Complaints relating to the IBM United Kingdom Pension Plan

IDRP Stage 1

Complainant: David Mitchell

January 2001

 What follows is the text of my original Stage 1 complaint to David Newman, the Manager of the IBM Pension Trust. You can find Mr Newman's response to it here, my Stage 2 complaint here and Mr Morgans's response to it here.

Preamble

When I joined IBM in 1968, the company pension scheme at that point, the N Plan, was a non-contributory, defined benefit scheme which I joined. In 1983, IBM introduced a new, contributory scheme, the C Plan, which was also a defined benefit scheme. The N Plan was closed to new members, but existing members could transfer to the C Plan if they wished. I did so in 1983.

In 1997 IBM introduced a new contributory scheme, the M Plan, which was a defined contributions, or money purchase scheme. As in 1983, the C Plan was closed to new members, but existing members could transfer to the M Plan if they wished. Like most long-term members of the C Plan, I did not do so, but remained in the C Plan.

As well as these three main plans, over the years IBM has offered a range of additional voluntary contribution schemes (AVCs) designed to top up N and C Plan pensions, such as the V, A and T Plans. Contributions to these AVC schemes are effectively part of the same defined benefit scheme and have contributed to its surplus. I joined the T Plan in the early 1990's.

My complaints relate to the setting up and funding of the M Plan, between 1997 and the present. I retired from IBM in January 2000.

At the end of 1999 there were approximately 23,150 members of the N and C Plans and 8900 members of the M Plan. Since the number in the N and C Plans at the end of 1996 was 22,527 it would appear that very few transferred from those plans to the M Plan.

The Complaints

My original submission listed 20 complaints under 4 headings. A subsequent letter added a further 4 complaints under two more headings. In a third letter I withdrew two of the additional complaints (both under the same heading). Thus my consolidated complaint lists 22 outstanding complaints under 5 headings:

  1. those relating to IBM's intentions in 1997 with regard to M Plan funding
  2. those relating to IBM's changing terminology with regard to Plans, Schemes, Funds and Sections between early 1997 and the present (December 2000)
  3. those relating to IBM's failure to contribute to the M Plan between 1997 and the present
  4. those relating to the composition and partiality of the Trustee over the period from early 1997 until 2000.
  5. those relating to the interpretation of Schedule C Rule 1(2) of the April 1997 Money Purchase Rules

Most of my complaints concern the Trustee (IBM United Kingdom Pensions Trust Limited) and/or the Principal Employer (IBM United Kingdom Holdings Limited). In one case, (3.c), I have complained about the actions of the Auditors, PricewaterhouseCoopers of Southampton. In general my complaints about the actions of the Trustee concern the directors of the Trust acting jointly as a board, but complaints 4.b and 4.d are directed at specific named trustee directors.

Of the twenty two complaints I submitted only one, 1.a, is in any way covered by the complaints submitted to the Pensions Ombudsman by Mr M.R. Cawley (OPAS Reference 26121), where a similar complaint appears as the third 'Complaint Against Trustees'. I included it because my complaint is not quite the same as his and also because it is an example of the Trustee acting improperly - something that I complain about separately (see 4.e).

1. Complaints relating to IBM's intentions in 1997 with regard to M Plan funding

 IBM intended, right from the outset in 1997, to finance its contributions to the new M Plan by using the existing surplus in the fund, which at that point of course was purely a Defined Benefits Fund. IBM admits as much in the February 2000 amendments to the Trust Deeds in section (D)(ii). It is also claimed in this amendment that the Trustee knew of this intention and agreed to it. However the documents sent by IBM to employees in early 1997 (the "It's your pension" Information Pack) about the forthcoming changes to the Pension Plan make no reference to this intention whatsoever. The first any member knew of this was a year later in the spring of 1998, when the 1997 Members' Report was published. It contains this small note:

During the year, Company Contributions of £2.7m (to the M Plan) have been funded from the surplus of the Defined Benefits Plans

Even then, the relatively small sum involved at that point (£2.7m) gave no real signal of IBM's long-term intentions. It is only the repetition of this note in the two subsequent reports, coupled with the increasing size of the sum involved, that have made it clear.

IBM has never informed members that it had or has this intention.

I wish to make the following complaints about this:

  1. that the Trustee, if indeed it knew of IBM's intentions before agreeing to the Trust Deed amendment of April 1997 which set up the M Plan, should not have so agreed. Appendix A of my complaint gave my reasons for this.

