Newsletter No 49
June 15, 2012
This newsletter is about the public progress of some legal cases, long term tensions arising from our fund's deficit, the MND elections, and some information for those who are saving to buy an annuity.
IBM LEGAL CASES
The "rectification" case, about how far the deeds should be corrected to reflect real intentions from around 1983, has been heard. It is likely to be months before the outcome is published.
We are not expecting to hear any more of the John Perry case. The contrast between John's earlier communications and the later silence is sufficient evidence that John has accepted a settlement, and the settlement has a confidentiality clause that precludes him from commenting on whether there is a settlement and its amount.
The "Bad Faith" case will not be heard until 2013. The tribunal cases are "stayed" , i.e. stalled, pending the outcome of that.
NON-IBM LEGAL CASES
The appeal against the original decision on RPI/CPI was turned down, as our newsletter 47 anticipated. Points to note going forward are:
a) Although we may see this as the UK government defaulting , the judges avoided conflict with Section 67, the statutory clause which says that every already-earned right to pension must lead to the pension being delivered. They avoided the conflict by deciding the Minister had always had the power to do what he did, so you never had a right to more, however solidly you were told you were earning RPI increases when you were earning them. As newsletter 46 said "The supporters of scheme members have held their citadel, Section 67, but will suffer losses on parts of individual schemes".
b) The credibility of the Minister, Steve Webb, has been damaged. He had told Parliament and the pensioner representatives who got to talk to him that the change was motivated by the merits of the CPI index. The evidence showed it was motivated from the outset by the desire to make existing pensions cheaper to deliver. Steve Webb's unwillingness to engage on the financial side of the decision prevented discussion of how gifting £175M from IBM UK pensioners to IBM shareholders would affect the UK's economic interest.
c) The erratic consequences for the private sector are still being played out, as thousands of trustees consider their deeds word by word. The legislation set a minimum on pension increases but not a maximum. That is illustrated by Ford Jaguar, where the union has negotiated RPI even though only CPI was legally required. Our trustee was able to degrade from RPI to CPI, where it did, because the deeds referred to an Index of Retail Prices rather than to the Retail Prices Index by name.
.THE BBC CASE
The BBC case may be worth extra attention because of the similarities in behaviour of the BBC and IBM. Here is a summary of the context and the judge's verdict. Interpretation of the verdict is your choice, but here is one view.
Civilisation is based on individuals giving up some of their power to do what they want, in exchange for what they expect to get from institutions. It is thousands of years since every person fought for what they could get on a day-by-day basis. This trade-off of autonomy for expectation underlies employer-employee relations and gives both sides obligations. The employer acquires a duty to maintain trust and confidence. You won't find these words in any statute, but the idea is established in our common law. Justice Warren endorses it in paragraph 36.
It would be nice if that was the end of the story - establish there was a massive loss of trust (as with IBM) and employer fault is established. But it is not that simple. The contradictory force comes from the idea that an employee who signs up to a deal must reset their expectations to the deal. Justice Warren refers to SWT. That is South West Trains, The short version is that if the employee signs up, he or she loses protection, including the protection of what the deeds said relevant to the deal. Via this aspect, a slew of other considerations come into play; the questions change from whether there was loss of trust to why.
Mr Bradbury, the BBC employee, objected to a proposed deal, and went to the Pensions Ombudsman. The Ombudsman turned his complaint down. In a corresponding IBM complaint (determination, commentary) the complainant had to give up at this point. Mr Bradbury had union support and was able to appeal the Ombudsman's decision. Justice Warren says the BBC does not have the powers it thought it had and he does not support the Ombudsman's reasoning either.
This should not be read as Mr Bradbury "winning" because Justice Warren did not decide what should be done - he asked the parties to consider that and get back to him. The difficulty is clear - if Mr Bradbury gets any gain from his efforts, what is the position of those who were in a similar position but allowed themselves to be persuaded/coerced into the deal? It remains the simplest solution, for all the organisations involved, for Mr Bradbury to ultimately lose.
FWIW, Justice Warren is the man who decided that Pringles are not potato crisps for taxation purposes, was the judge for the IBM "rectification" case and may well be the judge for the "bad faith" case. His decision on Pringles was overturned on appeal.
SOLVENCY II AND COMITY.
Those who are concerned about the possible impact of IBM greed and incompetence on their pensions many years ahead could be interested in how current activities are shaping what the balance of power between company and regulation will be by then. In Europe the issue is Solvency II and in the US it is a Supreme Court case instigated by the UK Pensions Regulator. Figures copied below show that three-quarters of European pension funds by value are in the UK or the Netherlands. (Other countries work on insurance principles.) The Netherlands is more strongly regulated than the UK so underfunding is a big problem only for the UK. Solvency II is work-in-progress to make regulations more uniform across the Union, particularly to make sure funds have enough in them to be like the reserves that insurance companies are required to hold. Actuaries who are closely involved suggest that current proposals mean that instead of the "ongoing" calculation of need being used, the figure would be more like the "buy-out" calculation. (As an indication, those figures from our 2009 valuation are £5.4B and £7.5B. Those are big numbers but all is relative. The Office of National Statistics has added up the 2010 UK obligations from all public and private arrangements and arrived at £7.1 trillion.)
Naturally, much of the UK has been quick to condemn the proposals as a plot against UK companies. However, the compromise eventually reached could well be good for scheme members. As with Human Rights, the EU policies tend to favour the individual. It was a European Court of Justice decision that pensions should be treated as deferred pay.
