NOTE - this document was read in by Optical Character Recognition. It does not retain its original fonts and pagination. Any glitches are probably not there in the original.

June 14th 2001

Dear Dr Marks

I refer to your Stage 1 IDR Complaint set out in your letters of 30 December 2000, Mr. David Newman's Stage 1 Notice of Decision dated 28 February 2001; your letter to Mr. Newman dated 6 March and your letter to the Trustee dated 16 April 2001 invoking Stage 2 of the Internal Dispute Resolution Procedure.

Having considered the further information and comments which you provided, the Stage 1 Notice of Decision given by Mr Newman and the information in the possession of the Trustee, the Trustee has reached the conclusion that in this case it considers itself to have acted properly. This decision therefore confirms the decision given in the first stage of the Internal Dispute Resolution Procedure. Consequently the Stage 1 Notice of Decision from Mr Newman should be deemed to be incorporated into this decision.

There are, however, a number of further points the Trustee would like to make in response to your letter of 16 April, in which you set out your reasons for your dissatisfaction with the Stage 1 of Notice of Decision.

The Trustee notes the content of the preambles in relation to LPI, the trustee system generally and the quality of evidence and has taken your comments into consideration when responding to the complaints you set out.

I reiterate, by way of confirmation, Mr. Newman's comment that the complaint and comments raised against IBM are not ones which fall under the internal dispute resolution procedure, nor is the Trustee in a position to respond on IBM's behalf. I note that you have forwarded a copy of your complaint to IBM. In relation to the two complaints concerning the Trustee, however, these are dealt with below.

The Trustee has considered the various statements you make in support of this complaint and I respond below under the appropriate headings.

You comment initially on the decision not to review increases to pensions on an annual basis. There has been no "decision" not to review pensions on an annual basis. Pensions are reviewed annually although in some years this review process takes longer than others. In this context it should be noted that when discretionary increases are granted they are calculated on an n/12ths annual basis. In other words where an increase has not been given 12 months after the previous year's increase, it has been adjusted to reflect this fact. Additionally, the increase has been applied so that the minimum increase is £5 per month, even where this has exceeded the generally applied increase, so providing further protection to the lowest paid pensioners.

In relation to the decision to allow the actuarial surplus in the Plan to be used to fund defined contribution section liabilities, we note your comments. We also note your comments in relation to the increased security, the provisions of Schedule 22 of the Income & Corporation Taxes Act 1988 and the other comments you make in this context. What your comments do not, however, take into account is that the introduction of the M Plan was in the context of the contribution holiday applying to that section. Had the M Plan not been introduced and new entrants had continued to become members of the C Plan the effect on the funding position of the Plan as a whole would have been to reduce the actuarial surplus to an equal, if not greater extent. Therefore, one cannot assume that there would have been increased security and an increased likelihood of augmentations to benefits if the Trustee had not allowed M Plan employer contributions to be allocated from the general fund. In agreeing to the introduction of the new M Plan Structure in 1996/7, the Trustee had full regard to the interests of members and the security of their benefits.

There has been no "decision" not to tell members about the allocation of surplus to meet M Plan liabilities. The Trustee is satisfied that it has complied with its legal requirements to disclose information to members. The Trustee does not agree that the position of defined benefit members has been detrimentally affected, nor that there has been a change in the prospects for retirees in relation to the granting of pension increases. This is endorsed by the pension increases which have been granted since 1997.

There has been no intention to conceal facts from Plan members. Reference to the contribution holiday is made in the Members' Reports and the Trustee's Reports and Accounts since 1997 and, a copy of the Actuarial Valuation Report is available to all members of the Plan on request.

The Trustee notes and has considered your comments under this section. Whilst there was some discussion concerning the possibility of an increase to pensions in payment of 100% RPI at the February 1999 Trustee meeting (there was no meeting in January of that year), such discussion having been initiated by Barry Morley, it was concluded that this issue had already been discussed by the Trustee at earlier meetings and that, as it had been only two years since the arrangements in 1997 had been implemented (including obtaining a commitment in principle from IBM that it did not intend changing its discretionary practice relating to service prior to April 1997), there was nothing to be gained in requesting an increase in excess of 70% RPI from the Company at that stage.

