The Association of Members of
IBM UK Pension Plans (AMIPP)
|Actuarial Valuations on 2003 (This page created 5 March 2005)|
Regulations require that Actuarial Valuations on trust funds are prepared at three year intervals. They are not distributed to all members but can be obtained on request from the scheme administrators, possibly with a small charge for the reproduction cost. Within the three year gap, most funds will have annual actuarial reviews. These are not available to members but in the IBM case there may be commentary on the funding level in the annual Members' Report. There are separate actuarial valuations for the "IBM Pension Plan" and the "IBM IT Solutions Pension Scheme" (the I-Plan). Since the M-Plan assets are held by insurance companies like Legal and General they are not relevant and receive just a mention in the Valuation - "The M Plan assets and money purchase liabilities of the M-Plan have been excluded from this valuation except to the extent necessary to calculate the reserves required to meet the expected cost of providing death in service benefits".
Actuarial reports for our fund purport to reflect the financial prospects at year end but take most of the following year (or more) to prepare. AMIPP has commented on the Actuarial Valuation for 31st December 2000, which was dated 16 October 2001. The report on 2003 is dated 24 December 2004 and was first available to members early in 2005.
There is little point in comparing the 2003 Report which was prepared by Watson Wyatt with the 2000 Valuation which was prepared by Aon, since they are very different. The underlying method has changed from the "Attained Age Method" to the "Projected Unit Method". The asset values are taken as a snapshot, rather than smoothed over five years. The new "Guarantee" reduces the deficit by eliminating some reserves for "prudence". Regulation has changed the different sorts of valuations shown, most importantly by the addition of "Buy-out" valuations. If you want to understand all that then you will need a copy of the actuarial report together with help in understanding. Some help will be found on this website and there also a good document "Understanding your Actuary". However, it is easier just to accept that the "answers" in an actuarial report have a large element of actuary choice in them. (Newsletter 24 warned about placing too much reliance on what the actuary says and an official review of the actuarial profession has strongly criticised communication from actuaries to trustees and hence to members, which leads to misinforming by default.)
The "Buy-out" basis is the most meaningful calculation for members as it is intended to reflect a current real world amount - what it would cost to buy from an insurance company a pension equal to the pension you have earned. (The number in the Valuation has to be theoretical - the actuary doesn't actually go and ask for a quote to take over all our pensions. There isn't an insurer big enough to be willing to quote.)
The buy-out findings for December 2003 are that there would have been enough money to pay the costs of winding up and to buy from insurers the continued delivery of pensions in payment (but without any future increases). That would have left only 52% of the money needed to buy the delivery of the pensions that non-pensioners had earned. (Again without increases once in payment)
This is only a measure of the security of the scheme since it did not fail in 2003. However, in the scenario where it did, the employees would have been left with about half of what pension they had earned. Those within three years of retirement might have got something extra from the Financial Assistance Scheme.
The actuarial report addresses what the trustees and company have put in place to put matters right. They have instituted a ten-year recovery plan. Regrettably, the Report gives little information on what the target of the recovery plan is. While it does give a figure for that expected solvency, "expected to exceed 100%", it does not give the figures for the likely variations around that figure. It does give variations for December 2006. Those show a 3 in 4 predicted chance of the solvency being better than it was in December 2003.
Since we are not told the corresponding chances for 2014, we don't know what risk of the employees not getting their due is built into the recovery target.
Since it is now 2005, it is reasonable to ask what progress the recovery plan has made. If the trust continues with its historical policy of secrecy, we will never be told the deficit amount at December 2004. There is not a lot to be gained from guessing it, since it will be history when next we are told a deficit amount (early 2008?). However, a reasonable guess is possible. One can assume the 2003 parameters for such things as inflation will still be sound. One can assess how the funds assets will have grown from a knowledge of where the assets are held and how such assets produced returns over 2004. One can assess fund outgoings by extrapolating figures from the accounts. (We get the accounts annually). We are told about contributions. If one puts that together, the data suggests that 2004 will have been a good year, reducing the deficit to a degree that is "above the line" necessary for the 10 year target.