  2. that IBM deliberately concealed its intentions from employees

  3. that this concealment meant that employee members of the C Plan in 1997, such as myself, who were faced with a decision about whether to leave the C Plan and join the M Plan or not, had to make their decision on the basis of incomplete and misleading information. Members of the N Plan were similarly disadvantaged.

  4. that the implication of IBM's intention was that future ex-gratia increases in C and N Plan pensions were likely to become less and less generous as the surplus diminished. Knowing this I might well have decided to switch to the M Plan rather than stay in the C Plan.

  5. that this concealment also affected my decision about what to do with my T Plan contributions. On retiring I could have removed these from the fund, rather than using them to enhance my C Plan pension. If I had known that IBM was also planning to use these contributions to fund the M Plan I might well have reached a different decision. Members of other AVC Plans (such as the A Plan) were similarly disadvantaged.

  6. that one reason for the concealment was that IBM wanted to ensure that members of the C and N Plans did not transfer en-masse, since if they had done so this would of course have reduced or even removed the surplus.

  7. that the Trustee, since it certainly knew of this intention at the point when IBM failed to make its promised contributions to the M Plan, should have informed members but failed to do so.

2. Complaints relating to IBM's changing terminology with regard to Plans, Schemes, Funds and Sections

Four words, fund, plan, scheme and section are central to the IBM UK Pension Plan case. When we compare published IBM documents in 1997 with the 1999 Pension Plan Members' Report (published in the spring of 2000) and replies to letters of complaint in 2000, we see that IBM has made changes in its use of these words.

The documents forming the "It's your pension" Information Pack sent to all employees by IBM in 1997 talk mainly about plans and take care to distinguish the M Plan from the existing plans such as the C and N Plans. There are however places where it is clear that plan is just a synonym for scheme. For example, the Glossary document has entries for "Defined Benefit Pension Scheme" and "Defined Contribution Pension Scheme" and in the latter definition says that "The M Plan is a defined contribution scheme". It also makes it clear that the N and C Plans are schemes that are contracted-out of SERPS while the M Plan is contracted-in to SERPS. Similarly the document titled "Key differences between IBM's pension plans" says, in the paragraph on Level of Contributions, "... under the respective scheme rules.".

These documents also make it clear that someone who is a member of the C or N Plans will have to leave it if they wish to join the M Plan. The document titled "You are currently a member of the C Plan" says, in section B.2, "You can leave the C Plan at any time, either because you are leaving or retiring from IBM, or because you no longer wish to be a member of this pension plan. If you leave this scheme, for any reason, you will no longer be able to rejoin the C Plan."

The word fund is used in connection with the M Plan in many places in the documents issued to employees. In the document title "IBM Group Money Purchase Plan (M Plan)" there is a paragraph on "How will this scheme be administered?" that says "The Board of Trustees will administer this fund alongside the existing benefit plans....". Similarly the document titled "Key differences between IBM's pension plans" talks about individual funds for each member of the M Plan and says in the paragraph on Management of the fund "The Trustee appoints the Investment Manager to manage the funds as a whole". The funds referred to here are clearly the set of M Plan funds set up for each member.

The word section is not used anywhere in the documents issued to employees in 1997.

The 1997 and 1998 Pension Plan Members' Reports, in the part headed Funding, refer to the Defined Benefit Plans and the Defined Contribution Plans. In the latest report, for 1999, the word Plan has been replaced by the word Section. There is no explanation for this change in terminology. Apart from this change the reports appear to use the same terminology in the same senses as the 1997 Information Pack. They also make it clear that the funds for the two plans have very different investment strategies and that as a result, any transfer of funds from one to the other requires selling investments belonging to one plan and using the proceeds to buy suitable investments for the other plan.

Pensioners and employees started complaining about the actions of the Trustees with regard to the fund surplus earlier this year (2000). Kevin Waller, the Pension Services Manager, has been largely responsible for replying to these complaints. In his replies, the word section is frequently used. He has more than once written that the C Plan and M Plan are "just different sections of the same Pension Scheme". This is in complete contradiction to the 1997 documents IBM sent to employees.

Further I would point to the August 1999 issue of the IBM publication "It's Your Pension", which deals with Member Elected Directors. This has, on pages 4 and 5, details of the duties and responsibilities of the Trustee. Appendix B contains relevant excerpts from these pages. The document is intended as a guide for prospective Member Elected Directors (MEDs) and while it does not have the force of law, it makes it clear that the Trustee has two distinct custodial duties and that each duty is concerned with the custodianship of a set of assets. It makes a clear distinction between the two sets of assets. If the Trustee's duties can be separated in this way, and the assets associated with each can be so clearly defined and separated, then this further supports my contention that there are not only separate schemes for benefit purposes but also separate schemes for funding purposes.