It is of course true that we cannot know for certain how IBM might have reacted to a proposal which was different to the one actually made. At the time the Trustee was mindful that proposing a higher increase might have been counter-productive. The Trustee's intention throughout was to attempt to obtain the best increase possible for members. To this end, as well as requesting an increase of 70% RPI for that year, the Trustee also requested that consideration again be given by the Company to guaranteeing increases, an end which it then considered more achievable than obtaining agreement to an increase of 100% RPI.

You refer to the merger of the Data Sciences Pension Scheme with the IBM Pension Plan. It is not clear from the comments that you make whether you are referring to accrual of future pensionable service or the granting of service credits in the Plan in relation to the Data Science's members. As regards the latter, these service credits were fully funded for by the monies transferred from the Data Sciences Pension Scheme.

Data Sciences employees became employees of IBM and IBM agreed to offer defined benefit members of the Data Science's Pension Scheme membership of the defined benefit section of the Plan. IBM was entitled under the transfer in provisions of the Plan (Clause 1 of Part VI of the 1997 Definitive Trust Deed) to direct the Trustee to accept a transfer into the Fund and to notify the Trustee which Rules shall apply to which individuals.

The Trustee considers that the practice of reviews to pensions in payment and the granting of discretionary increases falls within the paragraph 5(2)(c)(ii) which you quote. In addition, as referred to above, pension increases are granted on an n/I2ths annual basis. The Trustee and the Actuary to the Plan are satisfied that the surplus certificate has been prepared in accordance with all statutory requirements.

The Trustee, does not propose to comment on the correspondence entered into with Barry Morley. It should, however, be pointed out that this correspondence is no longer on-going.

The Trustee notes but does not accept your comments made in support of the statements "This pattern establishes that the trustees were not applying the proper principles. >From what the trust has said, it can be deducted that the wrong principle the trustees were applying was that what IBM wanted should be agreed to if the trustees considered IBM could conceivably do something, legally defensible, which would damage the members. This was a wrong principle to adopt, even though there were in practice no realistic threats from IBM." I personally was a director of the Trustee board at the time of the discussions surrounding the introduction of the M Plan and am satisfied that the statements you attribute to "the Trust" accurately reflect the considerations of the Trustee and its advisers at that time.

The Trustee had full regard to its own powers, the powers of IBM and the legal duties of both the Trustee and IBM in exercising these powers. Both the Trustee's legal and actuarial advisers were requested to attend the Trustee meetings which considered these issues and did so attend. Each adviser was asked to confirm that they were satisfied that the Trustee was acting properly, both at the relevant meetings and in writing afterwards. Both advisers did so.

The Trustee also notes your comments in support of the statements "The trust system was uniquely stressed by a combination of factors. The change of management culture by IBM US early in 1990s has produced powerful forces for short term profit maximising without any balancing forces through union recognition. There is no force outside the Trust acting for the benefit of retirees." A number of these comments relate to the behaviour of IBM and the Trustee is unable to comment, although you may wish to raise them with IBM directly. The implication of your statements generally is that Company appointed Trustee directors acted improperly and in the sole interest of the Company. This appears to be wholly based upon assumption and is refuted. The fact that some Trustee directors hold positions within IBM does not mean that those directors have acted improperly.

The Trustee also notes but does not accept your comments made in support of the statements "The trust system was stressed by the actual choice of IBM appointed trustees. The choice of people under extreme pressure to deliver IBM advantages made it excessively difficult for them to put aside those pressures in their trustee roles." It is also not true to state that "the Trust is not clear about when the decision on transfers was made." It is correct that the proposal was agreed in December 1996. There then followed a period during which the documentation was drafted by the Plan's legal advisers. At the 24th April 1997 meeting the 1997 Definitive Trust Deed, the Money Purchase Section and the Defined Benefit Section rules were executed by way of implementation of the 1996 agreement and were effective from that date.

