Newsletter No 34

The data on inflation as it bears on retirees:

The Retail Prices Index is based on a "basket" of purchases and hence can be a poor match to the purchases of an individual or group.   Because of that, the inflation experienced by pensioners has been more than the official RPI.   (Gas bills went up an average of 38% in 2006).   If you know your spending in various areas well enough you can work out your household's inflation using one of the online calculators.  The Daily Telegraph has worked the figure out as 9% for pensioners generally. 

Occupational pensions are deferred pay and increases of less than inflation are effectively a pay cut after the worker has done the job.  The problem becomes severe when compounded over years.  One respected forecasting organisation suggests that increasing inflation is a trend that will reach 7.1% by 2010.

For IBM UK, pensions (for pre-1997 service) have lost value by 3/10ths of the inflation figure, compounded over two decades.  That 3/10ths  is currently changed to 4/10ths and then made worse by a cut-off.   Thus the most recent increase  was at the maximum agreed between IBM and the Trust, 2.4%, when the official RPI was more than 4% and the actual inflation experienced perhaps 9%.

You will recall that the reason given for worsening the protection against inflation, when it was already the worse amongst comparable companies, was "too expensive".   This is in the context where 2006 was a "very strong year" for IBM Corporation according to its annual report and the company chose to increase dividends per share by 23%.

In some previous years our trustees have recognised the case for 100% protection against inflation and recommended it to the company.  Nothing prevents them doing so again but the indications are that they will not.  Why would a recommendation that was regarded as appropriate in 2004 be less than appropriate in 2006, given the company performance and increasing inflation?

The government's rolling review of the legislation:

The government has not yet come clean on its intentions, but there is still concern that they will adopt some of the NAPF's agenda.  (See newsletter 33).   A document from the Department of Work and Pensions is sympathetic to degrading pension schemes so that schemes continue to exist even when poor.  This is the result of input from the groups that the DWP chose to consult.   Administrators, actuaries, legal advisers and the like keep their jobs and profits when a scheme degrades.   How bad a scheme becomes for the scheme members does not affect these people.  There is an opposing view to those inputs, that the objective should be good schemes, so that scheme members will value the schemes and hence provide a motivation for companies to retain those good schemes.  The challenge now is to persuade the DWP to the promotion of good schemes.

A particular concern is the minimum increases on the pension that employees are earning.   You will recall that different periods of service since 1997 earn different minimum increases.   (These are minimums; IBM would like you to believe they are also maximums but they are not, any more than the minimum wage is a maximum.)   The DWP is suggesting the minimum for increases could be set to zero.  Employees can be fairly certain that if this happens our Trust will agree to the downgrade (as they did for the downgrade from LPI 5% to LPI 2.5%).  

The Trust and IBM's silence on the effect of age discrimination laws:

There is no change to this situation.  Because many age discrimination aspects can only be demonstrated by statistical methods, and scheme members do not have access to the statistics,  there is little prospect of any ageism there might be in our scheme being corrected.

The Trust's silence on MED arrangements

The Trust has now recognised the need to do something.  

A recap on the reasons:  The term "Member Elected Director" is an IBM invention - it has never had any meaning in the regulations.  The term in the regulations is "Member Nominated Director".   In the original 1997 regulations there could be MNDs who were not selected by a regulated process but selected by a company-designed process.  This was known as "opt-out" from the regulations.  The process used for selecting our member representatives up to now has been an "opt-out" process.  Under current regulations "opt-out" is not allowed.  Only member representatives selected under an allowed process can be MNDs.  Our trust board currently has no MNDs.

A recap on the timing:   Removal of the opt-out was first introduced in the "Child Support, Pensions and Social Security Act 2000" although the change was not implemented then.  A Green Paper in 2002 confirmed that the change would be implemented - "we plan to remove the employers' right to propose an opt-out".  The Pensions Act of 2004 which followed through on that plan completed its passage through Parliament in November 2004.  Thus our Trust has had six or seven years in which to consider the opt-out replacement.  However, it has only just recently begun to consult with some people (of its own choosing) about what to do.

