IBM UK has announced changes in its pensions schemes.  In essence they follow the IBM global strategy "to move toward defined contribution retirement plans" , by degrading the final salary schemes and upgrading the money purchase scheme (for those final salary folk who transfer to it).  A change in policy about Pensions in Payment increases is associated.

Has IBM closed the Final Salary scheme for existing members?

BBC TV has speculated it would but technically it has not.  The stick and carrot approach will lead some employees to transfer to the Money Purchase scheme but only if they all do will accruals of service on the Final Salary schemes cease. 

Effects for Employees   

Around half of the employees are already in the money purchase scheme, the M-Plan.  There will be no effect for them, except perhaps disgruntlement when the gap between the pension benefits for different people doing the same job becomes numerically apparent.

Employees will have choices.  Some of these choices, such as leave the company, sue the company, retire earlier, exercise right to defer without resigning, are not likely to be adopted widely.  The choice will often reduce to staying in the degraded C-Plan/I-Plan/N-Plan or transferring to the M-Plan (on better terms than previous M-Planners).

As always, this website cannot give financial advice, and you should not act on anything here without checking it for yourself.  However, we can indicate some considerations that might be relevant.  AMIPP will aim to cover the financial calculations in comparing DC with DB as far as they emerge, but there will always be another consideration - how far do you trust IBM to sustain the latest proposals?  Many people thought the 2005 employee contribution hike and "Guarantee" heralded a period of stability.  Obviously they did not.  (Incidentally this website was not misleading about the prospects.)

Employees always could change from the final salary plan to the M-Plan, but didn't because it wasn't financially astute to do so.  Employees with more than 30 years of pensionable service will remain in that position (not being offered M-Plan enhancements).  Other final salary employees will be comparing earning final salary pension on only 2/3rds of their salary increases (because the other 1/3 is not pensionable) with what M-Plan enhanced company contributions are worth.

Nothing in the changes is retrospective.  So what you earned in the final salary plan you keep, even if you transfer to earning pension under the M-Plan.  You are not required to convert that to a monetary figure which goes to the M-Plan.  You will still be "in" the final salary plan but not earning more pension through it.  When you retire there will be two components to the pension, one from the insurance company that you buy an annuity from with your M-Plan pot, one delivered from the IBM Pensions Trust.  The latter corresponds to what you earned before entering the M-Plan.  Because that was a final salary plan, what you earned was a fraction (years of service up to time of transfer times accrual rate) of your final pensionable salary.  What counts as pensionable, for your salary history up to now will not change.

Those employees with pre-1997 service will need to consider what the relevant pensions-in-payment increases will be when they are retired.  Any assurances about the next few years will be of diminishing importance as time passes and they have not retired.

Effects for Retirees

Pensions-in-payment increases have been following a rule which the trust described as:
 

The RPI increases are calculated from 3 months prior to the beginning of the interval to 3 months prior to the end of the interval [between increases].   In practice such increases have been awarded at the level of approximately 70% of the rise in the Retail Price Index.

The RPI mentioned is RPI(CHAW), the same measure as is used for any index-linked National Savings or Gilts you have, and for state pension increases.  It is not what the newspapers will be headlining as "inflation" because that is a different measure.

The practice follows the algorithm closely but the "approximately" qualification is needed because of the effects of rounding the numbers.

The new arrangements make increases annual.  This will be welcomed.  (The annual Hursley Retiree Club meetings have been hearing the chairman call for this over more than decade.)   A link with inflation will be guaranteed (for a period) so they will not be zero unless the calculation from RPI makes them zero.  This will be a welcome change from "discretionary" amounts.  IBM's previous policy was unique in having unpredictable amounts at unpredictable intervals.  

The amounts will be less than from the established algorithm.  This will extend IBM's status as the worst for protecting pensions from inflation erosion.  The trustees have been recommending 100% RPI increases to the company, so as to bring the inflation protection in line with the Government Actuary's figures for companies in general, but the trustees do not decide the increases. (Except in the sense that they could negotiate them when they have something to negotiate with.)

For five years, the RPI number in the algorithm will be replaced by the lower of RPI and 4%, while the 70% will be replaced by 60%.

For the following ten years, the RPI number will be replaced by the lower of RPI and 5%, while the 70% will be replaced by 50%

Because these increases will be formal benefits there will be detailed rules about which RPI measurement is used, about the three month lag, about rounding, and what could happen when there was disinflation.  This details have not been promulgated.

Retirees will have to judge about what will happen to inflation protection after 15 years.  It will be relevant that there will be comparatively few employees in the final salary scheme then, which will presumably lower the company's concern about how the members view the scheme.   

Effects for Deferreds

The effects for deferreds come via the pensions in payment increase changes, so are similar to those for retirees, but because of the interval before a deferred retires the fifteen years of formally defined increases become less relevant.

The £500m+ Funding.

This is part of the debt that the company owes the trust fund.  Money in the bank is better than the same money owed to one, and this payment will be welcome.  If you thought there was a doubt about World Trade being able to honour its commitment then you will think that your pension is more secure.  AMIPP thinks that paying off this debt is a good financial move for the company.  The money will grow in a tax-friendly environment and there will be a side-effect on the levy which the Fund has to pay in support of the Pensions Protection Fund.  (Judging by what other companies are paying, the levy saving will be a small number of millions of pounds p.a.)

Good or Bad News?

Clearly good in parts - there is an upgrade from 6% to 8% in the employer contribution rate for those M-Planners under age 35.  There is no associated downside for them.  Clearly bad overall - if there was a way for a company to take a big chunk out of risk and liability without diminishing the scheme overall then it would have been done before.

