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
SYNOPSIS:
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.
IBM PENSION PLANS
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 IBM’s 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.
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 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
User ID: INGRAMR at NHBVM8
PENSION PLAN FUNDING
QUESTIONS AND ANSWERS
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
DATE
RPI %
INCREASE % % TO RPI
(MONTHS)
------------------------------------------------------------------
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.