Scheme Members will have received recently (April 2011) a letter from the Pensions Trust reconciling the 2006 Actuarial Valuation (produced in 2007 as a snapshot of our fund's position on December 31st 2006) with the 2009 Actuarial Valuation (a snapshot of December 31st 2009 produced in March 2011).

There has not been a letter like this for previous Valuations.  Insofar as the letter represents a broader attempt to communicate with Members it is a welcome trend.  On the other hand, the presentation in the letter disguises some questionable Trustee decisions.

Readers who are not familiar with the purposes and content of a valuation, or not familiar with longevity statistics, might benefit from reading AMIPP's commentary on the 2006 Valuation.  (There are also comments on the 2003 and 2000 valuations).  The valuation for the I-Plan is separate and not discussed here.

The letter notes that this valuation was completed right up against a regulatory deadline.  It is often the case with schedules that finishing late is a consequence of starting late.  The policy communicated to members about interim valuations has been that 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".  In mid 2009 the banking crisis was a known factor and IBM had announced its forced retirement and scheme closure plans.  The Trustee could have started a valuation of December 31st 2008.  The regulatory deadline would then have been March 2010.  The Trustee decided the significance of the situation did not justify a 2008 valuation.  One year of the delay in telling members the effect of the events (and getting a recovery plan started) has been by Trustee choice.

The letter acknowledges that the assumptions used for 2006 proved unduly optimistic in practice.  The multi-year assumption for investment returns was 7.3% p.a, a real rate of return of 4.4% given the inflation assumption then of 2.9%.  A guess that proves wrong is not necessarily a bad guess, but the high level of this assumption adds weight to the suggestion that the infamous Guarantee allowed IBM to impose "best estimate" assumptions as opposed to the "prudent" assumptions used by most trusts.  (The text of the Guarantee has been kept secret from members).  The terms of the Guarantee were a Trustee choice.

The new policy, to invest more conservatively, will lessen the concern of members about the zigzags of the financial markets.  It should be a security gain for members, although you might expect that to be offset by an even more aggressive approach by IBM to reducing its pensions costs.

Those of you who read the actual Valuation should be wary of the elusive distribution of information.  The "Return on investments" is specified as "See below" but the table below is of discount rates.  Many pages away it is said that the investment return is equal to the discount rate plus 0.5% pa.  No explanation of the 0.5% is provided.  Previous Actuarial Valuations have not made a significant distinction between return on investment and discount rate - "The discount rate is the expected return, net of investment management expenses,...".   

The letter refers to "discretionary pension increases beyond those guaranteed out to 2020".  This is strange wording since until 2020 there are no discretionary increases - the benefit increases are specified by the deeds.  However, the letter formalises the intent of no increases after 2020.   The prospect of increases was always a mirage, to gloss the Guarantee.  In Newsletter 38 (before the 2009 degrading of actives' benefits) AMIPP noted "Logic says that zero increases on pre-1997 service, after 2020, is the trust board's best estimate. "

In respect of CPI the letter says "The Trustee asked IBM if it was willing to keep RPI as the index measure but IBM declined and the Trustee was obliged to move to the CPI basis".  This is different from the explanation pension services has given individuals before.  Before, they have said that IBM was asked if it wanted a change to the deeds.  This new account seems to acknowledge that no change to the deeds was required to retain RPI.  What is still missing is the reasoning why the Trustee felt it was obliged to move to the CPI basis.  There are those who think the obligation was the opposite - that the words of the deeds, in conjunction with 25 years of practice and statements, created an obligation to continue with RPI.  The regulations do not force a change from RPI.  The Trustee has chosen to go along with the movement of £175m from your future benefits to the IBM shareholders. 

While on the subject of CPI, there are a couple of predictions in the valuation that may raise eyebrows.  The anticipated difference between RPI and CPI is 0.75% p.a.  (3.0 - 2.25)  This is on the high side of predictions in the press and if it eventuates the damage will be higher than AMIPP calculated in Newsletter 46. (Which used a 0.5% difference).  The Valuation also predicts that the fluctuations of RPI will result in an average of 2.2% for RPI capped at 2.5%.  It will require RPI to be below 2.5% for some years in order to achieve this average.  (RPI is currently 5.3%). 

The letter says that "IBM in the UK, with the support of the IBM Corporation, is expected to be able to meet its pensions obligations".  This is hardly a surprise in the light of the Corporation's record profits.  Is the paragraph meant to suggest that the Trustee was once advised that IBM in the UK, with the support of the IBM Corporation, was expected to be unable to meet its pensions obligations?  If so, why were members not told?  If not, what did the Trustee gain from the Guarantee to outweigh the independence that it lost?

A recovery plan that extends for ten years is common, although only the first years are meaningful because recovery plans get reset whenever there is a new Actuarial Valuation.

Overall, the tone of the Valuation is to take more seriously the prospect of cutting the C-Plan free from IBM, either by building up sufficient funds to run it that way or by buying our pensions from a pensions provider (who would be regulated by the Financial Services Authority and have large reserves).  The official absence of the potential discretionary increases means that the Trustee is no longer in the position of the donkey following the dangled carrot which is attached to its harness, and can more easily adopt policies expensive for IBM.