Management Information Letters were the mechanism for broadcasting management instructions and information before there were websites.


Question and Answer 7 is specifically about pensions in payment (PIP) practice.

There is a detailed analysis of Q&A 7 amongst the complaints.




MIL - MANAGEMENT INFORMATION LETTER - MIL                Personnel 785



SUBJECT:  IBM Pensions Plans

DATE: 18 November 1986

FROM: Director of Personnel

TO:  All managers




This MIL advises you of:

1  Important changes to the funding arrangements for both guaranteed 'C' Plan benefits and for increases to pensions in payment for 'C' and 'N' Plans. ('C' Plan members, In particular, must be made aware of these changes, as the employee contribution rate is being reduced.)

2  Plans to improve communication on pensions to employees.

3  The 1987 opportunity for 'N' Plan members to transfer to 'C' Plan, by submitting an application by 5 December 1986.


GUIDANCE:    Pass on to staff This document will be on the database within 7 days.





Details of the arrangements follow.


Changes to Funding Arrangements


When 'C' Plan was Introduced in July 1983 it was estimated that total contributions of 23 percent of pensionable earnings' would be required to meet the costs of all the benefits it provided, together with 100 million pounds, payable by IBM, spread over 10 years for the upgrading of previous 'N' Plan service.  It was decided that members would pay 5 percent of pensionable earnings and IBM would meet the remaining 18 percent. Until the end of 1985 these contributions had been paid, together with 57 million pounds, paid by IBM, In respect of the previous 'N' Plan service. (The actual total requirement was 78 million pounds, not 100 million pounds as originally estimated, because some employees elected to remain in 'N' Plan.)


Following the 1986 Finance Act provisions with respect to pension fund surpluses, as well as new accounting standards both in the UK and the US, detailed studies have been carried out.  These have shown that it is not appropriate to continue with this policy fixed total contribution, since the inevitable variations in investment returns and inflation could lead to over or under funding.  Therefore, each year's funding will be at the level required to meet the actual benefit obligations. This approach fully conforms with good accounting practices. The effect of this change is to reduce the level of contributions now required.


(A)      Contribution Rates


(i) 'C' Plan Members - Fixed Rate


From January 1987 the contribution rate for 'C' Plan members will be fixed at a new lower level of 4 percent of 'pensionable earnings' less the Lower Earnings Limit' (currently the LEL is 1976 pounds per annum).  In addition, in order to share the full savings with its employees, IBM will further reduce the members' contribution rate for January and February 1987 to 0.1 percent of 'pensionable earnings less LEL' as paid through payroll in each of those two months. (This to the minimum possible contribution, required to retain the contributory status of 'C' Plan.) This is equally applicable to all 'C' Plan members during the period, regardless of their length of membership.


(ii) IBM - Variable Rate


IBM has the responsibility for meeting the ultimate cost of providing the benefits on the 'N' and 'C Plans.  It is IBM, therefore, which continues to contribute the balance required at any time to fund the 'C Plan.


At the time the Plan was introduced in 1983, IBM's contribution to the pension fund was approximately four times the employee's contribution.  The changes described above will break this relationship and could in the future cause movements in IBMs contribution, either up or down.


(B) Immediate Conversion of all Outstanding 'N' Plan Service to 'C' Plan Service


For those employees who joined 'C' Plan at their first opportunity (for most employees this was 6 July 1983), all outstanding 'N' Plan service will be converted to 'C' Plan service.  This is 20 months ahead of plan.


The funding arrangements (A and B above) supersede parts of the contributions' section of page 9.02.3 of the Employee Handbook, which will be updated in due course.


(C) Increases to Pensions in Payment: 'N' and 'C' Plans


In the past it has been IBM's practice periodically to review pensions in payment, and to grant increases on an ad hoc basis as appropriate.  To date these have been funded by IBM paying periodic lump sums into the pension fund, specifically for the purpose of meeting the cost of increases for existing pensioners at the time the increases were made.  This proved acceptable during the time when the number of pensioners was small (it has only recently risen above 1000).


