The Association of Members of
IBM UK Pension Plans (AMIPP)

(This page created 26 August 2003)

Members' Report and Annual Report on 2002


Members should have received the Members' Report on the calendar year 2002 and those who ask can obtain the Annual Report on which it is based.  Comments on the corresponding documents for the years 2001 and 2000 are on this website and most of those comments are still relevant.  Here we comment on the documents for 2002, in the light of the current pensions scene.

The forward to the Members' Report requires some interpretation. The second paragraph says that the "assets of the Plan at the end of 2002 [were] less than the value of the estimated liabilities".  For "Plan" you should read "Final Salary Plan" because money purchase plans do not have surpluses and deficits.  "Estimated liabilities" raises the obvious question about the method and parameters of the estimating - many of you know that there are various ways of estimating for any particular scheme.  This probably isn't a reference to the Minimum Funding Requirement (a statutory evaluation, which despite its name falls well short of the value of the pension entitlements), but to the Ongoing evaluation (which has an outcome that can vary wildly on the basis of parameters chosen for rates of return etc.), or to the "Buy-out" evaluation (which reflects what it would actually cost for the obligations to be taken over by another organisation and is always the highest evaluation). We can't know more about this until we see an Actuarial Report and the next one we will see will come late in 2004.

So it is necessary for us to resort to crude methods of estimating the current deficit.  Actuarial calculations take surplus/deficit into account by spreading the effect over five or ten years.  The Company contribution for 2003 (which is the year after the year the Reports refer to) will be 79M.  The Annual Report contains a schedule of contributions which shows this rate going up to October 2006 whereas the Chairman expects "a further substantial increase next year".  This is not an important contradiction - it is usual for the schedule of contributions to be set for several years ahead but then reset each year.  If you multiply substantially more than 79M by five or ten you get something around about the 1B mark.  So the best we can say is that there is a deficit of the order of a billion which it is planned, on current parameters, to remove by about the end of the decade.  It should be emphasised that it only takes a substantial change in the marketplace or in the parameters used by the actuary to arrive at a very different estimated deficit.

Does the deficit matter?  The chairman assures us that "the overall control posture of the Fund remains excellent" and that "the Fund continues to be administered in a controlled and professional manner in order to meet its short and long term obligations".  [It is not clear why the term "Fund" is used rather than "Plan" or "Trust" since the funds are just collections of assets and it is the Trust and IBM who have obligations, but presumably the terminology is not meant to make an important distinction.]   Some scorn has been shown on the message board about "control posture" but even if tidy administration cannot secure our pension bargains it is obviously a desirable thing.  It may even relate to security - if a company is delivering late on its schedule of contributions, for instance, that could be a warning sign.  [In actual fact IBM UK did make late payments in 2002 but it was just an administrative error and the amounts involved were so tiny that the Occupational Pensions Regulatory Authority and the Auditor decided not to make an issue of it.]

In a narrow context, under-funding does potentially reduce the benefit if you choose to transfer away from the scheme.  [You cannot do that transfer if you are receiving your pension.]   The transfer value you get can be less, to match the scheme's underfunding.  [The message board has comment and a link to details.]    The Observer 24/8/2003 has an article "Check what your transfer is worth" which notes that "Individuals may want to ask how their transfer values are calculated and if they have been scaled back.  They could challenge any such scaling back if an actuarial report has not been obtained or only a few people are leaving the scheme".   That advice is of doubtful value - very few people have the skills to check their transfer values, even if the scheme was willing to release the necessary data. 

Aside from the minority concerned with transfer values the main concern is whether underfunding threatens delivery of some pension promise or the structure of the whole scheme.   Some of you have concerns about whether IBM itself will remain solvent but the regulations for solvent companies are the most relevant.   The government has removed one of the attractions, for companies, of under-funding.   It used to be possible for a company to close its scheme while the scheme was underfunded and hence shed the obligation to provide the pensions in full.  This is now (largely) prohibited.  So underfunding cannot reduce the cost to a company in this way - what doesn't get put into the pension scheme remains a debt on the company's books.

So the main concern about underfunding is that the deficit might be viewed by IBM as an ethical underpinning for continuing to provide less than the pension bargain we retired under, or for even more erosion of pension value, or for scheme changes such as forcing C-Plan actives to the M-Plan.  The government has an action plan to impose a "requirement on employers to consult before making changes to pension schemes to ensure changes are developed in partnership", so that our 1996 experience could not be repeated, but there is a window of opportunity for scheme changes before that becomes law.

The forward to the Members' Report refers to the Jan 2003 increase, saying that "This was not an improvement that the Trustee had requested but the IBM Company did not wish to agree anything more at this stage".  You might be tempted to deduce from the use of the word "more" that the Trustee requested erosion by less than 30% of the RPI change.  This would not be a sound deduction from what is actually written.  The actual words used are consistent with the Trustee asking for 30% erosion and also some other benefit that was refused.  The actual words are consistent with the Trustee requesting 30% erosion over a different period.  We know from Internal Dispute Resolution Process responses that some requests by the Trustee, at other times, have been for 30% erosion. 

