Newsletter No 43

 

 

 

March 31st 2010        

 

 

As well as updates about litigation, this newsletter covers the relation between your vote and pensions prospects.  You may think "political junk on my doormat and now through my inbox" but if there is ever a good time to take a view of party pension policies it is now.

 

PARTY POLICY AND PENSIONS FUTURES

 

Most of us do not live in marginal constituencies so our vote will not influence the composition of the Commons.  However, people vote for various other reasons - as an expression of support for democracy, as an expression of support for a particular issue, as encouragement for those making a long term drive for change, as reward for services from their M.P., and so on.  Pensions policy does not come high on the list of factors that people provide to pollsters as their rationale for the way they vote, but it may have a little bit more influence this year because occupational pensions have had more publicity in recent years.  (Strikes and litigation about the closure of schemes, civil service pensions attacked as too generous, the increasing role of the Pension Protection Fund, widespread degrading of schemes, the prospect of the giant National Employment Savings Trust (NEST), business mergers jeopardised by deficits....)

 

Here is a list of links for those who want more information than the summary in this newsletter.  Steve Webb has been the LibDem pensions expert for many years.  Theresa May is shadow Work and Pensions minister.  Robin Ellison aims to get elected on a dominantly single issue pensions platform.  Ros Altmann is a well-known controversial commentator on occupational pensions.  Government activity has been covered in previous newsletters and government consultations give an indication of intentions.  There are bits about pension on the Conservative website. There is a good set of statistics about pensions here.

 

In general, the acknowledged understanding of the challenges far outweighs the offered differences of solution.

 

Demographic trends will increase the ratio of retired people to employed people.   The state pension is paid out of day by day government funds - the inflow of taxes and borrowing.  A natural result of the demographic trend would lower state pensions but all parties agree on the need to strengthen the state pension.  Making annual increases match the increase in average earnings rather than the increase in prices has the prospect of strengthening the state pension, and is agreed upon, but the state pension has fallen so low that even with expected strengthening there will still need to be extensive means tested benefits to avoid abject poverty for many.  People living longer has to be balanced by working longer.

 

It is a given that as the "inter-generational transfer" - taxing the worker of the time to pay the state pensions of the time - fails,  there will need to be more saving by the individual for the benefit of that individual.  Most ex-IBMers (and all IBMers become ex-IBMers one day) will have an occupational pension large enough to make state pension prospects less of a concern and means tested benefits even less of a concern . But in the wider picture there are currently millions without an occupational pension, and NEST (a national but weaker equivalent of the M-Plan ) is intended primarily for them.  However, NEST is undermined by poverty and means-testing.  The really poor would do better to pay off their immediate debts, but who is to advise them they should opt-out of NEST?  (The parameters of NEST are that the employee contributes 4% of salary, the employer contributes 3% (less until 2017), and tax relief contributes 1%.  The charges are 2% of the money as it is contributed and then 0.3% of the value of the pot annually.  Is that an attractive investment for those with modest incomes?) And even if NEST is an efficient way to save, that gain is lost to the individual if, when they come to take it as pension income, it means they lose other benefits.  While acknowledging these risks, the major parties agree on implementing NEST, with only differences about timing.

 

The parties all acknowledge the tension between employers (who tend to regard younger staff as better value than older staff) and the increases to the age at which the state pension is paid (which the parties all favour).  However, there are no solid proposals to prevent a category of poor who are too old to work and too young for the state pension.

 

Terminology differs in different countries but in the UK it has been usual to call the state pension the first tier of pensions provision.  The UK has an element of state pension that is related to the amount you earn, known as second tier. (Graduated Pension became SERPS became State Second Pension(S2P)).  The plan is for S2P to gradually become "flat-rate" rather than earnings related so it will then be sensible to regard it as part of the first tier.  Nowadays both occupational and private pensions are described as third tier but with the loss of S2P and the rise of NEST one might eventually regard occupational pensions as second tier.