The pension delivery last resort in the UK, the Pensions Protection Fund (PPF), delivers most of an individual's pension if the employer is able to abandon the scheme. It is being seriously suggested that if this "most" was upgraded to "all" then the EU could accept UK companies operating with lower funds.
"Comity" is the term used for nations respecting each others laws. The PPF has been successful in UK courts in establishing priority claims against employer's residual assets when schemes have had to be taken over by the PPF. Relevant claims failed in the US courts. That is being appealed to the US Supreme Court. The eventual Supreme Court decision will have no immediate impact for IBM UK scheme members because they have the "guarantee" until 2017 - an agreement written in US law that if IBM UK does not pay its debts to the pension scheme then IBM Corporation will. After the guarantee runs out, we will presumably be on the same basis as other UK schemes which ultimately have a US based owner.
The news for savers continues to be bad - "UK pension performance among worst in developed world".
There is a tendency for companies which sell annuities to produce quotes which overestimate the amounts a scheme might deliver by making favourable assumptions. The counterbalance to that is provided by regulation - the Financial Services Authority and the Financial Reporting Council. (In principle the Pensions Regulator does the same moderation for trustees and employers but the Pensions Regulator's requirements are much more woolly.)
Savers who want to understand deeply the illustrations in quotes from pension providers should read the latest FSA & FRC specification proposals. Here are a couple of snippets of general interest. When savers retire and convert their savings into an annuity, they have some 200 pension providers from which to choose. Limitations on what providers may trade-off mean that single female annuity rates are rising some 17% and single male annuity rates falling by 17%. Some providers have not yet adapted their mechanisms to incorporate this change.
MEMBER NOMINATED DIRECTORS
The results of the election, operative for another four years, are known. There were no AMIPP endorsed candidates. IPIG was partially successful with its candidates. The participation rates have not been published. One might deduce that is because many who were eligible to vote chose not to. Experience of previous elections has been that interest, measured in terms of candidate numbers or voter numbers, has been on a downward trend.
Not publishing the participation this time may be analogous to IBM's response to criticism about how many jobs were being "off-shored" - IBM stopped giving the figures for number of employees by country.
The downward trend may be the result of a realisation that the original intent of MNDs, to "give scheme members more influence in the running of their schemes", has been frustrated by the system. The AMIPP forum topic "MNDs'/MEDs' Experiences" is relevant.
The "purge" of trustees included the chairman. Bob Bridges has been appointed chairman. It is regarded as best quality governance if the chairman of a board is an independent. IBM has said it intends our board to have "industry best practice.” However, Bob Bridges is listed in the purge and there is no information about the chairman when he leaves.
ANOTHER ACTION GROUP
The Visteon action group have made progress by getting an all-party committee of MPs involved, and obtained publicity from a demonstration.
IBM US IMAGE
Here is a link, and another, reflecting a current tendency in the reporting about IBM US.
FROM THE HOME PAGE
The remainder of the material in this newsletter first appeared on the AMIPP home page, in the period since the last newsletter, so you may have already read it.
The UK and the Netherlands tend to use pension schemes with a fund, as opposed to accounts for individuals, much more than other EU countries:
Total investment in pension funds 2006
% of EU total
Source: Association of Pension Lawyers
The regulations in the Netherlands are stronger than in the UK. Funds there are expected to target a fund that is at least 105% of the amount guessed to be necessary to pay out the pensions as they become due. If schemes fall behind this situation they have three years to put it right. In the UK the target is 100% and the Regulator is uninterested until the plan to correct under-funding stretches over more than ten years. (And since the company debt to the fund is recalculated after each three year period, the ten year plans are rolling ten year plans.)
The stronger regulation will have contributed to the IBM fund in the Netherlands being in better shape than the IBM UK fund. Its coverage ratio is 121%. At the last valuation, IBM UK was at 87%. It is arguable that this makes little difference to the scheme members' security, since IBM is unlikely to default in either country, but in terms of how the scheme members' will feel it is significant. 11/3/2012
The E-petition calling for a debate on the switch from RPI to CPI received over 107,000 signatures. John McDonnell MP for Hayes and Harlington, put the case for a debate to the House of Common Back Bench Business Committee and has secured a debate on Thursday 1st March. The debate has only just been scheduled - it gives you a short window of opportunity to persuade your MP to attend.
Here is a link to a minor legal decision about IBM UK pensions. You can read it yourself to assess what it says; here is one possible interpretation. As well as the hundreds of cases to be decided by tribunal, there are two cases in the High Court. Those cases have scheme member representation, as explained in previous AMIPP newsletters. Our representatives do not directly prosecute or defend the cases - that is a job for professionals. Representatives do have insider information, hear all the evidence, and can influence proceedings through their legal support.
The two cases were originally planned to be together, so the representatives for both cases would have heard the same evidence at the same time. When the cases were put on different schedules, Armonk became concerned at the prospect of their executives being cross-examined twice, the second time in the light of the first time answers. Armonk also saw an opportunity for divide-and-conquer over the member representatives.
To bring the matter to Court, IBM posed the question as about the costs in the legal support for the Representative in the earlier case. (Although those costs would anyway be small in comparison with the overall millions in costs.) IBM suggested capping the costs to an extent that would have kept the senior legal people away from the Representative's involvement.
The judge ruled against IBM on its major proposition but he did make some remarks limiting how far the Representative(s) on one case could get involved in the activity of the other case and limiting the circumstances where the Representative could get the maximum legal support. (Technically George Metcalfe was not a Member Representative but the judge saw him as fulfilling the role.)
Getting the judge to commit such remarks may have been the height of IBM's ambitions when it started the skirmish. 17/2/2012
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