This contribution should be viewed in the same light as a message on
the message board – it is anonymous opinion that has not been reviewed or
approved by AMIPP officials.
How safe is YOUR pension?
During
the years you loyally and diligently worked your employer told you how good
their pension scheme was so you paid your contributions, perhaps added some
AVC’s, possibly bought some shares in your company on favourable terms and even
put away a bit more in PEP’s and ISA’s. You did all the things you were advised
to by your company’s pensions department and you’d got your retirement finances
all planned out. Or so you thought –
until now.
Hot
on the heels of the demise of the final salary pension comes a new twist hot
footing its way across the Atlantic and led by IBM. Last year IBM UK Pension Trustees were told by IBM US to cut
pensions in payment for its existing and future pensioners who were in the
defined benefits scheme. There was no
consultation with The Association of Members of
IBM UK Pension Plans (AMIPP) – IBM doesn’t do consultation
with retirees according to Jonathan Ferrar, Director of Human Resources UK,
Ireland & South Africa – so it just announced the cuts on the basis that
the corporation could no longer afford to continue to honour its decades old
formula for awarding increases to pensions in payment which weren’t madly
generous to start with. IBM Corporation
expects to save around $3
billion by freezing benefits for its existing worldwide employees and now a bit
more with these cuts to pensions in payment between now and 2010.
(Full
UK announcement is publicly available on:
http://www-05.ibm.com/employment/uk/pensions/pension_proposals_mainplan_jan2006.html)
In
contrast to claims that IBM can no longer afford to pay its pensioners what
they were told for decades they would receive it’s instructive to read IBM’s
2006 annual report it which boasted that it:
1. Forecasts a 50% uplift in revenues in the next 4 years
2. Achieved gross profits at the highest for 10 years
and
3. Increased dividends for the 11th year
All
this against a background of significant growth in the stock market over the
last four years and therefore in IBM’s pension funds.
As if
this wasn’t insult enough to its pensioners in April this year IBM announced a
$15 BILLION share buyback plan. Let me
repeat - $15 B I L L I O N – that’s 8% of the issued shares.
(Full
announcement is publicly available on:
http://www.ibm.com/investor/viewpoint/ircorner/2007/07-04-24-1.phtml
and
http://www.ibm.com/investor/viewpoint/ircorner/2007/07-05-29-1.phtml
Since
1995 IBM has spent $80 billion
on its stock buybacks. Why? If they’re
such a bargain it’s odd no-one else seems to noticed and snapped them up. The
real reason is that by reducing the number of shares in circulation it increases
the company’s earnings per share (EPS) as there are fewer of them. This means
IBM can pay a larger dividend per remaining share and gives the company more
shares to distribute in stock options to executives on favourable terms, albeit
on this occasion at the expense of loading the balance sheet with debt as the
company had to borrow the money to fund the share buyback. All jolly good news for CEO Sam Palmisano
whose own pension is estimated to be approximately $10,000 a DAY when he
reaches 65 as it pushes up the value of his stock options as well as increasing
his dividend payments. This is such a
good idea IBM has been spending about $100 million a day buying its own shares
on the open market and has indicated it will continue with more of the same in
2008. Well wouldn’t you if you
could?
To put $15 billion
of repurchases into perspective this is
approximately two and a half times what IBM spends annually on research and
development and 5X the savings from cuts
to the pension scheme. And by the
way, IBM’s day to day business generated $15 billion in cash last year.
So
who says IBM can’t afford to pay its pensioners? The same IBM executives who chose to take pension holidays in the
good times thus contributing to the pensions deficits in the hard times and the
same IBM executives who stand to benefit from improved earnings per share -EPS
and any resulting share value increase to which their incentive schemes are
linked – that’s who. The same IBM execs who haven’t been able to think of
anything better to spend the money on to grow revenues as well as earnings for
the last 12 years. The same execs who
presided over IBM’s fall from 29th place in 2005 to 42nd
place in 2006 in the Fortune 500. Just think if they’d had the wit to buy
Google shares!
What was it Anthony Robbins said? “If you do what you've always done, you'll get what you've always gotten.”
We’ve
seen how slashing retirees and soon to be retired employees pensions help pay
for these buybacks but have to ask if these share buybacks been good for IBM
shareholders in general? Well IBM’s
shares gained 73 cents on the day of the news: hardly a ringing endorsement
from Wall Street although they have gone up since. Then if you buy back 8% of
issued shares you would expect the share price to increase wouldn’t you? A look at the first chart shows that in the
short term IBM’s shares have been rising in dollar terms although this has to
be largely offset for UK & European shareholders by the fall in the US
Dollar. However a look at the second chart casts doubt that this strategy
really works so it probably hasn’t even been good news for shareholders.
If
you don’t work for IBM why should you be concerned? Firstly, if you’re still lucky enough to be in a defined benefits
pensions scheme it’s worth reminding yourself that your pension is deferred
payment for past work based upon a set of rules applied at the time of your
employment to be competitive with other employers to attract and retain the
right quality of employees - you. It’s bad enough to change the ‘rules of the
game’ for existing employees by reducing the rate at which their pension
accumulates for each year worked and then by closing the scheme but it is
contemptible to change the basis of payment for pensioners who had a clear and
reasonable expectation for all the years they worked of the value of the
pension they would receive in retirement especially, as in IBM’s case,
when it clearly can afford to honour its responsibilities to existing
pensioners if it so chooses.
Be
warned, this is already spreading to other major US Corporations – and now it’s
a Trans-Atlantic import coming to a place near you soon. And by the way, if
you’re in a defined contributions scheme, what’s to stop your employer one day
telling you that it can no longer afford to make its contribution? Don’t think
the government will help you. In a
reply from the DWP to a query about IBM’s pensions in payment cuts a government
spokesman said there’s nothing they can do about it.
Actions like this
from rich successful companies send out the wrong signals to other
companies. Worst of all if (when) inflation does rear its ugly head in
the future the government of the day may well find itself with a generation of
people whose pensions have been savagely cut needing to apply for state
benefits, something no-one expected, and the same people at the DWP today
needn’t bother about as they’ll be long gone with their index linked pensions
paid for by the rest of us. At least
that’s what they expect but even they might be unlucky if the government
follows the lead from the Bank of England, reported in the DT on 7th
July, to close its defined benefits system.
After all, it’s only a short step for the BoE to cut pensions in payment
one day.
Be warned. It
could happen to you next.