10 Nov 2004

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For the first time we do not have to say "We can make no prediction about when there will be a determination" since the determination has now been made.  You can read it as published, and also with AMIPP comments and summaries.  There are two early  responses, an explanation, reasons for a possible appeal, and copies of all the determination paragraphs, many with commentary.  These links are also accessible in our complaints section.  These are the only documents that have been added to the website since the last newsletter.  A major chunk of this letter is taken up with an account of the current state of the saga that began on 2nd Aug 1999 when the first complaint went to the Pensions Trust.  Those of you uninterested will find other important matters later in the newsletter.

The Ombudsman has not upheld any of the complaints, but we think you will agree that this is largely because your concerns have not been investigated, rather than being found unreasonable.  On the question of promises about increases derived from pre-1997 service the Ombudsman does not say that there was no promise.  He does not say that the promise was kept.  He says that he does not need to examine the firmness of the promise, what the promise was, whether it was delivered etc. because whatever the details it was not "legally enforceable". [215]   The complainants say this amounts to saying "a company can do or say whatever it likes when it wants to recruit, retain or retire employees and then do something different subsequently" . It is hard to believe this is a correct view of the law.  (How were the Equitable Guaranteed Annuity Rate holders able to enforce their claims?)

On the status of transfers, the one-way chute of money from C-Plan funds to pay employer contributions to the M-Plan, the Ombudsman says they were made legal in future by the latest amendments to the deeds and he does not need to decide whether the previous deeds made them legal when they first happened.  He says the accelerated rundown of C-Plan funds did not change the position of the members, in contrast to the complainants' view that "More assets, same liabilities, equals better prospects for members."  He extends his view to saying that somebody contemplating AVC investments in that time should not have been influenced by whether they knew or did not know about the one-way chute.

Elsewhere the Ombudsman extends his view of the irrelevance of the transfers to the issue of why we were not promptly told about them.  The Ombudsman does not contradict the complainants view that they were right to assume the M-Plan was separately funded (particularly in view of a reference to "this fund" which could only reasonably seen as referring  to an M-Plan fund [88]) but he goes no further than to say the information given was "not clear".  However, he sees no harm in the period when members were making decisions in an uninformed way.

On the issue of the trustee-directors decision to allow transfers, the determination makes clear that only two alternatives were considered - not allowing the M-Plan at all, or allowing the M-Plan with the chute.[70]  The third option of allowing the M-Plan but not the chute (which the complainants say should have been adopted) was not considered.  The Ombudsman does not regard the third option as a relevant factor that should have been considered.

In forming his view of the legality of the chute, the Ombudsman relies heavily on the Barclays case as a precedent.  The complainants said the IBM case was significantly different.  The Ombudsman does not contradict the fact that Barclays was a non-contributory scheme, and that Barclays met a regulated qualification about providing protection against inflation which the IBM UK C-Plan doesn't, but he does not accept the reasons why these differences are significant. [77][196]

The Ombudsman concedes the view that IBM has not delivered on its stated aims [214] but chooses not to follow the complainants into "why?".   They argue that the aims were not pursued because of IBM Corporation's improper control of the bargain, contrary to the intent of UK law operating between a UK company and its scheme members.

There are other issues, covered by the pages linked from the complaints section.  You may feel the determination ought to be appealed against, not just from our scheme members point of view but as a matter of public interest.   If the Ombudsman's view forms a precedent,  surpluses will be a thing of the past over future decades, irrespective  of economic cycles.  If there is a prospect of surplus then companies will be able, irrespective of how the scheme treats members, be able to introduce a chute to a money purchase plan and shift money away before the surplus can emerge.

The Ombudsman feels that direct promises from the employer to the scheme members, without explicit incorporation in the deeds, are never legally enforceable.  If this gets taken as a precedent,  scheme members in future will have no reason to take any notice of what the company says.

However, the problem with appeals is that finance considerations dominate justice considerations.  Way back in 2001 this website warned that this might affect the Ombudsman:

The Ombudsman has to consider the possibility that his determination will be appealed and he will lose the appeal, particularly where the behaviour of the trustees is dubious. The courts may allow correction of the trustee actions, but may not. An article in the periodical "Occupational Pensions" put it this way: "In practice, the courts will still intervene if they mistrust the motives of the trustees - the Ombudsman's difficulty is that, if he should choose to do the same thing, his decisions are reviewable by the courts, which may take a different view of the trustees' motives from him". Might the Ombudsman be influenced in his decisions by a risk of loss of face, and unrecoverable costs? (External legal costs for the Ombudsman's Office were £226,000 in 1997/1998). Would the probability of an appeal, and the calibre of the legal team to be pitted against him, be a consideration? At best the prospects will have no effect on the IBM retirees' chances. At less than best, they will have a chilling effect on the Ombudsman's willingness to find in favour of the retirees.
 