Not bad in terms of what might have been.  One company (AET) was able shift employees from a generous scheme to a lesser one by threatening no salary increases at all.  The Ombudsman found that promises about comparison with leading companies were not legally enforceable and he did that without examining the extent of the gap between promise and delivery.  If the reduction in inflation protection had been larger it might have only very marginally increased the chances of legal redress.

Fair? Ethical? Legal?

Trustees have an obligation to be "impartial" across the categories of member.  Since a "package deal" is being presented, one could say there was fairness in both employees and retirees losing something.  (That was not the case with the contributions hike.)  The M-Plan members are unlikely to see the disparity between M-Plan and the enhanced M-Plan for transferees as fair.

The company ethics are not good.  To give one impression when the company wants to recruit and retain, then act differently when the member is retired and powerless, or active with resignation as their only power, is not ethical. 

The reason of "too expensive" cannot mean unaffordable.  That would be ridiculous coming from a controlling company that made $8 billion of profit in 2004 and has spent $67 billion in the last ten years on buying back it own shares.  Rather "too expensive" should be read as "executive bonuses depend on the share price; we would rather spend on propping that up than on benefits".

Pensions are deferred pay.  Cutting pay is not an automatic route to higher profits in the long run.  All companies have to balance cost savings from cutting benefits versus the effect on the quality and motivation of the staff they retain. Maintaining or uplifting benefits can inspire a chase to the top amongst competitors, just as lowering them results in a chase to the bottom.  IBM at its peak success led benefits upwards.  Today's IBM may be uncompetitive because it has led the chase downwards.

The first thing that has to be said on legality is that two sets of lawyers, Nathan Nabarro for the trust and Freshfields for the company will have said the changes were legal.  That does not make it so - IBM US has paid up for some illegal changes they made to the US schemes and no doubt they had top legal advice when they made that illegal move.  Nobody suggests there is prescriptive UK legislation that can be pointed to for a yes/no answer on the legality of these changes.  The legal opinion is based on precedents - analogies with previously decided cases.  However, every case is different in detail and the analogy can be inapplicable.

The people who recently bought a pension to be delivered by the IBM UK Trust, using their AVC money, seem to have the strongest case to bring.  They had the opportunity to choose from three styles of pension: one with no increases, one with some exact formula for increases related to RPI, and one for "Discretionary Increases" in step with those for non-AVC-funded pensions. 

The people who chose the third option could know:

a) Of the case where a company attempted to withdraw a pension it had described as "ex-gratia" and the Ombudsman disallowed that, with the comment "The use of the words "ex gratia" did not automatically mean that [the company] was not legally obliged to make the payments".

This is relevant because "ex gratia" and "discretionary" have been used as synonymous in documentation provided to members.

b) That the Ombudsman had determined that for IBM PIP policy: "Various publications set out figures from which, it seems to me, existing and potential pensioners could, over the period which I have been reviewing, have made their financial planning on the basis that their pensions (to which LPI did not apply) were likely to be increased by approximately 70% of RPI although such reviews did not take place at fixed annual intervals."

This is relevant because what could be planned on a few years ago could have been planned on when buying with AVC money. 

c) That a prescriptive algorithm had been published for the de-facto 70% policy, that the Actuarial Reports assessed liabilities in accord with that algorithm, and that IBM statements associated with the contributions hike and "Guarantee" in 2005 had implied there would be a period of stability.

All relevant to the contract, even if not explicit in it.

d) In a lecture to the Association of Pensions Lawyers, Lord Scott, a law lord, said:

"For the present it suffices to notice that the result of Equitable Life litigation is that in exercising their distributive powers trustees and managers of pension funds should regard themselves more as giving effect to a contract rather than exercising discretionary trust powers."

This is relevant because the Equitable case was about what could be deemed to be part of an agreement when it was far from explicit in the relevant documentation.  A litigant retiree who bought the third option would want to know what the law was, when his financial planning was abruptly rendered ineffective.  The Equitable guaranteed annuity rate litigants won their case - the Law Lords supported their interpretation of the deal they had.

Considerations such as these might well lead to somebody who took the "discretionary" option to seek clarification from the Pensions Ombudsman about what their deal actually was.

What was the role of the trustee-directors?

We are told that there were negotiations, and that improvements from IBM's original proposals were made.  However, we are not told what IBM's original proposals were - perhaps they were an extreme negotiating position.  We are not told what the trustee-directors original position was, or which of their powers they used to achieve improvements.  So we have no way of judging whether they attempted or met their paramount obligation under the law - to achieve the best result possible for the scheme members.

The deeds permit the trustee-directors to block major scheme redesigns but that bit of the deeds proved worthless because of legal advice that if "employees give their consent to their terms and conditions being changed" the directors must go along with that.  We know of no legislation that says this - it is an interpretations of precedents.

Members will find this surprising - the idea, that an employee agreeing to the least bad of the options she/he was forced to choose amongst is thus volunteering to override the deeds' protection against redesign as a whole, is strange.  On an ethical level, the employees of a third world sweatshop are not forced to work at gunpoint, they choose to work (in preference to starving).  It cannot be said that that makes their situation acceptable or that they chose not to have regulations to protect them.

What was the role of the Employee Forum?

It is the individual employee who consents to terms and conditions being changed.  The Employee Forum doesn't have a role in that (although a recognised union would have an official role in what terms and conditions were negotiated).  There is nothing to suggest the Employee Forum achieved any modification of the proposals.

What was the role of AMIPP?

Like most of you, the AMIPP organisation has had no involvement until now.  However, one of the few curbs on the exploitation of corporate privilege is having well-informed employees and retirees.  AMIPP would like to think that our "Keeping you informed" policy over the past six years has helped in that respect, and edged the company away from something worse.