January 28 , 2010         

This newsletter looks both forward and back on IBM's final salary schemes, to assess the prospects of change of direction.  (Previous newsletters have covered what happened more fully, this one is intended as overview.)   It is assumed you have caught up with what MPs think of IBM's behaviour.  (You can watch the debate on a PC or read it from Hansard.  Those of you who persuaded their MP to sign the Early Day Motion helped in obtaining this debate.  There is still value in getting more MPs to sign.   The earlier South Today program is also still accessible. ) There is also more below about what those coerced out of IBM UK might do now, and on the national scene.

A DECADE OF DAMAGE

The end of the "Noughties" and the imminent demise of accruals makes this an appropriate time to review IBM's final salary pensions experience.  At the broadest level, the closures might be viewed as a by-product, a by-product of a decade in which the few who decide how corporations spend their money tightened their control of governments and society.  The resulting increased inequalities left no place for pensions schemes with the characteristics of IBM UK's original final salary scheme.  (The decade saw zero net job creation in the US.  Executive pay continued its trend.   There is corresponding evidence for the UK.  Also)

However, the manner of the degrading may be enlightening, even if the fact stems from wider trends.   Other companies and trusts have closed schemes to accruals but none have shown the callous approach of IBM.  For the decade, the outstanding characteristics have been a preference to spend elsewhere than staff and scheme members,  cycles of artificial boom followed by real world bust,  repeated misleading presentation of changes, and secrecy as a mechanism to avoid accountability.  Currently, the IBM staff are incensed, sufficiently to produce an unprecedented legal "fightback".

Spending Preference.

Information Technology plays an increasing role in our lives, and it is no surprise when IT companies flourish.  On a broader front, it is natural that some companies fail, and some come close to insolvency.  When this happens the workforce usually knows how bad the situation is,  and can take a sensible view of when degrading the pension scheme is the appropriate salvation.  But this has never been the situation with IBM.  Degrading the schemes has been a move to free up money to spend on buying back IBM shares.  Some $100 billion spent that way has just about kept the share price unchanged (after allowing for inflation).   It is impossible to be certain whether different spending would have had better results, but we can say that for the US executives who judge their own merits by the amount they can take from the Company, the buybacks have been a success.  We can also see that the final salary schemes have been sacrificed to the policy.

Funding Cycles.

Unlike predicting the paths of planets, predicting the future cost of a final salary scheme is heavy with guesswork and short on science.  Most of those involved in the guesswork are motivated to be ambitious about cost - erring on the side of assuming pensioners will die earlier and investments will produce higher returns.  Although the resulting prediction is artificial and does not alter what the actual cost will be,  it benefits the company by delaying delivery of money to the fund.  Advisers do not pay a price when their advice is ambitious.  (In fact advisers will be more in demand for trusts that are volatile than for ones achieving stability.)  Only the scheme members have a motivation for prudence, and the MNDs who might reflect that do not have the facilities to research the best predictions.

Under-estimating cost cannot continue forever - a deficit will eventually show up in the calculations.  The deficit has reached around £1B a couple of times.  There is room to view this as both error of prediction and also as a real increase in cost.  IBM Corporation sees it as predominantly the latter.  Although the promise has not changed - to provide a pension for life proportionate to final salary - the appearance of that promise on the Corporation's accounts may well be different from the appearance expected when the promise was made and the pension earned.  The Corporation sees that as somehow unfair to it, and something to be countered as far as possible by scheme degradation.

Misleading Presentations. 

There is a big difference between what the company (and the trust)  say and what they can be forced to do to match what they say.  Regulations and the Trust Deeds are legal documents and can in principle be enforced (although lawyers will still find room to dispute the interpretation of the documents).   What is written to "rally the troops" or enhance a public relations image is not as legally important.   There is still some obligation on the company,  but it falls in the murky areas of "bad faith", "failure to maintain trust & confidence", and "constructive dismissal".

There have been words widely misleading or misunderstood.  When introducing the M-Plan, IBM wrote about it: "The Board of Trustees will administer this fund alongside the existing defined benefit plans".  Many readers saw the phrase "this fund" as confirming that the M-Plan was to be separately funded.  So when it eventually emerged that the M-Plan was to be funded by using about £100M that the company and members had contributed to the final salary plans it was widely seen as wrong to use the final salary members' contributions for a purpose that could not benefit any final salary member.  