 

Political differences have arisen over eligibility for the first tier pension.  The question is how much should be tied to the idea that this pension is a return on the investment of National Insurance Contributions and how much it should be a right to dignity for the elderly.  The government has moved away from the NIC consideration in order to help those (primarily women and particularly carers) who have worked fewer years and hence paid less NIC.  The LibDems moved all the way to espouse this tier as a right of residence, although their stance has since softened. See the Citizens Pension.  While the different political angles are profound for some categories of people they effect, they are not profound for overall provision.

 

It would be a profound change if tier one became a scheme with a fund, like a normal final salary scheme.  There are supporters for this because eventually it would be less of a drain on the exchequer than the pay-as-you-go arrangement.  The snag is in how to get from here to there - in the period when the fund was being built up the workforce would be paying to build the fund up as well as paying the elderly folks' pensions.   None of the major parties propose this.

 

Occupational pensions were once the star of pensions provision, but that has changed in various ways.  The trend in workplace practice has been for management to value loyalty less and value hire-and-fire flexibility more.  Employees identify with their employer less, change jobs more often, and place more value on immediate rewards relative to potential rewards.  The apparent low cost of provision turned out to be an illusion built on actuaries failing to recognise  longevity improvements and on coincidence with fluctuation in economic growth.  Faced with these realities, no party offers plans for a return to employers' heavy participation in covering the risks for their ex-employees.  The most proposed is the hope for some "swing of the pendulum" or some slowing of the employer disengagement through "deregulation".  

 

The party policies are short on specifics but one proposal merits comment.  This is "conditional indexation".   Indexation is what maintains the value of your pension in the face of inflation.  (At least partially in the case of IBM final salary pensions.)   Conditional indexation is the idea of planning to maintain the value but with a let out for employers if they are financially stressed when the time to pay out comes.  UK employees are not enthusiastic about conditional indexation because they see fuzziness in the rules for what will actually happen.  The government consulted with employers and did not find great enthusiasm.  There is enthusiasm amongst those who make their living in the pensions industry.  The cynical will say this is an effort at job protection.  Money purchase schemes are much simpler to run than final salary schemes.  (In our case, administration for the M-Plan just computes a fraction of the payroll and forwards it to a company like Legal & General to be invested.  For the C-Plan there is a lot more to do in the way of guessing the future and making detailed investments to match.)  More work to run schemes means more fees for professional advisers.  Anyway, a Conservative government would "look at" conditional indexation.

 

(The Netherlands has better final salary provision than the UK and some parts of it use conditional indexation without enormous conflict.  Perhaps that is because scheme members in the Netherlands have more faith in their employers and the regulations.  Schemes there must be 105% funded, as opposed to the underfunding here, and if schemes there do get out of shape they are given three years to put things right, as opposed to the ten (or even seventeen) that our regulator tolerates.)

 

There is a longstanding political difference between the Conservative party and others about whether money saved for a pension ever has to be converted into a pension (by buying an annuity).  Currently this has to be done by age 75.  The alternative reasonings go "The saving was tax-advantaged because it was for a pension, so it must be used for a pension" versus "What right has government to tell us what to do with our own savings?".   It is a near certainty that a Conservative government would remove the restriction.  This is important to those who want to take advantage, but that is not a lot of people and is likely to be less people in future.  It is not a lot of people because those taking advantage would have to have enough other income not to want the income from the annuity.  It is likely to be less people in future because there will be less incentive for high earners to make their savings in the form of a pensions pot.  The era of full income tax relief on pensions saving for the highest earners is already over.  No party has said they would undo Labour's actions and plans to reduce the tax advantages for the most affluent when saving (nominally) for a pension. 

 

To summarise the summary, it is hard to find reasons to vote for one party or another in the broad picture of pensions.  Only if you fall in some small niche where the parties have specific plans would you be able to draw a (tenuous) line between your vote and what you want to happen in the pensions arena.