Now, the complainants also have to consider finances.  It is possible that a judge would decide that the public ramifications of not appealing were important, and a case should be heard in Court even if the appellants could not afford it (and thus had to be protected from uncapped costs).  The Catch-22 is that even to reach the stage where a judge might make this decision exposes the appellants to a big financial risk.   (Five figure sums, if not six)  

It is likely that we have to accept what we commented on at the time of the Government's Green Paper:

There is no mention of ameliorating the fundamental failing of the mechanism - that mistakes in favour of scheme members can get rectified using legal teams funded by trusts and corporate budgets yet mistakes against scheme members cannot in practice be challenged.

Some of you might feel this shows that it was pointless exercise to involve the Ombudsman, given the extent of corporate privilege and the unbalanced system.  However, the Ombudsman did have a choice in how to use his powers.  This Ombudsman used his powers to steer away from investigating the areas where the complainants had their strongest case, and to omit their arguments from the determination.   This is in strong contrast to, for example, his South African equivalent, who has written:

"The purpose of this office is not only to determine and dispose of complaints lodged in terms of section 30A(3) but also to investigate complaints... Where our investigation reveals any form of maladministration or unlawfulness, which has not been pleaded by the parties, it will nevertheless be further investigated and forms part of the ruling where necessary. Whenever our investigation reveals a related issue not initially raised or accurately formulated by the parties, all interested persons shall be afforded an opportunity to submit further submission and evidence in respect of this new issue." 

This adjudicator is willing to not only pursue the raised complaints, but follow them into investigation of related issues.  Any of you who think it foolish to have bothered with the Ombudsman system might ask themselves how we would have fared if we had encountered an adjudicator of the South African's calibre.

Three other interconnected topics of importance to scheme members have emerged recently - a "guarantee" from IBM world Trade, a plan for increased employee contributions to the C-Plan, and Actuarial Report figures.

The guarantee is explained to members in a Royal Mailing that you may have received, and on the official Trust website. (Also I-Plan version).  Whether you think the guarantee is of importance will depend on your view of IBM's willingness to pay its bills in the absence of a guarantee.  Up until now, the company has decided unilaterally what employer contributions should be made to the fund.  (The Trust has had the power to object if a certain low limit was not met, but that limit was so low as to be irrelevant).  The new Pensions Act will change that, with the Regulator becoming an adjudicator if trust and company cannot agree.  The Regulator will be able to order the company to make particular contributions.  This is then a debt that the company has to pay, and the debt can be pursued to parent companies and across national borders.  The expected guarantee pre-empts that situation by agreeing a policy for the employer contributions (before being forced to by the law) and lessening the difficulties in pursuing any debt.

This is not a question of what IBM UK could afford - the debt could be pursued to associated companies anyway.  It is a question of whether you think that without a guarantee IBM would be recalcitrant in paying its debts to the Trust.

The guarantee has another advantage for IBM.   Questions about the employers' ability and willingness to pay are common to all trusts, and usually referred to as the "Company Covenant".  It is widely agreed that where there is a strong covenant the trust can have a risky investment policy, with a high proportion of its assets in equities.  This is deemed reasonable because if returns are poor it will be the shareholders who lose, not the scheme members.  A by-product of this changed investment policy is that the actuary will calculate a smaller deficit because the assumption about future returns on equities is higher than for the alternative assets.  A smaller deficit means smaller (initial) company payments on any plan to recover from the deficit. (This is common actuarial practice although not all actuaries agree with it.  In this article the authors say "A more risky investment policy within a pension scheme should normally lead to a higher, not a lower, pace of funding, in order to provide equivalent member security.")   If there were no guarantee, and its effect on the deficit not there, then the IBM UK deficit calculation today would (probably and fortuitously)  be very close to the £1B that AMIPP guesstimated for you a long time ago. 

As well as the £900M deficit figure, you have been told some other figures from the Actuarial Report.  AMIPP will comment on those when the Actuarial Report is available.  However, it is worth warning now of the dangers of placing too much reliance on what the actuary says.  Very respected actuaries themselves have begun to acknowledge their role in creating the current pensions crisis.  To quote from a recent article

Our guidance notes allow actuaries to claim that:
- schemes are `fully funded', using phrases like `100% funded on an ongoing basis' (or `closed fund basis'), when they do not have enough money to meet their benefits with any degree of certainty; and
- 'full transfer values' are being paid, when these transfer values would not secure even 50% of the benefits.
 

We believe that these practices have the potential to mislead, and are not in the public interest.