Also around this time,  IBM UK wrote "we aim to compete favourably with the practice of other leading companies" over pensions in payment.  Many people took that to mean what it said but it eventually emerged that adjustment for inflation was being determined by Corporate Directive.  A fixed algorithm was used and the aim of the algorithm led to IBM being one of worst in the country for inflation protection.

In 2004 the increased cost of the C-Plan to employees was accompanied by assurances this was a long term solution.  While 2006 proved otherwise, 2006 also had assurances.  IBM told employees  that what was being introduced "Meets Trustee's long term stability and funding objectives".  Of course, long-term is not forever, but the timescales in the pensions world are long.   The "guarantee" of Corporate funds for the scheme then extended to 2014.  The inference that the scheme would survive unaltered while funds were guaranteed was not denied at the time.  

The MPs noted widely divergent statements from Brendan Riley to different audiences, on the recent performance of IBM UK.

The Trustees statement about the next valuation may prove to be another example  (See Newsletter 38 - 2 April 2009).  We have not had a valuation since the one for 2006.  We were told there would be an early valuation if "there is a significant fall in the value of the assets, or  other change in market conditions which could have a significant adverse impact upon the financial position of the Plan".  We have seen the worst financial crisis in our lifetimes coupled with the most drastic and dubious plan changes that could be made.  Will that prove significant enough?  Or is the Trustee determined on saying one thing and doing another?

Secrecy

Secrecy and accountability are opposites - what scheme members do not know about they cannot complain about.  In our case, both company and trust have tended to tell the members little.  Information that there was a mechanism allowing company contributions to the money-purchase schemes to be paid for from final salary funds trickled out well after the mechanism was implemented.  The Trust's website has always been quick to point out that the trust deeds override what the website says, but it does not show those deeds or a plain language account of the deeds.  More than once, the Trust has issued a figure about a deficit without saying anything about the assumptions on longevity and return-on-investment which led to the figure.  (A practice which is about as helpful as giving the price of something without saying whether the price is in pounds or dollars.)

The 2009 "consultation" did not meet Parliament's intentions.  We now know that the pre-consultation account of the proposals was a facade - the company and trustee had already agreed those proposals were untenable, and had agreed some changes in the direction of making the proposals acceptable.  We know the scheme member representatives were denied historical data on IBM policies.  They were denied the opportunity to read what the "guarantee" actually says.  They were denied even discussion with the trustees, despite the common aim to promote the interests of scheme members.  They were not told when IBM engaged KPMG to design the exodus or what specification KPMG was given.

How could this happen?

It is reasonable to ask, given all the apparatus of Regulator, Pensions Ombudsman, The Pensions Advisory Service, Trusts, Member Nominated Directors,  Tribunals, and Pensions Acts, how the scheme members can be treated in such a derisory manner, yet nobody is held accountable.  The answer lies in motivation and money.

"How much does going to Court cost?" is a "How long is a piece of string?"-like question.  But one can assess the orders of magnitude.  Even to prepare a case might take six figure pounds and carrying it to conclusion seven figures.  This is particularly pertinent when we consider the difference between individual circumstances and circumstances that damage a large group.  When the circumstances are individual, for example an ill health retirement refused without proper consideration of the medical aspects, the cost of putting things right is trivial (in pension fund scales).  But for a group, the cost to the company of not doing what it wants to will be large.  Hence there is more motivation for the company to invest in legal action.  When the Pensions Ombudsman's Office handles a complaint that has implications for a group, they are aware of the likely prospect of being taken to the High Court if they decide for the complainant, but no such prospect if they decide against.

Although trustees have a duty to make the interests of scheme members paramount, there are many times as many people in the occupational pensions industry who do not have that duty - administrators, fund managers,  actuaries, legal advisers, insurers...   The motivations of these people will be varied, but will include the desire to remain commissioned for future work.  In conjunction with the employer's hire-fire-remunerate control of the majority of the trustees, one can see how the members' interests get compromised.

In this light, it is not so surprising that we have a lot of regulatory apparatus yet MP's look at IBM's behaviour and call for more regulation.

WHAT NOW?