 

There is another reason to doubt the credibility of party positions.  Some legislation is driven by public outrage, e.g. the Dangerous Dogs Act.  Some is driven by clear strong principle, e.g.  the Freedom of Information Act.  Some is the result of extensive parliamentary debate and consideration of alternatives, e.g. Reform of the Lords.  Most legislation is the result of lobbying and civil service planning.   Pensions fall in this last category - calculating the effects over decades of pension arrangements is not something that more than a few MPs would feel comfortable about, and they are not the ones shuffling in and out of ministerial positions in pensions every few months.  Effectively, deciding has been handed over to the process of reviews and consultations run by the Department of Work and Pensions.  You might think of distancing decisions from MPs as a good thing, but in this case there are disadvantages.  The influential reviews are those led by Pickering and by Turner.  We covered these in previous newsletters.  They were necessarily led by people with long involvement in pensions provision as a profession.  Consultations have been frequent but their obvious drawback is in who responds to the consultations.  There are one or two responding organisations that voice a scheme member perspective, e.g. Help the Aged and Age Concern, Which, and the Occupational Pensioners Alliance.  But these voices are heavily outnumbered by voices from the multiple branches of the pension provision professions.  Thus the DWP (and the Board of Actuarial Standards etc), working from consultation responses, produce the legislation that the profession wants, rather than what scheme members need.

 

There have been proposals which might raise the influence of scheme members.  Having half of the trustees elected by scheme members, rather than a third, has been Labour manifesto policy for two elections but it is not implemented - it will be hard to take it seriously if it appears again.  A better supported idea is to have a stable Pensions Commission.  It is widely accepted that taking the interest rate decisions for inflation management away from MPs and giving them to the Bank of England has been a success.  For the same reasons - the need for technically demanding understanding, long term consistency, and focus - there is support for a permanent Pensions Commission .  However, this is not a strong distinction between political parties; no party is strongly for or against it.

 

Fortunately, money provided by corporations does not play the same role in UK elections as it does in US elections.  As well as making massive donations to buy influence, often to both sides of politics, US corporations can fund campaigns against individuals.  The equivalent here would be IBM paying for media advertising that personally attacked Sandra Gidley, the MP who organised the Parliamentary debate in which IBM management was criticised by MPs from all parties.  Here in the UK, corporations tend to concentrate on influencing the decision makers in authority rather than the voting public.  These activities will be discreet and often not reprehensible.  In IBM's case we can point to efforts in opposition to the government's flagship NEST scheme.  Some years ago many were convinced that IBM's assistance to Labour in the form of polling software was not a genuinely commercial deal.

 

If you feel this newsletter does injustice to the political party you favour, you have the chance to say so by using our forum.

 

LITIGATION  

There are now three legal challenges to IBM in development.  There is one from the Pensions Trust. (Expected to cost a seven figure sum, paid out of the six billion trust fund.)  There is one by a large group of employees and recent ex-employees. (Costing a six figure sum, paid for by the "Big Blue Fighting Fund" organised by IBM Pensions Interest Group (IPIG).)  There is one by a group aiming to use Employment Tribunals.  (Costing collectively a five figure sum.)

Although all three are testing whether IBM's 2009 behaviour, taken with its behaviour in 2006 and before, formally amounts to bad faith or failure to maintain trust and confidence, they approach it from different directions.

The employees involved, and others who have contributed, can be proud of the organisation and purposefulness shown in reaching this stage.  Organising an expensive court case against a multi-national employer is not easy.  The number of employees seeking compensation for the same events, through the employment tribunals, is unprecedented.

But reaching the courts is not in itself a solution.  However abhorrent IBM's behaviour seems, it may not be illegal - apartheid was once legal.   Even the most expensive legal advice is often proved wrong - one can go to the courts and see two Queen's Counsel contradicting one another; the judge eventually decides that one (or both) of them are wrong.  The fuzziness in the law, the particular attitudes of the judge or tribunal chairman, and the relative skills of various legal teams all introduce uncertainty. 

