Dec 7, 2011

This newsletter is regrettably negative - much of it is about what has not been done.

The hearing of the main IBM High Court case has been delayed until February 2013.  That will make it seven years since employees were forced to a major decision about C-Plan membership, for which some feel they were given false information, and four years since the announcement that earning C-Plan pension was to be abolished.

The "main High Court case" referred to above is what the Trustee refers to as the "Bad Faith" case.  Since this Newsletter was first released it has been announced that the rectification claim, a different case, will be heard in 2012.  (We think this is the meaning of the announcement.  It is somewhat unclear because the Trustee refers to the "C-Plan" case, when both cases involve the C-Plan.)  The distinction between the cases was covered in Newsletter 45.

We have not heard a date for any of the tribunal cases.  The John Perry case has been delayed into 2012.

It is a matter of opinion how far this represents "Justice delayed is justice denied".  There is little doubt that delay is in IBM's interest.   Time allows adrenaline and outrage to subside, and favours focus on technicalities rather than on what behaviour is acceptable.  Meanwhile the de facto pension scheme is what IBM wanted and the cost cutting has reached the IBM accounts in time to embellish the position as Sam Palmisano reaches the end of his term.  For the Trustee, a longer time means a greater turnover of trustees, weakening their individual responsibility for the damage done to people's lives.  Further time solidifying the scheme as IBM wants it will constrain what the trustee might be asked to do by the eventual judge, in correcting the 2009 decisions. Further time means further work for lawyers.  The disadvantages of delay fall almost entirely on the scheme members.

The suggested reason for delay is slowness in disclosure of information by IBM.  However, the High Court judges who have been managing the preparation of the case have powers to order disclosures, and IBM could be punished for willfully frustrating disclosure, so the pace is not entirely for IBM to decide.  Questions can be raised about the level of commitment in pursuing the case.  In particular, would the Trustee claim of "neutrality" be better described as passivity, or even as endorsement of IBM's arrangements?  (In 2006 the employees were told that the deal they were being offered met the Trustee's "long term stability and funding objectives".  Does anybody believe the 2009 happenings to be compatible with that?)

When there are rioters with placards we expect the police to quell the rioters, irrespective of any sympathy the police may have with the messages on the placards.   It is their job.   When a company behaves badly in dealings with its pension scheme we might expect the Trustee to act positively on behalf of the members, irrespective of any sympathy with the profit motive of the company.  Our Trustee had an opportunity to take a position on the Company's behaviour.  They might have taken the position that the behaviour was incompatible with previous agreements and they would seek an injunction if IBM tried to impose it without a Court decision.   (The Trustee did say it would not agree to Deed changes until a Court had reached an opinion but it did not stick to that).  Instead we find the Trustee washing its hands of responsibility for protecting the members, and preferring distant after-the-fact possible remedies.   (The equivalent of the police deciding not to act because they could not be certain how the Courts would eventually deal with alleged rioters!)

For those who take a lofty view of these affairs, the key question is whether society has adequate checks to curb the activities of bad corporations.   A highly distinguished group of experts has recently studied this, in the area of tax avoidance.  The report has a good exposition of the difficulties in judging a corporation's behaviour - where is the boundary between "egregious, or very aggressive, tax avoidance schemes"  and "the large centre ground of responsible tax planning"?  The report has perspective on how those who pay for technical advice influence that advice: "It put tax professionals, whether advisers or company tax managers, in the invidious position of having to decide whether they should try to reduce the tax bill by using such [abusive] schemes, given that on the present law the schemes would almost certainly produce that result, even though they personally regarded the schemes with distaste. The obvious dilemma lies in the fact that their competitors might set aside such scruples and gain a commercial advantage by recommending or adopting the scheme".  The conclusion of the report was that a profound change in the tax law was needed, "a general anti-abuse rule".   There are parallels in curbing corporate bad behaviour towards pension scheme members.  Currently the control is through Trust Law.  Trust Law was developed over centuries when the interests of the benefactor and the beneficiary were aligned - the laird wanted to provide for his faithful retainer, or the parent for an under-age child, etc.  There are good grounds for saying that Trust Law cannot reasonably be stretched to cover pension dealings, where the corporation and scheme member interests are opposed - the corporation views the scheme member as a cost; there is no benefactor.  

One can elaborate how the symptoms of faulty law are paralleled across tax evasion, professional advice, unfulfilled pension deals and stealth redundancy.  (Our Trust's expenditure on "Legal and other professional fees" has risen steeply - £150K in 1990, £1600K in 2010. ).   But those parallels are academic - the realpolitik is that the Treasury sees tax law changes as good.  So we will see that change, but not even a study of the pension law position.

How IBM UK sees the merits of delays can be judged by their approach to internal complaints - the forum mentions one lasting 13 months.