I note your comments on the change in Trustee directors between end 1996 and April 1997. This was caused partly by the need to implement the statutory Member Nominated Trustee requirements introduced by the Pension Act 1995 (member-elected directors in the case of the IBM Trustee) and other circumstances at that time. However, all directors had access to all relevant information and advice which had been obtained by the Trustee and your implication that the Trustee in April 1997 was unlikely to have absorbed the factual background and to make an informed decision to proceed with the execution of the documentation is refuted.

The Trustee notes but does not accept your comments made in support of the statements "Some trustees wished the potential benefit of the reserves to the members to be considered. They were hampered by the trust administration's unwillingness in marshalling the data and arguments entailed in that. They were thwarted by the trust not allowing the subject to be discussed, acting on the principle of doing what IBM wanted, when IBM did not want some of the potential benefits to members to be considered."

The only specific comments you make under this heading appear to be requests for information made by B.K. Morley and B.I. Petch as regards "the relation of what the IBM trust was doing to what UK pension trusts in general were doing, including matters of pensions in payment". You make reference to B.K. Morley's "Veto on info availability e.g. marketplace pension increases". The issues raised by Mr Morley at the time of his resignation as a Trustee director were fully reviewed by the Trustee. This review included a meeting with Mr. Morley more fully to understand the nature of his concerns. Mr Morley's concern with regard to the matter you raise concerned whether the Company had acted inappropriately by refusing to pass Company generated marketed data on pension increases to the Trustee. Upon investigation the Trustee was able to learn that this data had been obtained by an arrangement between the Company and a third party, the terms of which arrangement precluded the Company from disclosing it to others. The Trust administration was subsequently asked to obtain separate data for the Trustee which was presented at a later Trustee meeting. The Trustee does not therefore agree with your assertion that the trust administration was unwilling to provide the information requested.

The Trustee notes your comments in support of the statements: "Increased reserves are of benefit to members as security. Increased reserves are of benefit to members because they increase the prospects of the fund becoming over-funded and the paragraph 2(3) of schedule 22 to the Income and Corporation Taxes Act 1988 coming into play. Increased reserves are of benefit to members in that they reduce the influence of contribution holiday considerations in judging the appropriate balance between the actions that benefit the company and those that benefit members. Increased reserves are of benefit to members because they increase the likelihood of fulfilling the expectations that members were given, by IBM and the Trust, that erosion in the value of their pensions would be made less if economic conditions were favourable." While the premise underlying your statement is in part correct, the Trustee should like to make the following observations:

The Trustee notes the points you make with regard to your personal position. As already acknowledged by Mr Kevin Waller, there was an error in one of the charts used in the 1991 presentation; in that the October 1977 pension increase was stated as 20%, when in fact it was 12%. In all other respects, the presentation was accurate. Your interpretation that discretionary increases might be higher or lower than 70% RPI is correct. Increases have continued to be given to pensions in payment. Increases are, and always have been, discretionary and subject to the approval of IBM.

The Trustee is not in a position to comment on your statements concerning IBM Corporation.

While there is no specific heading in the body of your complaint substantiating this allegation, the Trustee believes that it is answered in the responses made above. The Trustee does not accept that the trust administration has failed to properly carry out its duties. It should be noted however, that the trust administration has an obligation to the Trustee as a whole and not to any particular or individual Trustee directors per se.

You state that, whilst you do not take issue with the legality of the contribution holiday applying to the M Plan section, you consider that this situation is unfair in any event. We do not propose to address the legal position since this does not form part of the substance of your complaint. However, it should be noted that case law subsequent to that of Kemble v Hicks 1999 PLR 287 has confined this case to its own facts. Barclays Bank v Holmes 2000 72 PBLR has clarified the law in this area in many material respects and, having obtained the opinion of Leading Counsel on this matter in the specific context of the IBM Pension Plan, the Trustee is satisfied that there is one trust, one fund and one Plan.

In relation to the unfairness which you raise, the Trustee does not consider that retirees have suffered any unfairness. When introducing the M Plan the Trustee took steps to ensure that there were no detrimental changes in the benefits of defined benefit members and, indeed, the Trustee does not consider that pensioners have been affected detrimentally since 1997.