It was recognised that a trust might not have arrangements in place instantly when the "no opt-out" regulations commenced.  There is a Code of Practice which says six months is reasonable for deciding on arrangements and a further six months reasonable for making selections under the arrangements. 

Why it matters:  MNDs are empowered and protected by the regulations.  They cannot be denied responsibilities that are open to other trustees.  They are strongly protected against a company (or a trust majority vote) throwing them off the Board.   Where they are employees, the company must give them time for trustee work and not penalise them for their trustee decisions.   In contrast, MEDs are not empowered or protected by the regulations.

Of course, if bad things don't happen it is irrelevant whether those things were prevented by regulation.  (In the same way as it doesn't matter whether you insure your house against fire if it doesn't burn down.)  However, it is an unnecessary risk to have member representatives without the regulated powers and protections.  AMIPP believes the delay is already unsatisfactory, and implementation is needed as soon as is practical.   Newsletter 33 discusses what arrangements would be good.

UK/EU Court decisions:

Our newsletters since newsletter 20 have covered the plight of members in schemes where the company failed prior to the introduction of the Pension Protection Fund.  (The link we gave then is still relevant.)  We reported that the Unions had funded putting a case before the European Court of Justice.  There is now a verdict from that case.  The ECJ decided that the UK government had failed to implement a European Union directive that it had signed up to, a directive requiring governments to "protect" pensions.  However, this was not a complete victory for scheme members because the ECJ said "protect" did not mean protecting 100% of the pension.  The ECJ was not specific on what "protect" did mean, but indicated that 50% would not be sufficient.

The implications of this ruling were:

(a) There was no conflict between EU law and the UK's Pension Protection Fund.  The PPF provides 90% for most employees and 100% (less some increases) for most retirees.  (details)

(b) There was a conflict between EU law and the Financial Assistance Scheme which the UK government had introduced for victims prior to the implementation of the PPF.  The ECJ left to the UK to sort out what was necessary to put things right.

In a separate but associated UK court case there was a judicial review of the government's response to the Parliamentary Ombudsman's condemnation of the government's treatment of the victims.  The media has reported this as a victory for the complainants but the victory is partial.  The review agreed with the Parliamentary Ombudsman's description of the misleading information issued by the government but didn't agree that all the victims should be compensated because it could not be shown that all of them relied on that information.  Both sides have been given leave to appeal the judicial review findings and the government has launched an appeal.

The victims are now being advised that they might have to bring cases individually:

The point is that it remains open to individuals to establish causation. They can do this by explaining how they read leaflets themselves, in hard copy or on line, or that they were told that their money was safe by others who had read leaflets - such as trustees who had read the OPRA leaflets - or that they understood from press reports (also influenced by misleading press releases and the 1996 leaflet) that their money was safe. They would then need to just explain how they at least lost chances of remedial action as a result (for example they could have diversified their savings, tried to negotiate higher contributions from their employer, retired at the first opportunity, not put AVCs into their scheme etc etc)

It is more likely that, rather than face thousands of cases, the government will move towards better compensation for the victims in general.  This is the interpretation being put on what the relevant minister said in recognition of the judicial findings.   

Thus questions are still open about where "new money" is to come from and about the mechanism for delivering the rescued pensions.  Opposition parties and scheme member organisations favour dropping the FAS in favour bringing the victims under the PPF, but there is disagreement about where the "top-up", that the PPF would need, should come from.

Today's news - the budget increases the amount allocated to help these victims from £2B to £8B.  It is too soon to say what this will do in terms of replacing the lost pensions but it is likely to bring the compensation close to what the PPF would provide, thus strengthening the case for combining the organisations.  Overall, although the fourfold increase is a victory for the victims, the process that they had to go through has given a bad impression of pensions as a form of saving. The same money, offered early, would have increased confidence in pensions.