MED ELECTIONS

There will be MED elections in 2012.  Involvement as voter or candidate in these elections has always been more symbolic than effective - an expression of desire to be influential on behalf of scheme members rather than an expectation of influence.  It is impossible to assess MEDs individually or collectively on their records since they are directors of IBM UK Pensions Trust Ltd and the directors as a board influence secrecy.  However, outcomes are not secret.  Since the last election we have seen the Trustee refuse a request for talks from the Pension Consultation Committee (PCC), when both  PCC and trustees were considering the surprise 2009 IBM proposals.  It is hard to see how any MED could have considered that to be in the members' interests.  The Trustee has been willing to acknowledge the "bad faith" claims against IBM but unwilling to use the power to prevent deeds changes prior to Court consideration.  The Trustee adopted a "Statement of Funding Principles" that called for an actuarial valuation when "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", and then decided that the credit crisis of 2007-2008 was not significant enough to justify a December 2008 valuation.  The outcome was a year's delay before there was any regulatory pressure on IBM to do anything about a fund deficit which ballooned to the £1B area.  It is hard to see how any MED could have voted for that.

The trend away from final salary schemes towards money purchase schemes reduces the importance of all trustees, including MEDs, because money purchase involves fewer decisions.   (Oversimplifying a bit, the trustees just have to ensure that money is collected according to the payroll and forwarded in bulk to the insurance companies that the members have chosen.)

Although you may feel MED elections have proved to be an irrelevance, it is worth repeating a couple of points AMIPP has made before.  The inferior status given to deferred members, who can neither stand nor vote, is at odds with the long term interest in the scheme that deferreds have.  Retired MEDs are intrinsically better placed than employee MEDs, not because of their personal qualities but because they have more time to devote and do not have to balance what they do as MEDs with concern about how IBM's assessment of them could affect their careers. 

NATIONAL ASPECTS, RPI/CPI

In Newsletter 47 we told you about the High Court challenge to CPI use and said "It will be a surprise if that succeeds - the unions are unlikely to find the judge taking the politically sensitive position that a minister made an unreasonable choice, however unreasonable the choice is shown to be by analysis".   There was no surprise - the judgement shows only one of the three judges thought the Minister had done anything illegal.  However, all the judges were clear that Steve Webb's decision was motivated by cost cutting.  This contradicts what he said in discussions and to Parliament - that the motivation was the superiority of CPI as a measurement.  (For us it adds to the frustration that he would not engage on the question of how a gift of £175M from IBM UK scheme members to IBM Corporation shareholders could be regarded as a UK economic gain.  The £175M figure is from our fund's valuation.)

Since the last newsletter the government has improved on its proposals for public sector pensions.  It has also extended the depressing of public sector salaries, thus reducing pensions.  This illustrates the difficulty of dealing with an employer when there is no alternative employer.

The date for the introduction of an increased age for receiving a state pension has been made nearer, to be age 67 by 2026.  How much this will save the Treasury depends on what the cost will be in supporting those too young for a state pension and too old to hold a job.

The schedule for the mandatory participation of more employers in the NEST scheme has been slowed.  NEST has already been criticised as having contributions that are too low for an adequate pension.  The new schedule risks adding "too late" to "too little".  There is a cycle here that is moving in the wrong direction.   Employees will opt-out of NEST if they regard the management costs on their savings as excessive.   The postulated low management cost for NEST depends on economies of scale.  Large aggregate savings in NEST depend on mandatory employer participation plus limited employee opt-out.

For its economic predictions, the Office for Budget Responsibility will be assuming that CPI will be 1.4% p.a. less than RPI inflation.  AMIPP used a 0.5% gap in its Newsletter 46 assessments.  Our Trust's actuarial valuation uses 0.75%.   (The latter two roughly correspond with the history of the gap.)  At first sight one might say that the predictions do not matter, what matters is what actually happens to CPI.  However, there are risks for scheme members in the government prediction:

(a) The government has found that it can manipulate increases, even for private sector pensions earned years ago.  It may have acquired a taste for this, and use divergence from its own predictions as a cause for again adjusting the measurement methods.

(b) Trustees may be tempted to follow the government lead in this creative bookkeeping.  Adjusting assumptions about RPI and CPI is a fruitful way for them to obscure the real deficits in their schemes. 

Your National Insurance Contributions are/were intended in part to pay state pensions.  This principle is not lost in the plans for more integration of NIC and income tax.

INTERNATIONAL

Here is a quote from a US website:

Throughout the IBM Pension heist, Ellen E. Schultz, a Pulitzer Prize winning investigative reporter with the Wall Street Journal, exposed IBM's and other companies shenanigans that have cost retirees millions and millions of dollars, while enriching corporate executives.

Ms. Schultz has just published a book that every IBMer should read: Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers.