I refer to your Stage 1 IDR Complaint set out in your letters of 16 December 2000, 4 January 2001 and 17 January 2001 and the attachments to those letters; Mr. David Newman's Stage 1 Notice of Decision dated 15 February 2001; your letter to me dated 3 March 2001 invoking Stage 2 of the Internal Dispute Resolution Procedure and your subsequent letter dated 13 March 2001.

1. COMPLAINTS RELATING TO IBM'S INTENTIONS IN 1997 WITH REGARD TO M PLAN FUNDING

1. You restate the legal arguments you advance in Appendix A of your original complaint. There are a number of points which should perhaps be raised in connection with your arguments. Firstly, it is not correct to state that there are no circumstances in which a surplus might arise under the M Plan. A "surplus" might arise and monies be reallocated to the general fund where, for example, there has been a refund of member contributions on termination of Pensionable Service or, for example, where there is excess Retirement Account and the benefits payable would exceed Inland Revenue limits. Consequently the underlying premise of your argument is ill-founded.

It is, however, correct to state that as far as M Plan beneficiaries are concerned, allowing contributions to be credited to the M Plan Retirement Accounts from the Plan's "surplus", rather than from a cash contribution from the Company, is a neutral act that makes no difference to their situation. You contrast this with the position of the defined benefit section beneficiaries and state that it is not in the interests of those beneficiaries for "surplus" monies to be allocated to M Plan Retirement Accounts. The Trustee disagrees, however, with your arguments.

The Trustee has a duty to act in the interests of all beneficiaries of the Plan and equitably between different classes of member. When executing the 1997 Deeds, and in the negotiations leading up to the execution of those deeds, the Trustee satisfied itself that the Plan benefits of C and N Plan members would not be reduced. Indeed the Trustee sought to improve the position of C and N Plan members by requesting that discretionary pension increases be guaranteed. Whilst it was not able to obtain such a guarantee, it did, however, obtain a commitment in principle from the Company that it "did not intend changing its discretionary practice relating to service prior to April 1997". These increases have continued to be granted and are included in the actuarial funding assumptions for the Plan.

Moreover the closure of the C Plan to new entrants was effected in conjunction with the introduction of the M Plan. Had the M Plan not been introduced, it may have been the case that new entrants would have continued to become members of the C Plan and accrue pensionable service in the C Plan. In such circumstances the effect on the "surplus" in the Plan would have been to reduce it to an equal, if not greater extent.

The Trustee disagrees with your assertion that it "can be seen to have taken into account irrelevant, improper or irrational factors" in agreeing to the introduction of M Plan and the Company's "contribution holiday". In reaching its decisions the Trustee took into account the rights and interests of all members and balanced them against the rights and interests of the Company. In agreeing to the new Plan structure the Trustee avoided any detrimental change in C and N Plan members' benefits / contribution levels, obtained an assurance concerning pension increases (which assurance has been honoured) and secured the future of the Plan for the benefit of members generally. Whilst the introduction of the M Plan may have benefited the Company (although, at best, this is open to doubt as the Company could have taken a contribution holiday in any event), this does not make the Trustee's decision improper.

2. Your allegation is that IBM deliberately concealed its intentions from employees. I can only reiterate on behalf of the Trustee that there was no intention to conceal the facts. However, from the perspective of the defined benefit members, the Plan is a "balance of cost" scheme and the primary concern for members with such type of scheme is whether or not the assets are sufficient to meet the liabilities. This is the case.

In addition 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 is satisfied that it has complied with all legal requirements to disclose information to members.

3. As stated in Mr Newman's letter to you, the Trustee does not consider information on the allocation of surplus monies to impact on the decision of a C Plan member to transfer to the M Plan.
4. You state that "the implication of IBM's intention was that future ex gratia increases in C Plan and M Plan pensions were likely to become less and less generous as the surplus diminished". Your comments in relation to pension increases in the future are speculative and are not borne out by the history of pension increases to date. In addition, as Mr Newman pointed out, an allowance for pension increases is made before the "surplus" in the Plan is calculated.
5. I can only reiterate Mr Newman's previous comments that your AVC contributions were applied to provide you with a pension, the terms and conditions of which were made known to you and agreed by you at the time of your retirement. The allocation of surplus monies in respect of M Plan contributions should not affect the payment of your AVC benefits. The increases to the AVC element of your pension continue to be awarded in the same manner as they would otherwise have been awarded and an assumption for discretionary increases at 70% RPI is built into the funding assumptions, as referred to above.
6. In dealing with the issue you raise it is first necessary to establish how the Plan's actuary calculates whether a "surplus" exists in the Plan. While there are many aspects to this calculation, its key elements involve a calculation of the Plan's liabilities and assets. In calculating the value of the liabilities for active members the actuary takes account of each member's service to the date of calculation and his salary projected to his assumed retirement date. In addition an allowance is made for discretionary increases in payment of 70% of RPI. To the extent that the value of the assets exceeds the liabilities there exists an "actuarial surplus".

The transfer of members' accrued benefits to M Plan retirement accounts was calculated to reflect the value of the members' liabilities accrued to that date. As the calculation is made as at the date of transfer, future contributions are of no consequence. This is particularly the case when it is realised that the calculation of any "surplus " relates only to past service and not future service. Future contributions are intended to fund for the future accrual of benefits on a neutral funding basis: they are not intended to generate surplus.

For similar reasons, the actuarial assumptions for investment growth on these contributions is included in the calculations with the intention of producing a result which is cost neutral. In other words, it is intended to fund for the accrual of benefits and is not intended to produce either a surplus or a deficit going forward.