I wish to make the following complaints about this:

  1. that over the past year IBM and the Trustee have been trying to rewrite history and pretend that while there may be separate schemes for benefit purposes there are not separate schemes for funding purposes.

  2. that this rewriting is intended to remove the possibility of future objections by members

  3. that this rewriting is prompted by legal advice taken as a result of a trustee resignation and member's complaints (advice no doubt influenced by the ruling of Rimer J in the case of Kemble v Hicks)

  4. that the Trustee has acquiesced in this rewriting.

3. Complaints relating to IBM's failure to contribute to the M Plan

IBM failed to discharge its duty towards M Plan members (the Defined Contributions 'section') between 1997 and February 2000 as defined in the schedule in the 1997 Trust Deeds. Over this period it should have contributed £24m of its money to the M Plan, but instead used the surplus in the C and N Plans (the Defined Benefits plans).

That surplus is most certainly not IBM money - it is Pension Fund money placed in Trust for the benefit of C and N Plan members. The only way that IBM can claim that it put its money into the M Plan is to admit that it took money out of the Defined Benefits Plans (so the money was now IBM money instead of Pension Fund money). But admitting that means admitting that it breached the rules outlined in OPRA Note 3, which govern the way in which an employer can remove money from a pension fund.

I wish to make the following complaints about this:

  1. that IBM failed to meet its obligations to the M Plan.

  2. that the Trustee failed to complain about this.

  3. that the Auditors, PricewaterhouseCoopers, failed to draw attention to this.

    That they should have is made clear by page 29 of the OPRA Document "A Guide for Pension Scheme Trustees" which says:

    "All schemes must have a statement from the scheme auditor confirming that contributions have been paid to the scheme in accordance with the relevant schedule. If they have not, the scheme auditor must state the reasons why."

    "If the scheme auditor has reasonable cause to believe that any duties relevant to the proper administration of the scheme are not being carried out, they have a legal duty to consider reporting the matter to OPRA."

4. Complaints relating to the composition and partiality of the Trustee

Before the Trust Deed amendment of April 1997 setting up the M Plan, the Trustee consisted entirely of IBM-nominated directors. As a result of the 1995 Pension Act, the constitution was altered to include 4 member-nominated directors, who joined the board the same day the amendment was enacted, so they were not party to the decision-making process which led up to the amendment. The member-nominated directors make up one third of the total, so their propositions can always be ignored or over-ruled.

The IBM-nominated directors have, at least since 1995, included senior executives who are paid bonuses which are directly related to IBM's various profit objectives and are also participants in IBM share option schemes which, even after retirement, can be redeemed at considerable profit. These options are however redeemable at IBM's discretion.

I wish to make the following complaints about this:

  1. that the way in which several of the IBM-nominated directors are remunerated gives rise to a conflict of interest when considering decisions, such as the decision to fund IBM's M Plan Contributions from the C and N Plan surplus, which directly affect IBM's profits.

  2. that in particular Messrs Serkes and Cadigan, IBM-nominated directors during the period 1995-1999 who hold very senior positions in the parent US Corporation, were specifically charged to cut costs and improve returns for IBM pension plans world-wide. Their remuneration by IBM was directly affected by their success in achieving these aims.

  3. that trustees have failed to declare such conflicts of interest properly and to abstain from voting on issues where these conflicts arose.

  4. that the chairman of the board of directors from 1997 until the present, Mr Morgans, failed to ensure that such interests were declared or that those with such interests abstained from voting where necessary.

  5. that the record of decision-making by the trustee directors shows them to have put IBM's interests before those of the members. Examples include approving the April 1997 amendment to the Trust Deeds, approving the periodic transfer of funds mentioned earlier and approving the February 2000 amendment to the Trust Deeds.

  6. that IBM has, by its choice of nominated directors, tried to ensure that the Trustee puts IBM's interests before those of the members.

5. Complaints relating to the interpretation of Schedule C Rule 1(2) of the April 1997 Money Purchase Rules

The argument that IBM and the Trustee have used to justify its use of the Defined Benefits surplus to subsidize its contributions to the M Plan between April 1997 and February 2000 was given in a letter that Kevin Waller wrote to David Reid on the 20th of December 2000 which contains this text:

"IBM is crediting surplus monies in the Fund into the Retirement Accounts of individual M Plan Members. This is in accordance with Rule 1(2) of Schedule C of the 1997 Defined Contribution Deed which provided that Employer contributions may be paid by an a cceptable alternative method."