The company intends, as far as possible, to maintain its ability to award such discretionary increases when the occasion requires.  In future, therefore, the company will make a specific allowance, within its normal annual contributions, to provide for pension increases.  However, in common with private Industry in general, the company cannot guarantee these increases, because It is impossible to predict the economic environment that will affect their provision.


Communication: 'N' and 'C' Plans


It is recognised that any pension plan is inherently complex, as are comparisons with other companies' plans and personal pensions.  It is intended to improve communication of the pension plan during 1987 by providing employees with revised documentation to assist them in their understanding of their pension plans.


This will include:


       A general explanation of benefits.

       Information to assist employees to forecast the level of pension they would receive at any chosen retirement age.


       An improved Benefits Statement, including an explanation and up to four pension predictions at varying retirement ages.


       Individual pension estimates provided by the Pensions Services department In response to written requests from those employees within 12 years of their normal retirement date.  Normally such requests will be processed within one month.


       An annual report available to each member on request, outlining the scheme accounts, fund performance and latest actuarial statement as to the ability of the fund to meet benefit obligations.


'N' Plan Members: Transfer to the 'C' Plan


'N' Plan members may transfer to the 'C' Plan on 6 January of any year provided they are eligible (ie they are aged 25 or over but have not yet reached age 63 on the date of transfer).  'N' Plan members who wish to transfer to the 'C' Plan on 6 January 1987 should complete the attached application form and return It to Pensions Services department, North Harbour, not later than 5 December 1986.  For those of you using PROFS, the application form is attached to this MIL as a separate document (With this MIL reference).  You should print a copy of this document, for completion.


The following conditions will apply:


1.  Employee contribution salary deductions will begin on 6 January 1987 at the rate of 0.1 percent of 'pensionable earnings less the State Lower Earnings Limit' (currently the LEL is 1976 pounds per annum).From 6 March 1987 this percentage will be fixed at 4 percent.  Pensionable earnings are defined as 'basic annual salary' (or 100 percent salary) plus London Allowance if applicable. Contributions currently attract full tax relief, which is automatically handled through payroll - there is no need to notify your Inspector of Taxes.


2.  Future pension and dependants' benefits for 'N' Plan members transferring to the 'C' Plan on 6 January 1987 will be calculated as follows,


a   'C' Plan pensionable earnings will be used as from 6 January 1987.


b    Benefits for service up to 5 January 1987 will be calculated on the 'N' Plan formula.  Service up to 5 January 1987 will not be converted to count for 'C' Plan benefits.


d    Benefits for service after 6 January 1987 will be calculated using the 'C' Plan formula.


e   All other terms and conditions of the 'C' Plan become effective immediately on transferring.


3   Latest retirement age for the 'C' Plan is 63; earliest retirement age, subject to company consent, is 53.


4   If a transferring employee is also a 'V' Plan contributor, the employee's 'V' Plan contribution will automatically cease on the date of transfer to the 'C' Plan.  Pensions Services department will notify individuals of the benefit secured by their total 'V' Plan contributions.


5    Transferring employees may not withdraw from the 'C' Plan while still employed by IBM.




Finally, I would like to remind those employees considering making new or increased 'A' Plan contributions for 1987 (see Personnel MIL 777, dated 21 October 1986), that the final date for receipt of completed application forms by the Pensions Services department is 28 November 1986.




J C Steele


Director of Personnel

Portsmouth, North Harbour


For further information:  Compensation and Benefits Policy,

  North Harbour, 725-5171








Q1   What are the taxation changes?


A    The 1986 Finance Act implements the budget proposals that resources in pension funds which are beyond those needed to meet current benefit obligations may lose their exemption to tax.  This means that the fund has to be closely monitored to ensure that it is never 'in surplus'.  As the returns on investments and other factors such an inflation cannot be predicted, contributions will inevitably vary from year to year, to keep the fund in balance and free from tax liability.


Q2   Surely, If less money is being paid into the fund, pensioners' benefit levels or security must be threatened?


