at retirement, and the level of increases provided afterwards.

This sentence is about any pension plan, including those of "leading companies". It describes one consideration that had been taken into account in setting the PIP policy. It does not contradict the first sentence.

The fourth sentence is:

Index linked pensions provided by Public Sector employers are, of course, funded quite differently.

This sentence reinforces the exclusion in the second sentence. It does not contradict the first sentence.

The best evidence of how many potential retirees were given the message "For pensions in payment, IBM UK aims to compete favourably with the practice of other leading UK companies" would be independent social research on their recollections. In view of the possibility that cost will preclude that, it is right for me to provide information on the context of their conclusions.

For decades, IBM and its employees co-operated on the basis that IBM was "one of the best" (maybe the best) of companies for benefits, and the employees were some of the best possible employees. Describing the approach that T J Watson Sr had in 1937, which was continued by his son and others until the 1990s, his son writes [3]:

"He believed in management by generosity and he was right; morale and productivity at Endicott were high, and in that great era of industrial organization, IBM employees never found any need to organize".

Perhaps one might question the term "generosity" since pensions are not charity, but that quote still makes sense as a description of a company&employees relationship that was successful for decades.

To the employees in 1986, MIL 785 Question 7 was not news, it merely documented their understanding and experience that in all major matters of benefits the company policy was to be one of the best. It was on that basis that they were buying their pensions with their efforts and financial contributions.

A recent case [4] makes it appropriate for me to make a comment now about consumer protection for the consumers of occupational pensions. The case involved the obligation of "good faith", which I referenced in my complaint at the IDRP stage. One commentator [5] has said of the case:

"In one aspect - relating to pension rights - ICI were judged to have been negligent in relation to the information provided to the employees. The company had not adequately communicated to the employees the fact that some of them could lose out on pensions in the future. That information was available to the employers and they had chosen not to pass it on."

There is a parallel with IBM. Since I retired, IBM's PIP policy has not compared favourably with leading UK companies. I have given figures elsewhere [6] and expect that those who can afford to buy fuller data will reach the same conclusions. If IBM had exercised its discretion to honour expectations and MIL 785 then the value of my pension would be the same or better than it was on retirement. In fact it has degraded in value because of a policy of degrading it by 30% of the RPI changes, and this is the worst policy amongst comparable UK companies.

In this extreme situation, where the pension was sold on the basis that an IBM-style "one of the best" PIP policy was in place, yet the seller knew that a different rigid policy was in place that would make the provided PIP the worst in practice, "good faith" is relevant.

I should mention a motivation for what happened. When IBM UK needed to shed staff, circa 1990, it understood the benefit to the company of retaining its good image with employees and customers. It wanted the redundancies to appear as early retirements rather than dismissals [7].

The desire to maintain brand image was a disincentive to telling potential retirees that the company was already operating a mechanical rule for degrading the value of pensions by 30% of RPI changes, irrespective of good economic conditions or the practice of other UK companies.

Yours sincerely,

B L Marks

References:

[1] A meeting following the AGM of the London IBM Retirees club, 29/1/2002
[2] I provided this MIL with my letter of 11/12/2001.
[3] "Father, Son & Co.", Thomas J Watson Jr, ISBN 0-553-38083-4
[4] Hagen & ors v ICI Chemicals & Polymers Ltd & ors. ICI
[5] http://www.incomesdata.co.uk/brief/fore699.htm
[6] The introduction to my Stage 2 IDRP complaint. 
[7]  "Dole queue camouflaged as a career move". 
         from the The Times, Fri 28 Feb 1992, P4, copy attached.