The authors recognise that:

- Actuarial funding target methodology is obscure and opaque. This means that bases can be weakened or strengthened through what those outside the profession might, possibly unfairly, describe as `sleight of hand', and those within the actuarial profession sometimes describe as `actuarial magic'.
 

and that:

There is a natural tendency for clients to want low contribution rates and to present a positive picture to members. This creates commercial competition between advisers, leading inevitably to strong pressure towards weaker actuarial bases and methods.

(The IBM UK Trust is client to Watson Wyatt for both actuarial services and investment advice.  There is no evidence that such pressures played a part in deciding that.)

Although the wording in the announcement of the guarantee obscures matters, it is likely that the Actuarial Report will show it is associated with a certain level of solvency.  (Showing a solvency level became  a requirement of the Actuarial Profession, the actuaries professional body, in March 2004.)  This is good because a solvency measure comes closer to real world financing.  It is based on aggregating what each individuals pension rights would cost to purchase in the market, ie from an insurance company that sold annuities.  From the date given,  first quarter 2014, it appears to be a ten-year recovery plan.  (This is likely to be the longest period allowed by the government's interpretation of the EU's requirement on "technical provisions" for pension schemes).

It is good to note that the funding objective has a fixed end date.  This is not like the old USSR where production was always poor and there was always a ten-year plan to improve it.  This funding objective, in the absence of most horrors, will be met; if initial company contributions do not head it that way they will be improved.  There will be Actuarial Reports in the meanwhile but (unless we are being deceived) they will be aimed at corrections along the same course, not replacing the funding objective.

Changes are proposed to some of the plans.  That means increased employee contributions to the contributory schemes and a reduced accrual rate for the non-contributory N-Plan.  Since this is to the detriment of the employees and has no obvious benefit to any member, you might wonder why the Trustee agreed in principle.  We note:

a) The argument of "sharing the burden" is a weak one.  The defining characteristic of a final salary scheme, both legally and in the way they are sold to employees,  is that the employer carries the risk.   It is unreasonable for the employer to say that they only carried the risk until it turned into a cost!   The part of the bargain we are receiving or are expecting is a pension for our lifetime.  That the actuaries misjudged what that would cost, leading to extra costs now for the employer, should not alter the bargain.

b) Any claim that the extra contributions from the company are an indication of goodwill is also thin.  The size of the deficit is the result of IBM's unilateral decisions on its contributions (and the infamous C-Plan to M-Plan payments), and an agreement of recovering from the deficit only anticipates what will be a legal requirement.  Similarly the fact that already-earned benefits are not changed - that is worth pointing out but anything otherwise would have been illegal.

c) We repeat from newsletter 23:  In general, the trustees have strong powers to protect pension benefits already earned, and weak powers with respect to benefits not yet earned. If IBM chooses to cut salaries (or to increase employee contributions or cut accrual rates which would be similar in effect) then the trustees have little influence. The trade unions and/or Works Council would be the place to look for consultation about that, insofar as IBM co-operates with them.

d) You will never know whether IBM threatened to cut salaries or abandon the guarantee or make some other move if the trustee did not agree to their proposals.  Perhaps there were no threats but the trustees foresaw those possibilities for themselves.

e) The wording of the announcement misleads about the trustee's role.  The trustee should not negotiate on behalf of employees because its duties are towards the membership as a whole, not one section of them.  But that does not mean the trustees should not uncover and adopt the best deal available for the membership as a whole.  In fact, this is their duty and trustees across the UK are doing it all the time.

Overall, the most that can be said with certainty is that the system leads to very difficult decisions for trustees.

Elsewhere in IBM there have been elections for an employee forum.  This anticipates regulations which will require more consultation than before.  We wish those elected well, remembering they will be up against IBM's idea of what consultation means. Its view of "consultation" is that you have been consulted if you have been told what has been done - "The consultation process will in no way affect management's prerogatives and power to take appropriate decisions at the time required by the business and does therefore not necessarily have to take place before the decision is taken".    

Elsewhere in the UK, the Pensions Bill continues its progress and everyone we know expects it to be passed into law this month, for activation next April.  There will remain some 100 other pieces of legislation, Statutory Instruments, to be developed and made law in order to fill out the meaning of the umbrella Act.

Elsewhere in the world, IBM US has paid up for some of the illegalities of its "cash-balance" conversion, while other payments will depend on the outcome of appeals.  There is a detailed account which also comments on IBM's ability to pay.

IBM US plans a further $4B of share buybacks.  This implies that it has no current shortage of cash.  Such buybacks greatly benefit a few executives by raising the share price. Hopefully this batch will do more for the company than the previous $48B of buying, where the shares were bought for more than they are now worth.