The Valuation has a fuller summary of the "Guarantee" (see Newsletter 24) that IBM World Trade provides to the Plan. It doesn't give the reasons that the Trustee sought a guarantee but World Trade is bigger than IBM UK and owns it. In the guarantee, World Trade formally agrees to underwrite the contributions required from IBM UK. It is debatable whether World Trade would have allowed IBM UK to default on its debts anyway, since that would have had a catastrophic impact on overall IBM affairs, but the formal agreement is a good thing.
The guarantee is not a guarantee that the scheme will be continued or that the 10 year solvency target will be met. It uses a different valuation basis - the "closed fund discontinuance basis" instead of the "buy-out basis". The former predicts lower liabilities. The latter is defined by regulation and the actuarial profession, the former is a choice made for our scheme's actuarial purposes. The difference is perhaps not important, given all the other uncertainties associated with a 10 year target.
Some odds and ends that may be of interest:
The chute of money from the final salary plans to the M-Plan was £25.5 million in 2001 and £24.8 million in 2002. It is not clear why this £50.3 million was not included in the explanation of how a £585 million surplus in 2000 became a £900 million deficit in 2003. (Maybe it was included, under an uninformative label)
At the moment, March 2005, employees have not been told what they will be earning in pension value during the financial year 2005/2006. The Report provides a hint that it is likely to be a few percent less than was earned by a year of service 2004/2005. This is because increases represent a big part of the value of a pension and the government has allowed companies to degrade the algorithm for increases earned on current service. The Report assumes the company will take advantage of this to degrade our scheme. The hint is reinforced by the statement "Under the Pensions Act 2004, pension accrued after 5 April 2005 must be increased in payment in line with growth in RPI subject to a maximum of 2.5% in any year". More informatively, that should be "Under the Pensions Act 2004, pension accrued after 5 April 2005 must be increased in payment at least in line with growth in RPI subject to a maximum of 2.5% in any year". (The deeds say that all increases are discretionary, although they must meet regulated minimums.)
The Valuation may also be hinting at a change of investment policy, not yet disclosed to members, when it says "Allowance has been made for a 10% move out of equities into bonds in the period up to 31 December 2006". There are more details of asset allocation and plans in the Report.
There is a hint of increased "Burn and Churn" for employees: "The assumed rates of withdrawal from service are higher than those used for the 2000 valuation, reflecting [experience] and the Principal Employer's expectation of future turnover."
The Valuation says "Rule 1 of Schedule C of the 1997 Rules of the Defined Benefit Section states that each employer shall pay such contributions as the Principal Employer, having considered the advice of the Actuary, decides..."
What Rule 1 actually says is "Each employer shall (subject to its rights under Rule 4 of this Schedule) pay into the Fund:- (a) contributions at the rate specified in any schedule of contributions prepared at the direction of the Trustees in accordance with the provision of the 1995 Act; and (b) such other contributions into the Fund as the Principal Employer, having considered the advice of the Actuary, decides."
Whether those two quotes say the same thing is a matter of interpretation but the former quote clearly puts the blame for the underfunding that produced the £900M deficit on the company rather than the trustees.
The membership data in the Valuation is less informative than Aon gave. The average pension is given (£14,000 p.a.) but that is an average over widely disparate numbers. Not giving the average for smaller groups suppresses, for example, the information that the pensions for females average about half of the pensions for males.
There is a paragraph in the Report which suggests you should not use the content of the Report in your financial decisions without taking professional advice. For you individually this could well be good advice but AMIPP does not think it is intended to say that you must go to the expense of taking professional advice before taking account of the facts in the Report. The same paragraph suggests you should not disclose the content of the Report without obtaining particular permission. AMIPP does not think this means you must obtain permission before discussing it with, for example, your financial adviser.
|Back to: Documents Contents|