Deficits

As we said in Newsletter 39 - 8 July 2009, the exodus will not alter the deficit shown by an actuarial valuation.  This is because the accounting for final salary pensions has two distinct components - pensions already earned and pension being earned.  The funding model for the latter is that the employer puts money into the fund each year to balance the extra pension earned that year. (Around 20% of the salary bill for C-Planners.)   Obviously, that component will be very different when no more years of service in the C-Plan are being accumulated.  But it is the former component  - "past service liability" - which an actuarial valuation shows.  The funding model for this component is a recovery plan - an agreement between employer and trustees for the employer to pay up, typically in equal payments for each of ten years.  (Such plans are not stable.  After at most three years there will be another valuation and a possible new recovery plan.)

On previous occasions, a big deficit has been the cue for major scheme degradation.  Under present regulations this cannot happen again - there is not enough left that can cut, even by stretching the law.  Nothing is certain, and a government could give up on the principle that pension earned must be delivered, but currently there is little threat of that.  Retirees will have been encouraged by the Minister having referred to this principle as "absolute".  (Pensions are not so secure in some other countries.)

Courts and Tribunals.

Many hopes are pinned on the Trustee obtaining a "declaratory judgement" to the effect that it is not permitted to implement the current proposals.  That prospect will not be lost as the result of the trustee lacking funds, although the case may be costly.  (Trustee actuarial and legal fees totaled £1.2M in 2008.  We can expect much higher in 2009 and 2010.)  The prospect could be lost for other reasons.   IBM Corporation thinking is an unknown, but US experience may be relevant.   When IBM made illegal changes to its pension scheme in the US, it responded to challenge by admitting to the least defensible part of what it did, and paying out $0.3B in compensation.  That left the major part of the changes as merely contentious.  After judges had disagreed, IBM "won" on that part of the case when the Supreme Court refused to consider an appeal to them.

The Trustees major 2009 point has been "the Trustee feels that the Company has not lived up to the Trustee’s expectations".  In other words, the Trustee might have been fooled in 2006.  Whether the Trust was fooled is the primary issue for the Trustee, not whether the scheme members were fooled, although the questions are to an extent coupled.

A judgement that implied the Trustee was fooled would not be entirely good for the Trustee since it would emphasise the concerns about how that came about.  Those concerns are in the complaint about 2006 which the Pensions Ombudsman is now investigating.

So there remains the possibility of there not being a clearcut judgement because of a compromise being made which avoids it.

There is a strong possibility of a "second front" being opened at an Employment Tribunal.  Success at a tribunal leads to financial compensation but it is not intended to restore the job and pension prospects to what they were before the events occurred.  Compensation will be limited - it might be the difference between salary and pension for the period that would have been entailed in doing a fair dismissal as opposed to an unfair dismissal.  The tribunal is only a possibility after actually leaving employment  (up to three months after leaving).  Some of the current exodus are likely to go to tribunal either because of the compensation or as a way of objecting to the "bullying" that MP's recognised.

It would scarcely be practical for all those interested to be involved in the decisions about the best firm of solicitors or the best way of containing the costs.  Nor would it make much sense for each person to use solely their local solicitor.  AMIPP understands that IPIG will bring co-ordination and information to the decision making, but not funding.   Ideally, the first decisions will clarify the opportunity - giving a sure cap on the cost of being involved, an outline of the case, and a guide to potential compensation - so that everybody can assess the proposition.  Although the Minister noted that age discrimination could be taken to a tribunal, the bare bones of the IBM victims' cases are expected to be that the job losses were planned and that to induce him/her to leave IBM reneged (as the MP's put it) on 2006 arrangements.

Will 2010 be the year when the squeals faded, or the year the Brits fought back?

NATIONAL

The BBC scheme is an example of making changes to retirement policy in a more fair way.

The Office of National Statistics has published more numbers on occupational pension schemes.

Personal Accounts, the forthcoming national DC scheme which AMIPP has covered in several newsletters, is now rebranded as National Employment Savings Trust (NEST).  For some reason, IBM thinks it is expert enough in pensions to be organising an alternative to NEST.

The Occupational Pensioners Alliance received a boost in its campaign for trust board chairmen to be independents when Roger Maynard eventually resigned from the British Airways board.

The Equality and Human Rights Commission has reported on the dissonance between employers (who want to replace older staff with younger) and government and the workforce (who want to work longer).

AMIPP, the Association of Members of IBM UK Pension Plans          www.amipp.org.uk