PEOPLE CHANGES

Jonathan Ferrar, who was Human Resources Director, has been appointed to a post in Armonk and replaced in the UK by Jane Middleton. She comes from the legal team advising Human Resources in 2009.  If decades of practice is followed, the Human Resources Director will be also be appointed as a director of our pensions trust.  A possible explanation of putting an IBM lawyer in charge of Human Resource and on the Trust Board is that IBM expects continued formal opposition to its pension decisions and to the setting of employee rankings by pre-allocation rather than actual performance.  (Which can lead to "Managing Out" as an alternative to acknowledging redundancy.)   As our American friends might say, IBM Corporation is playing hardball with UK staff and our Trust Board.

To recap on people changes:  Larry Hirst, David Heath and Stephen Wilson were the UK executives behind the 2006 pensions deal.  David Heath and Stephen Wilson have resigned from IBM.  Larry Hirst, who is reported to have said more than once that if the 2006 deal did not last then "They can have my badge", is still an IBMer but not in the UK.  (And strangely silent about the 2009 changes).   Brendan Riley and Jonathan Ferrar were the front men for the 2009 proposals.  They are now promoted away from the UK.  The most relevant Corporate executives were Randy McDonald and Jesse Greene, both in 2006 and 2009.   Jesse Greene is also a director of our UK Pensions Trust.

FUNDING LEVEL

The trustee has issued the annual statutory statement.  Points of note are:

a) An Actuarial Valuation is very different from an update.  The assumptions for a valuation are the responsibility of the trustees and determine any recovery plan necessary.  The assumptions for an update are the responsibility of the actuary and do not need to be agreed with the company.  Because the calculations are so sensitive to the assumptions used, the updates are of little value when compared with a valuation.  The term "Valuation Report", (capital V, capital R as in the letter to plan members) is obsolete;  Actuarial Valuations are defined in regulation

b) There has been no actuarial valuation for December 2008.  You can now judge the answers to the questions in Newsletter 42 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 [since the last valuation in 2006] 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?  The statutory statement shows that events not only "could have" but did have "a significant adverse effect".

c) The most recent funding level statistic in the annual statement is an estimated deficit of 818m.  This matches what was reported in the Members' Report and Newsletter 41.  Newsletter 41 explains why such estimates are almost meaningless.

d) For IBM, large deficits are not in themselves a threat to pensions delivery, they merely reflect the trustee getting assumptions wrong about how cheap the scheme will be.  However, we have seen that in practice the large deficits have provoked Armonk to require drastic degradation of the relevant plans.  There is not enough left to cut for this to happen again on the same scale.

e) The regulations allow 15 months to agree and calculate a valuation.  If the trustee fully exploits that we will not have a valuation until 2Q2011 and it will be about YE2009.

OTHER

Other IBM UK job losses are expected beyond the exodus provoked by pension changes.  It is difficult to establish numbers - IBM regards secrecy as its best defence The dispute at Fujitsu has ended. - the change from DB to DC pension scheme is to be accompanied by a 5% pay increase.  British Airways is maintaining its final salary schemes through a 4.5% increase in employee contributions.

A LONG SHOT

 

We are still seeking the pension videos from either 1983 (Title unknown but may be 'C Plan announcements') or 1987 probably called 'You and Your Pension'. These are likely to be in u-matic format or may even be 1" tape. If anyone thinks they have a lead on this, please contact IPIG at info@ipig2009.org.uk

 

DEATHS

 

Some information about IBMers who have died is available on the web, but no comprehensive list is available to AMIPP.  That makes it inevitable that occasionally emails from AMIPP will be directed to the inbox of somebody deceased.  We are sorry when this happens.

 

 

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CONTACTS

 

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DISCLAIMER

 

As always, nothing on the AMIPP website is financial advice.  Also, AMIPP is not responsible for the content of websites that it links to.

 

 

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