PensionChair is an organisation that promotes networking amongst the chairmen of pensions trusts.  The chairmen who are members have access to a pool of information and PensionChair also organises meetings for them.  Brian Marks was one of four speakers at their "Negotiating with the Sponsor" meeting in December 2006.  This page has the text of his talk.  It was not prepared from an audio recording so it will not match exactly what was said, but it is fair representation of the content.  The Q&A that followed is not reproduced here.

Motives and Conflicts

If we want to analyse negotiations with the sponsor we need to ask, as we do with any negotiations, what is in it for each of the negotiating parties?  And because even the perception of conflict can effect negotiations, we should look for conflicts of interest. 

For the trustees, we know their duty - to act in the interests of the scheme members and to do so fairly across all the sections of the scheme membership.  There may be something in the negotiations for some trustee individually, for example because they are receiving a pension from the scheme, but it is generally accepted that such conflicts of interest are not much of a cause of concern.  There may be a bigger perceived conflict where the sponsor has hire and fire control over the chairman of the trustees and the chairman's remuneration is a significant amount.  I am sure nobody here would feel any pressure about a possible financial loss resulting from incurring the sponsor's displeasure but the issue is one of perception.  An openness in the conduct of negotiations is a strong counter to suggestions of undue conflict of interest. 

For the sponsor, we know that the duty of the company's executives is towards the shareholders.   However, there is a great deal of room for interpreting what that means because of balancing of short and long term advantages and because of wide range of unknowns in the future economic environment.

When major changes were made to the IBM UK scheme, one trustee, who was also the Human Resources director for IBM UK, chose to explain to the workforce that although the system might give the impression of a conflict of interest problem, he had avoided that in practice by not involving himself in the trustee voting on the changes.  This seems to me a good approach - it allows the executive to bring the reasoning for the changes to the trustee boardroom while lessening any concerns about conflict of interest.  You might want to recommend the approach to executives on your Trust Board. 

Depending on the level of the executive, there may be a further perceived conflict.  Nowadays it is common for what executives take personally from companies, in the form of share options and the like, to be strongly linked to the share price.   The lifetime of an executive with a particular company is short in comparison with the lifetime of a pension scheme, so this can lead to the impression of executives unduly concerned with short term propping up of the share price.    (The parent IBM company has been spending billions each year buying up IBM shares) 

The livelihood of actuaries and legal experts is tied up with DB schemes and to a lesser extent DC schemes.  It is not closely tied to the level of benefits.  A miserly and underfunded scheme needs at least as much actuarial and legal advice as a better securely funded one.  This can lead to the impression that protection of benefits is being given inadequate attention.

Powers

I suggest we need to distinguish negotiations with the employer where the company is in dire danger of ceasing to exist, from negotiations which are about trimming the balance between benefits to scheme members and benefits to shareholders.   

In the near-bankruptcy category, each case will have its own certainties brought about by what there is and is not money for, and there may well be little room for negotiation.  The Courts and the Regulator have recognised this and been willing to give their approval to arrangements which look dubious if viewed only in the light of protections provided by the Trust deeds and the regulations.  (Whatever the trustees do in these cases they have already failed the scheme members by their earlier behaviour.) 

Most negotiations will fall into the other category - concerned with changing the balance of benefits or with the funding level. 

In recent years, the negotiating hand for trustees has grown stronger and then weaker again.    

Until June 2003 the negotiating position for trustees was very weak.  Most sponsors have the power to unilaterally wind-up a scheme.  The sponsor could say "If you don't agree then the scheme will be wound-up."    The trustees would have to agree, in the interests of the members, because wind-up was so bad for the members.  The ill-effects rumble on - Somewhere over there Parliament is discussing the limitations of the Financial Assistance Scheme this afternoon [that was Dec 7th].  The situation changed dramatically with the regulation that windup by a solvent employer had to be preceded by funding the scheme to buy-out level.  Wind-up became bad for the sponsor rather than so bad for the members. 

For a while trustees held a strong hand.  The Regulator reminded them that a deficit was an unsecured interest-free loan to the company and urged them to be robust in lessening such loans in a timely fashion.  Where the trustees had the power to windup they had a strong bargaining tool. (Estimates from public information about the IBM UK scheme say that the buy-out deficit was once, before benefits were degraded, some £2B.  Most companies would be disconcerted by having to find that amount at short notice.)  

The position changed again with the interpretation that legal advisors, advising one another at their symposia, have given to the South West Trains case.  Let me remind you about that: 

The company, the trustees and the majority of the unions were in favour of a scheme change.  The unions had successfully balloted their members about accepting the agreement.  The trustees asked the Court to validate the change, pre-empting a challenge from those who thought the deal was not good enough towards them.  The Court did so.     

Legal advisers have decided on a massive extrapolation of the SWT ruling.   They now advise that employers should offer staff some alternative changes to the pension scheme.  If the employee accepts one then that becomes part of the terms and conditions of his or her employment.  The legal advisers say the trustees must implement those t&c s.  They say it makes no difference if all the options are bad for the member, so that the member necessarily "chooses" degraded benefits.  They say it doesn't make a difference if the deeds make the degradation questionable - the deeds are overruled by the t&cs. 

Personally I think this is an absurd extrapolation, particularly as the judge in the SWT case made a point of saying he didn't intend to go beyond the particulars necessary for that particular case.   But, like most trustees, I have no law degrees and one can see the position trustees have been put in.  It would be an extreme position to say "We have doubts about our legal advice and will use trust funds to have it clarified by a judge".  As far as I know, none of the trusts faced with the SWT extrapolation have done that.  So we have de-facto law made by the advisers.  