The fact that the the victims have been told that there isn't a "class action" approach to compensation shows that the difficulties our scheme members had in challenging IBM in 1999-2004 are still with us.  It can be financially reckless for an individual to use the law even when the potential gain to the class of scheme members as a whole is large.  The government's reluctance to ensure that pensions actually get delivered emphasises the need for individuals to be vigilant about our scheme's activities, since the mechanisms for protection after the fact are weak. 

In a separate court case there was a decision which might be cause for concern.  A company has been given legal endorsement of a plan to create another company, shift its debt to the trust fund to that new company, let that new company go bankrupt, and hence make the Pension Protection Fund responsible for delivering pensions to the original company's retirees.  This is not necessarily worse for scheme members than having the original company go bankrupt but you might be surprised that Parliament did not foresee this trick.

Parliament did in fact limit the benefit of the trick where "at any time, the trustees or managers of the scheme enter into a legally enforceable agreement the effect of which is to reduce the amount of any debt due to the scheme under section 75 of the 1995 Act which may be recovered by, or on behalf of, those trustees or managers".  However the court said the debt was not "due" because the circumstances that would trigger its payment had not yet happened.  That appears to create a precedent for other companies to  offload their pension responsibilities, provided they do it early enough.  (Note that the Guarantee provided by IBM World Trade is a guarantee that IBM World Trade will pay IBM UK's pension debts if IBM UK cannot.  It does not prevent the amount of the debt being reduced.  Scheme members are not allowed to see the actual Guarantee document so we cannot tell how significant that is.)

US Court decisions:  

There has been a judicial decision in the US that is specific to IBM.  The Supreme Court has decided not to consider a judgement from a lower court which scheme members wanted altered.  The Supreme Court takes on board less than 5% of the cases people bring to it and it does not give reasons when it refuses so there is no new reasoning to report.  The outcome is that IBM will pay out $0.32 billion as a consequence of introducing an illegal "cash balance" scheme, as opposed to the $1.3 billion it would have paid out if the findings of the original judge had been ultimately upheld.  This is an example of the US "class action" process working out.  

In a different class action case, IBM has agreed to end the case by paying compensation to employees who should have received overtime pay but did not.

A government decision:

In newsletters 27 and 28 we wrote about transfer values and the possibility of them being raised.  This hope has been dashed by a government decision.  This extract from the Financial Times somewhat simplifies the position of actuaries on this topic.  The Actuarial Profession as a whole recommended a better way of calculating transfer values but some individual actuaries, who saw their role as helping the company keep costs down, favoured the old method which has been retained.  The effect on our scheme will be to keep the number of deferreds up.  Transfer values that better reflected the actual value of the pension entitlement would have led to more people taking a transfer value instead of deferred pension.

Etc:

Job cuts in IBM UK within Integrated Technology Delivery are reported. 

There have been personnel changes in North Harbour, where our scheme is administered.  Anne Conroy, who replaced Kevin Waller, has moved on and been replaced by Sally Settle.   Kevin Waller has returned from advising IBM UK (over the period when the "final salary scheme"  was converted to a "much less than final salary scheme") and now has an undisclosed role in the pensions administration.  Anne Conroy took a job with IBM in India.  (IBM now has more than 50,000 employees in India and the figure is expected to go to 70,000 this year.)  On the Trust Board, one of the IBM executive trustees domiciled in the US has been replaced by one domiciled in Europe.  David Heath is no longer the HR director for IBM UK so, if history is repeated, the new HR director will replace him on the Trust Board.

We mentioned in newsletter 33 the unions have had some success in improving British Airways plans for the future of its pension scheme.  A proposition seems to be largely agreed now although there is a snag with one of the unions.  The unions representing higher paid jobs are accepting the proposition but the ballot by GMB, which represents employees such as baggage handlers, produced a vote for refusing the offer.

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