The Rule 1(2) referred to says:

"If the Principal Employer, having obtained the advice of the Actuary, consider it appropriate, contributions to be made by an Employer under (1)(a) above may be made by way of an acceptable alternative method."

Rule 1(2) and IBM's interpretation of it raise several other questions to which I would like answers:

  1. To whom must the method be "acceptable"? To the Actuary? To the Trustee? Did they accept it? In writing? When?
  2. Who originated the drafting of the April 1997 Definitive Trust Deed and its accompanying deeds? Presumably it was IBM, in order to allow for the new M Plan scheme it was setting up. If it was IBM, how were the Trustee directors made aware of what this rule meant or might be taken to mean? Were they aware of its power to allow IBM to use the C Plan Surplus to substitute for its M Plan contributions? If they were, why was the rule not made clearer?

It's my belief, in the absence of answers to these questions, that Rule 1(2) was deliberately worded to conceal its true intent from the Trustee since I can see no other explanation for the failure to make its meaning clear and unambiguous.

I would argue that since Rule 1(2) specifically refers to "contributions" that the "acceptable alternative method" must still be a method of the Employer's making contributions and cannot refer to an alternative source for those contributions. In fact, Rule 1(1) does not actually define a "method" of making contributions so it is not clear to what method the "alternative method" of Rule 1(2) is an alternative. Thus I would argue that Rule 1(2) does not allow IBM to make transfers from the surplus in substitution for its contributions to the M Plan. Indeed I would argue that Rule 1(2) has no clear meaning whatsoever.

I wish to make the following complaints:

  1. that Rule 1(2) has been incorrectly misused and construed by IBM and the Trustee to justify the transfer of the Defined Benefits scheme surplus

    2. If the words of Rule 1(2) do indeed mean, or can be taken to mean, what Kevin Waller wrote in his letter to David Reid on the 20th of December, then I wish to make the following complaint:

  2. the Trustee should not have agreed to Rule 1(2), for similar reasons to those I gave in Appendix A of my complaint. That is, it allows a transfer which is not in the interests of any of the beneficiaries of the Defined Benefits scheme.

Appendix A: On the legality of the Trustee decision to allow the company contributions to the M Plan to be funded from the surplus of the Defined Benefit Plans

The same Trustee manages both the M Plan and Defined Benefit Plans although they have entirely separate sets of members. While this may be entirely proper, the Trustee must be careful when considering decisions that affect both schemes. This is the case when deciding whether to allow the surplus in the Defined Benefit Plans to be used to pay IBM's contributions to the M Plan. The Trustee has a duty of care to separate the effect its decision has on the beneficiaries of the M Plan from that which it has on the beneficiaries of the Defined Benefit Plans and consider each in turn.

Let us consider each side of the argument in turn. In the case of the M Plan, who are the beneficiaries whose interests the Trustee must consider? The M Plan is a money purchase scheme and by definition there can never be a surplus in such a scheme. There are no circumstances under which any of the funds will be distributed to anyone other than its members - the employees, pensioners and their dependants. The members are therefore the sole beneficiaries. In particular the employer cannot be regarded as a beneficiary of the scheme since it can never receive any funds from it.

Given this, was it in the interest of the M Plan members to use the Defined Benefit Plan's surplus to pay IBM's contributions to the M Plan? The answer must be no, for the Trust Deeds guarantee that these contributions will be paid anyway. As far as the M Plan beneficiaries are concerned allowing the transfer was an entirely neutral act that made no difference whatever to their situation.

Now let us consider the beneficiaries of the Defined Benefit Plans. A defined benefit scheme can have a surplus, or indeed a deficit. As a consequence the employer is a beneficiary along with the members. It is because of this that it is entirely right and proper for the employer to take a pension holiday from paying contributions if the scheme is in surplus, as IBM did in 1997, 1998 and 1999 and is indeed likely to do for the foreseeable future. But that is not the issue here. When we consider the decision to allow some of the surplus to be transferred to the M Plan, what we must ask is was that transfer in the interest of the beneficiaries of the Defined Benefit Plans?

The answer must surely be no. Because the C and N Plans are closed their membership cannot grow, but only decrease. The surplus in the Defined Benefit Plans may be temporary, but while it exists there is the definite possibility that it may be distributed to the beneficiaries. Indeed, if it were to grow large enough it might have to be redistributed, in the manner defined by the 1995 Pensions Act, to avoid the scheme falling foul of Section 22 of the 1988 Income and Corporation Taxes Act. In such a case the surplus would be distributed first to employee and pensioner members in the form of increased benefits in line with RPI increases and then (and only then) back to IBM. For IBM, reducing the surplus also carries the risk that it may have to make larger contributions if future economic circumstances fail to maintain the value of the fund sufficiently.