So that is the overall position - negotiations awash with conflicts of interest in which the trustees cannot even use the powers in their Deeds to resist changes.  What does negotiation mean in that context?

Unions, Members and Associations

Here we must distinguish between companies where there is an effective Union, like British Airways, and companies where there is not, like IBM UK.    

BA's scheme members get to know what is going on before it is too late to change.  The trustees held mass meetings to give members information.  The members knew of a proposal (rejected by trade unions and later improved) for a one-off payment of £500M into the fund in return for staff working longer and agreeing to a cap in their pension benefits.  Members have been told about PriceWaterhouseCooper's advice to the company about how much it should afford.  As chairmen, you might think this is too much openness, but there can be little doubt that members prefer to know what is going on.

For IBM UK the scheme members get told about changes after they have been settled.  It is technically a slight exaggeration to say that because, like other companies, IBM UK is required to consult with employees on pension changes.  So there is what would be called on the Continent a "Works Council".  However, in practice that means only that IBM has to tell a handful of employees what it has decided and those employees cannot tell others because of confidentiality agreements. 

(Why have BA not used the SWT approach?  Perhaps because it would simply antagonise the staff.) 

From a trustee chair point of view, Union involvement puts the chairman into more of a mediator role.  Where there isn't a Union, does the obligation to act in the members' interest require the Trust Board to press the case for the employees? 

Often this won't be a real question because the Board won't have much to bargain with - their "negotiating" will be more a matter of pointing out what is in the company's enlightened self-interest.  

That brings us to the central question - why have a pension scheme at all?  The answer is that the scheme aids the company in recruitment, retention and retirement of staff.  However inexpensive a scheme is, it is of no value to the company if it doesn't influence the staff favourably in those three R's. 

So we can expect a trust chairman who is "negotiating" to want to be confident about how scheme members will see changes of security or benefits.  You might be lucky enough to have a scheme members association.  Many schemes have social-club type associations, often promoted by the company, but only a few have associations which have an interest in the running of the pension scheme as their foremost objective.  This is because it is difficult to form an association without company promotion - the addresses of potential members are unavailable because of Data Protection laws and potential members tend to scatter when they retire.  So we think that the forty associations who have joined the umbrella Occupational Pensioners' Alliance represent the majority of such associations.  www.opalliance.org.uk 

The associations vary, but to give you the flavour I will describe the Association of Members of IBM UK Pensions Plans (AMIPP - www.amipp.org.uk) .  This has as an objective  "Playing the fullest part possible in restoring the members' trust and confidence in the intentions of IBM UK and the Trust board."   This is a polite way of noting that the founders of AMIPP had lost trust and confidence in IBM and the Board.  IBM had invented a way to transfer money from the DB scheme to the DC scheme and scheme members thought this was contrary to the Deeds, the law, and what they had been told.  About fifty of them approached OPAS, because they did not expect funds grown from their contributions to be used in a way that could never benefit DB members.  After four years of deliberation David Laverick decided there had been no maladminstration.   The loss of trust & confidence was irretrievable.  

There is no doubt the Pensions Ombudsman was over-worked at the time.  There is no doubt that he was a legal amateur with no experience of Trust Law when he embarked on the Determination.  There is no doubt that it represents too much of a financial risk for the complainants to challenge such a Determination, however bad, in the High Court.  A contribution to the DWP's website, , explains what AMIPP proposes as a change of mechanism. (More users of the Ombudsman mechanism are dissatisfied about the Ombudsman's independence than are satisfied about it.) 

The relevance of that for today's topic is only to explain AMIPP's origins.  AMIPP established a website with a facility for registration.  About 10% of scheme members have chosen to register and they get email notification of each Newsletter.  There have now been 32 Newsletters and probably most AMIPP members nowadays value the plain language accounts of what the government and IBM are up to more than they value news about complaints to the Ombudsman. 

 Like any other self-selecting group the AMIPP members are not necessarily strictly representative of a wider population.  However, I suggest that if you do have anything that can be regarded as a scheme members' association it would be wise to understand their viewpoint before "negotiating".   The employer's self-interest is very much tied to the quality of the pension provision in members' eyes.

Levy.  Chairmanship style

Back in 2004, before the PPF levy rules were known, IBM decided that the foreign owner, IBM World Trade Corporation, should provide a Guarantee which backed IBM UK as the sponsor of the UK Pension Plan.  In reality this guarantee may have cost the owner nothing since it never intended to allow IBM UK to default.  But it was reassuring for the members, and was regarded as a partial quid-pro-quo for the 50% hike in employee contributions which occurred at the same time.  I think it is unfortunate that recently such guarantees have been seen as merely a device to reduce the levy payable, rather than as a boost for the members. 

Coming back to the negotiations themselves, I would like to say something about chairmanship style.   Most chairmen will have come from a background of a senior position, often financial, in business.  For example, the chairman of IBM UK's pensions trust is a past Financial Director of IBM UK.  In business we expect an executive to have "vision" and "leadership", so that success is having a team which implements what the executive thinks appropriate. 

It is not obvious that that is the best style of chairmanship for a Trust Board.  I have not been chairman of a Trust but I have been chairman of a Standardisation committee.  This committee had twenty meetings where the committee members attended at the expense of their organisations, coming from various parts of the United States and Europe.   The end product was a 200 page technical document which products were then expected to conform with. 

The organisations promoting this activity were not doing so in order to have the chairman's opinions implemented.  They were more concerned that anything they suggested should be carefully evaluated, explained, discussed, and documented; and decided about openly and rationally in a way that gave equal weight to all contributors. 

You will have your own ideas about what constitutes good chairman-of-the-trust style but I'm prepared to bet that scheme members would prefer negotiations based on openly constructing a position from the trustees, rather than trusting the convictions of the Chairman.