7. The Trustee is only required to notify members where IBM fails to pay contributions in accordance with the Schedule of Payments agreed by the Trustee and the Plan's Actuary (section 88(1) of the Pensions Act 1995). The Schedule of Payments did not require any contributions to be paid into the M Plan and consequently there was no failure which was reportable by the Trustee to members.

2. COMPLAINTS RELATING TO IBM'S CHANGING TERMINOLOGY WITH REGARD TO PLANS, SCHEMES, FUNDS AND SECTIONS

In your request for a Stage 2 Decision you amplify your complaint under paragraph 2 to deal with issues wider than the changed terminology. In relation to the use of terminology the Trustee confirms the comments made by Mr Newman in his Stage 1 Notice of Decision.

The Trustee has received advice from Leading Counsel that there is only one Plan, one trust and one "Fund". The Plan as a whole has used the nomenclature "plan" to describe different benefit structures of the Plan for many years (viz: C Plan, N Plan, T Plan, V Plan etc). There has never been any prior misunderstanding (so far as the Trustee is aware), any allegation of any intention to deceive members, nor any suggestion that each section/plan constitutes a separate scheme, plan, trust or fund. The introduction of the M Plan was communicated to members using the same terminology. In recent times it is clear from the claims made against the Trustee that there now exists confusion as to whether the M Plan constitutes a separate trust/plan or a section of the main Plan. In an attempt to alleviate this confusion reference to the word "section" has been included in Trustee communications. References to such terminology are intended to clarify rather than obfuscate. Fundamentally, however, the underlying position remains the same: there is one trust, one plan and one fund.

Your reference to the August 1999 edition of "It's your pension" concludes that this is a "vital legal point". The Trustee agrees with this conclusion. However, for the reasons given above and in Mr Newman's Stage 1 Notice of Decision, together with the advice it has received from its legal advisers, it concludes that your assertion that there exist separate plans, trusts and funds is incorrect.

Your comments with regard to the main purpose of the Plan as expressed in the 1957 Interim Trust Deed are not accepted. It is clear from the recital to this deed that the main purpose of the Plan is "providing retirement provision and ancillary benefits for present and future employees".

You also make reference to Section 149 of the 1995 Pensions Act in support of your contention that the defined benefit and defined contribution sections of the Plan each form a separate trust. However, the section to which you refer relates to the treatment of contracted-out benefits and compliance by the Plan with the certification requirements. The Trustee does not consider that this in anyway supports your argument that the M Plan comprises a separate trust.

3. COMPLAINTS RELATING TO IBM'S FAILURE TO CONTRIBUTE TO THE M PLAN

The Trustee agrees with the comments made by Mr Newman in his Stage 1 Notice of Decision. These concur with the legal advice obtained by the Trustee on this matter.

You state that there can never be a surplus in a defined contribution scheme. As referred to in paragraph 1(a) above this is not the case and I have set out two occasions when surplus monies can arise. In the preamble to Mr Newman's letter he set out an explanation of the legal structure of the Plan and stated that the money purchase calculation basis is another formula for calculating benefits. To that extent it is correct that there is a distinction for accounting purposes when calculating the liabilities of the Plan. That does not, however, result in a division of the Plan's fund into two or more sub funds.

4. COMPLAINTS RELATING TO the COMPOSITION AND PARTIALITY OF THE TRUSTEE

The Trustee agrees with the comments made by Mr Newman in his Stage 1 Notice of Decision. You have not produced arguments or evidence that any of the Trustee Directors have acted in bad faith or breach of trust and consequently I do not think any further comment can be made. Your complaint seems to be based upon the assumption that because certain Trustee Directors hold senior positions within the Company they cannot have exercised their trustee duties properly. You still provide no evidence to support this assertion. All Trustee Directors comply with their legal obligations to declare conflicts of interest. There is no obligation on such Trustee Directors to refrain from voting or from being included in any quorum when trustee decisions are taken.

In relation to the comments in your paragraph i), the decisions of the Trustee to approve the 1997 amendments to the Trust Deed, the use of surplus monies to allocate employer contributions to M Plan Retirement Accounts and the execution of the February 2000 Deed of Amendment have all been addressed elsewhere. The Trustee is satisfied that it acted in the interests of the Plan's members and in accordance with the Trust Deed and Rules in all cases.

You assert that IBM has tried to ensure that the IBM-nominated Trustee Directors put IBM's interests before those of the Plan's members. As this is clearly a matter for the Company, the Trustee is unable to comment, although you may wish to raise it with the Company directly.

5. COMPLAINTS RELATING TO THE INTERPRETATION OF SCHEDULE C RULE 1(2) OF THE APRIL 1997 MONEY PURCHASE RULES

The Trustee considers that Mr Newman responded to the points you raised in full.

In relation to your further complaint that the Trustee should not have agreed to Rule 1(2), the Trustee considers this argument to have been addressed previously in this Stage 2 and the Stage 1 Notice of Decision.

The Trustee has been advised by Leading Counsel that it is the Company who determines whether an "alternative method" is "acceptable" and "appropriate" for the purposes of Rule 1(2) of Schedule C.

Finally, you raised the question as to whether or not certain Plan investments are sold when monies are allocated to M Plan Retirement Accounts and reinvested in accordance with the members' investment options. The process is that the Trustee reviews the cash requirements of the total Plan in terms of the funds required to comply with the M Plan investment options, the payment of pensions and expenses and other outgoings of the Plan as a whole and these liabilities are set against the inflow of employee contributions, investment income and other monetary receipts. The majority of money allocated to the M Plan Retirement Accounts therefore derives from current income received by the Plan from a number of sources. It is however sometimes necessary for the Trustee to sell assets to balance the income and expenditure requirements of the Plan generally.

6. YOUR LETTER OF 13 MARCH 2001