It may be significant that the rejection is said to come from "the IBM Company".   IBM UK is the company that made the pension promise to you, and IBM UK is the sponsoring employer in our trust scheme, but it is Armonk attitudes to pensions that hold sway.

The words in the forward about the complaints are different from last year and different from this year's Annual Report.  They seem to be suggesting that the time taken for the enquiries is unexceptional.  That is not the case; the IBM affair is probably setting a record for the duration of the enquiries (and investigations for half of the complaints have not started).   We explain elsewhere the difficulties that the Ombudsman may be having in doing what is right in the face of inadequate resources and judges who resent his role.

The forward refers to "four new Member Elected Directors".  You might find that peculiar since Elaine Kirkwood was already an MED whose period was expiring and she was not re-appointed as the result of any election.  This is explained by the Trust and IBM powers to label almost anybody as an MED.  The other three MEDs were elected in November 2002.  You might find the situation peculiar since the arrangements that the members agreed to under the regulations say: "The IBM Pension Trust Board will consist of twelve positions, four of them filled by individuals nominated and elected by employee and retiree plan members".  However appointed, all MEDs start with the same powers and duties.

The 24.8M referred to under "Funding" in the Members' Report as "credited" to Members retirement accounts is referred to as a "Transfer between sections" in the Annual Report. [Note that these transfers are nothing to do with the transfer values referred to above.]  The previous corresponding number (25.5M) was described in the 2001 Members' Report by saying "During the year, Company Contributions of 25.5 to the M Plan section were funded from the surplus of the Defined Benefit Sections".   You must judge for yourself whether the latest wording is an effort to disguise the fact that the M-Plan continues to be bolstered from a fund that employees contributed to on the understanding that it was to be used to provide final salary benefits.  The M-Plan also received 1.1M contributed by the employer in 2002.  The Members' Report does not mention this.  We do not know how IBM and the Trust rationalise the division between what comes from the company and what comes from raiding the C-Plan fund.   

Our comments from a previous year on the meanings of "entitlement" are still relevant.  

For those who choose not to request the Annual Report, here are one or two bits that might be of interest.

The actuary has assumed that the "rate of salary increases will be 5% per annum compound (excluding promotional salary scale)" and he makes "allowances for increases to pensions in payment ... at the rate of 2.45% per annum compound in respect of discretionary pre 6/4/97 service".   This does not mean that a constant rate of salary increase is planned, or that annual pension increases are planned;  these parameters are just numbers chosen to make the actuary's calculations come out with what he thinks is the best figure. 

Members were advised about the Myners Review back in 2001.  The full report was encapsulated in ten principles which the government is using in enquiries to see if voluntary conformance is sufficient or if the principles need more regulations to promote them.  This Annual Report summarises the ten principles and reports on our Trust's conformance.  For example the summary of the first is:  "Trustees are being asked to assess their skills, information and resource to enable them to make decisions on investment issues" and the conformance claimed is "The Plan has an Investment Committee and consults external advisors before all key decisions.  Day to day investment decisions are delegated to the appointed investment managers."

The un-summarised [Section D] Myners' Principles are not lengthy and some pension funds have chosen to use them in full in their conformance reporting.  You may want to consider whether the Trust's summaries were intended to enhance the appearance of conformance.  The full first principle is "Decisions should be taken only by persons or organisations with the skills, information and resources necessary to take them effectively. Where trustees elect to take investment decisions, they must have sufficient expertise and appropriate training to be able to evaluate critically any advice they take. Trustees should ensure that they have sufficient in- house staff to support them in their investment responsibilities. Trustees should also be paid, unless there are specific reasons to the contrary.  It is good practice for trustee boards to have an investment subcommittee to provide the appropriate focus. Trustees should assess whether they have the right set of skills, both individually and collectively, and the right structures and processes to carry out their role effectively. They should draw up a forward-looking business plan."

Not all our Trustees are paid, and we have been told no specific reasons for that.  [Note added Nov 2003 - retiree trustees are now paid.] The Trust has a Statement of Investment Principles (about how it invests) but we have not heard of a Statement of Funding Principles (a forward-looking document agreeing the company's future contribution policy so that investment can take a co-ordinated approach to risk.)

The Members' and Annual Reports continue not to mention the Internal Dispute Resolution Process, although it is a legal requirement for the Trust to have one.  This can lead to the situation were a complainant, getting unsatisfactory responses from the Trust, is told that he/she cannot approach the Ombudsman because the many months of IDRP have not been started.  So we remind complainants to make clear at an early stage that they want the IDRP used.


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