A History of Protecting the Value of Pensions

There is on record an account of pensions being awarded around the year 500 B.C. by Darius, King of the Persians, to those who were the then equivalent of the modern local government official. There is no record of whether these pensions were index-linked:-)

The pensions idea did not catch on much, and even in the 1930's private occupational pensions were not common. By the mid-80's they were common, although a book from that time mentions "money-purchase" only as a future trend. It also says: "Most private plans are on a final salary basis, and the majority are contributory."

There was a concern about "early leavers". If somebody worked in sequence for two companies which had identical pensions schemes and pay scales they were liable to wind up with less pension than if they had worked for one company all through, because not all of their pension would have been calculated on their lifetime final salary. To ameliorate this, the government specified the rate at which a deferred pension should be increased - in step with the Retail Price Index, up to a maximum of 5%, annually. This applied to all leavers in 1986 and after.

As pension funds built up reserves, also known as a surplus, there was much attention to "who owns the reserves?". Technically they belong to the trust company but that does not resolve the contention between retirees who see them as deferred pay and companies who see them as the result of some earlier company over-contribution. The Occupational Pensions Board, since absorbed in OPRA, reported on "the balance to be struck between employers' legitimate interest and those of members of occupational schemes." They reported in 1989 that "all pensions in payment should, as a matter of good practice, be increased by LPI".

LPI is "Limited Price Indexation", a term coming into use to describe the rule already applied to deferred pensions. By the way, LPI has a lower bound of zero, so even with deflation pensions would not reduce.

By the way, the quote above is directly from the Occupational Pensions Board report. Other facts here are mostly from the monthly "Occupational Pensions", which most experts would agree is the periodical of choice for professionals in the occupational pensions industry. The IBM Trust uses its surveys both for internal presentations and when presenting to retirees.

There was a time when LPI as a minimum for all increases was intended to become law, but that did not happen. However, most companies did regard it as good practice. For the schemes surveyed in 1993, 95% of the members had a guarantee of LPI or better. Of the companies that did not give this as a guarantee, 60% gave as good an increase or more anyway. So 98% of members did well enough. The figure for recent years is the same.

Using surveys to evaluate what IBM has done is a touch complicated because IBM's increases are not annual. IBM is almost alone in not reviewing increases annually. Of 82 companies in the 1993 survey by Occupational Pensions only 2 varied when they gave increases (and it does not say whether their average interval was more or less than a year).

Only a dozen companies are in all of the last ten surveys, but we can compare these amongst themselves and with IBM. Because several of the non-IBM schemes have LPI or better, (one has 5% annual guaranteed), and because inflation has not hit 5% since mid-1991, these schemes have preserved the value of their members' pensions. On average the value has actually increased a bit from December 1990 to December 2000. (Although the gain is equivalent to less than half a percent per annum.)

In terms of what a £10,000 pension in 1990 became worth by year 2000, in 1990 pounds, the figures are:

for the best of the schemes	£12,617
for the average member of the non-IBM schemes	£10,478
for the worst non-IBM scheme	£10,143
for IBM	£9,633

This sort of table is not like the tables you see for investments like ISAs, since it is a reflection of IBM policy rather than of success in making investments. The IBM Trust has a good record in making investments.

These are the values in year 1990 pounds - to make the unit a year 2000 pound, add an extra third to the numbers for the inflation over the decade.

These are the changes to the pension. Accumulation of the differences over time, including potential spouse's pension, is left to the reader.

Footnote: The RPI figures used here are taken from www.statistics.gov.uk. This, and the different period for the calculation, explain why the results here are somewhat better for IBM than those in A Decade of Decline.

References: "Occupational Pensions", Dec 1993 pages 8-14, Dec 1996 pages 7-15, Dec 1998 pages 3-11, Dec 2000 pages 8-15, "Protecting pensions: safeguarding benefits in a changing environment"

Now read: Decade of Decline (3)

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