Reducing the surplus by transferring it to the M Plan puts it forever beyond reach of the Defined Benefit Plans beneficiaries. This is because the M Plan can never distribute its funds to anyone other than its members. Thus as far as the Defined Benefit Plans beneficiaries are concerned allowing the transfer was an entirely negative act that was not in the interest of any of them.

Of course the transfer was of benefit to IBM. It saved IBM a total of £24m over the three years in question. But this benefit to IBM did not derive from its position as a beneficiary of the Defined Benefit Plans but from its obligation as a contributor to the M Plan.

In his judgement in the case of Edge v The Pension Ombudsman (1999 4 All ER 546), Sir Richard Scott V-C said:

"The Judge may disagree with the manner in which the Trustees have exercised their discretion but, unless they can be seen to have taken into account irrelevant, improper or irrational factors, or unless their decision can be said to be one that no reasonable body of Trustees, properly directing themselves could have reached, the Judge cannot interfere."

He ruled that the Edge Trustees had acted properly in that case. However in the IBM case it is my submission that the trustees 'can be seen to have taken into account irrelevant, improper or irrational factors'. Since the transfer had a neutral effect on the beneficiaries of the M Plan and was not in the interest of any of the beneficiaries of the Defined Benefit Plans the Trustee should not have agreed to it. No reasonable body of Trustees, properly directing themselves should have reached that decision. That they did was therefore either irrational or the result of mistakenly considering the irrelevant and improper factor of its benefit to IBM in its entirely separate role as a contributor to the M Plan.

Appendix B: Excerpts from 'It's Your Pension - Member Elected Directors (August 1999)'

On page 4 we find the following:

The main duties and responsibilities of the Trustee are

  • ...
  • To act as custodian of the assets of the defined benefits scheme for the beneficiaries
  • To act as custodian of the assets and appoint external fund manager(s) to provide investment vehicles for the defined contribution plan
  • ...

These duties and responsibilities are described in more detail on pages 4 and 5:

To act as custodian of the assets of the defined benefits scheme for the beneficiaries

To ensure that there are sufficient assets available to meet the liabilities of the fund. The trustee sets the investment strategy and appoints external fund managers. The fund managers' performance in the financial markets is constantly monitored by the Trustee and where necessary corrective action is taken to optimise the return. In relation to the IBM defined benefits plans - N, C and Data Sciences - this means monitoring the investment performance of those professionals appointed by the Trustee.

To act as custodian of the assets and appoint external fund manager(s) to provide investment vehicles for the defined contribution plan

The Trustee is responsible for selecting a suitable investment manager(s) to provide an appropriate range of investment vehicles for members of the M Plan. The Trustee also has responsibility to ensure that the investment manager it has appointed, (currently Legal and General), to provide and manage the investment vehicles available to members, remains the most suitable supplier to do so, principally in terms of the financial return received. In relation to the IBM defined contribution plan the Trustee has an ongoing responsibility to monitor the investment performance of the appointed manager(s) to ensure that it is satisfactory, The Trustee periodically reviews the range and scope of those investment vehicles available to members to ensure that they remain sufficient and appropriate choices.

Appendix C: Relevant Documents

In compiling my complaints I have made reference to the following documents.

  1. The Deed of Amendment dated 24th February 2000

  2. The "It's your pension" Information Pack sent to all employees by IBM in 1997. This pack contains several documents that describe the changes IBM was then making to the Plan, and the various options open to employees at the time.

  3. The "It's your pension" document sent to all employees by IBM in 1999. This document describes in some detail the duties of Member Elected Trustee Directors.

  4. IBM United Kingdom Pension Plan Members' Reports 1996-1999.

  5. The following documents published by OPRA (see http://www.opra.gov.uk):

  6. Plan Sponsor magazine, February 1998. The cover story, "Big Blue's Pension Makeover" describes in detail, with interviews, the roles of TF Cadigan and JD Serkes in reducing IBM's global pension costs.

    See http://www.assetpub.com/psfeb98/coverfeb.html

  7. The 1993 and 1995 Pension Acts

  8. Determination by the Pensions Ombudsman: Holmes v Barclays Bank (2000)

  9. Kemble v Hicks (1999 PLR 287)

  10. Edge v The Pension Ombudsman (1999 4 All ER 546)