A    The benefit obligations of the fund are accurately calculated to ensure that members' positions are secure.  The new methods assess the long term liabilities and assets of the fund more accurately, increasing the efficiency of the fund.


Q3   Why are the contributions being reduced rather than the benefits being increased?


A    The benefits of 'C' Plan already compare favourably with pensions provided by other leading employers; many employees will reach the Inland Revenue maximum by the time they retire.  We believe it is better to reduce the contribution for all members, thereby allowing individuals to make further provisions to meet their personal requirements - for example, through 'A' Plan, if they so wish.


Q4   Does my contribution so towards paying for increases to pensions in payment?


A    No. Increases to pensions in payment have, In the past, been funded by IBM separately from the normal contribution rate, as they do not form part of the guaranteed benefits package. In future, the specific allowance paid by IBM for increases to pensions in payment will be part of the company's normal contribution rate.  Increases to pensions in payment remain separate from the guaranteed benefits.  It is not, therefore, appropriate to regard them as being funded by the employee contribution.


Q5   Once money is in the fund, can IBM remove it to use in the business?


A    No. The fund is managed on behalf of the members by IBM United Kingdom Pensions Trust Ltd, which is required by the Trust Deed and Trust Law to administer the fund for the benefit of the pension plan members.  The Deed stipulates that, once money has been put into the fund by IBM, it cannot subsequently be removed, other than for payment of benefits to members.


Q6   What is IBM's record of increases to pensions in payment (PIP), and how does that compare to the Retail Prices Index (RPI)?


A   Over the last 10 years the increases have been as Indicated below:



            PIP     PIP INCREASE  TIMING




  OCT  1977  18      12  67  14

  JUL  1979  22      12  55  21

  JUN  1980  16      15  94  11

  JUL  1981  12      11  92  13

  NOV  1982  10      8  80  16

  DEC  1983  5       4  80  13

  APR  1985  6       5  83  16

  JUN  1986  6       4.8  80  14




Q7 Why do pensions in payment increases not reflect the full RPI?


A   As in all compensation and benefit matters, we aim to compete favourably with the practice of other leading companies. It is common among private companies to provide increases that largely, but not wholly, mitigate the effects of inflation as It affects the pensioner.  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.  Index linked pensions provided by Public Sector employers are, of course, funded quite differently.


Q8 I want to continue to use my current level of contribution to save money in a tax effective way for my retirement.


A   You can continue to do this by starting to make, or adding to 'A' Plan contributions at up to 10 percent of your salary. These currently attract full tax relief and increase your total benefits, subject to Inland Revenue limits. (This is of principal interest to those aged above 40 years.)


Q9 Can I discuss my personal position with a pensions or finance specialist to help on to decide on my retirement plans and likely pension?


A   Pensions are complex, and unique to each individual.  With the added complication of income tax and other personal sources of income, IBM is not able to provide an individual advisory service. IBM recognises that its pension plans require more clarification. To this end, the literature will be rewritten in a more easily understood format, and will include worked examples of pension calculations.  This will be available during 1987, and will assist you to understand your Benefits Statement.  Meanwhile, if you are within 12 years of normal retirement (age 51 for 'C' Plan members) you may contact the Pensions Services department, North Harbour, who will be pleased to give you a pensions estimate.


Q1O I only start to pay pension contributions In December 1986.  Will this affect my contributions in 1987?


A   No. The contribution rate for January and February 1987 of 0.1  percent applies equally to all contributions made in those months, as does the 4 percent thereafter.


Q11 What to the position if I leave IBM during January or February 1987?


A     If you cease to be employed by IBM before 6 March 1987, you will pay 0.1 percent contributions for the period from 6 January 1987 until your last day of service.


Q12 What is the position if I cease to be employed by IBM during December 1986?


A   You contribute to 'C' Plan at five percent of 'pensionable earnings less Lower Earnings Limit' until you cease to be employed by IBM.  As the new arrangement only applies to current members in January and February 1987, you do not benefit.