The Association of Members of
IBM UK Pension Plans (AMIPP)
Members' Report and Annual Report on 2003   (This page created 2 August 2004)


Members should have received the Members' Report on the calendar year 2003 and those who ask can obtain the Annual Report on which it is based.  Comments on the corresponding documents for the years 2002, 2001 and 2000 are on this website and most of those comments are still relevant.  Here we comment on the documents for 2003, in the light of the current pensions scene.

There is an electronic copy of the Members' Report for non-I-Plan members on the Trust's internet site, and a different one for the I-Plan.  The quotes here are meant as references to those.  The latter is discussed at the end of this page. 

The style and size of Members' Reports has varied over the years.  The 1990 report, for example, had 8 pages whereas the latest has 20 pages. (Incidentally the 1990 one reported an 11.1% decrease in the fund value over the year, quite similar to the 10.0% drop in 2001 and in the same ballpark as the 17% drop in 2002; there were some very good years in between.)  This 2003 report has new headings and layout, bringing it more in line with quality reports from other trusts, although of course the information content is more important than the presentation.  AMIPP does not think there are hidden messages in the heading changes.  (In contrast to the occasion when members were expected to deduce a change of funding methods from a terminology change of "plans" to "sections"). 

The "Chairman's Report" of the Members' Report is Jim Lamb's opinion, as opposed to the other material which mainly from the Annual Report.  The first paragraph "Plan Funding" reports a large deficit.  How large is large?  In our 2002 comments we suggested "something around about the £1B mark".  There is no obvious cause to amend that, especially since we will get better information within a few months when the Actuarial Report for the end of 2003 is made available.

How large is £1B from a member perspective?  The Annual Report tells us that the final salary plans paid out £166M in 2003 so a crude analysis says that £1B corresponds to IBM being about 6 years behind in contributing to the fund.  (Times are changing, but up until now all the decisions about paying into the fund were IBM's, not the trustees').  This analysis is crude because it doesn't account for rate of return on the existing assets, future costs and changes, etc.  For anything more than a crude perspective the actuarial report is needed.

How large is £1B from an IBM UK point of view?  AMIPP doesn't think that is an important question.  The parent undertaking and controlling party is IBM Corporation. IBM Corp makes the IBM decisions. (It would be a difficult question to answer anyway.  Practices about what IBM Corp charges IBM UK for the privilege of selling IBM Corp products and about what IBM UK pays to buy things from other parts of IBM Corp give a potential (within the regulations) for unreality in the IBM UK accounts.)

How large is £1B ($1.8B)  from an IBM Corp point of view?  IBM US profited by $7.6B on $89B in sales last year.   We have reported that IBM spent $47.6B on buying back its own shares over the years.   IBM US put $3B into the US pension fund in 2003 (and for some strange accounting reason that improved the profit figures). Business Week reports IBM has "$7.3 billion in cash on hand".  We haven't seen a recent figure for IBM's total value (market capitalisation - what it would cost to buy IBM if you could instantly buy all the shares at their going rate), but it was $173B in year 2000.  So £1B is noteworthy in IBM Corp terms, but not a crippling debt.

The second paragraph says the Trustee has welcomed the Company's statement on support of the plan, worded as "it remains the Company's current intention to continue to support the Plan through the payment of employer contributions in accordance with the provisions of the governing Trust Deed and Rules".  The trustees were wrong to welcome such a weak statement.  The company's contributions are provided to implement payment of deferred salaries.  They are not charity, they are a way of paying debts.  The company's willingness to pay its debts should not be in question. 

The "Scheme Actuary" paragraph is an example of information that it is nice to know about but which could hardly influence any member's decision making.  No doubt the Trustee will get good (and expensive) advice from Watson Wyatt on how to invest.  It does not follow that a change of actuary was necessary.  (The Myners review recommended that "contracts for actuarial services and investment advice should be opened to competition separately.")  (There are other business connections with Watson Wyatt, eg when IBM bought PricewaterhouseCoopers a few actuaries came along with the deal and IBM sold those on to Watson Wyatt.)

The change of trustee director is welcome.  As the text makes clear, to call Sir James Ball "independent" is a stretch, whereas Bob Bridges is genuinely independent.

The section on pension increases is weird throughout.  Most of you will have realised that when it says "2.2%, in addition to statutory increases" it does not mean the pensions were increased by more than 2.2%.  It means that part of the pension was increased by 2.2% (if you had service before 1997) and the other part was increased by a statutory percentage (if you had service after 1997).  You will have noticed that the period between January 2003 and March 2004 is not 15 months.  It is no surprise that the increase is approximately 70% of RPI over the period stated because it is exactly computed as 70% of the RPI change between three months before the last increase and three months before the latest increase - this is the mechanical rule that the trust has told us is used.  About the rest we repeat the Newsletter 22 comments:

- The only statement about Trustee proposals is "In recent years the Trustee has made a number of different proposals to the Company on pension increases".  This statement has almost no information content - the proposals might all have all been poor but different from one another in minor ways.  The 2002 Members' Report, although almost as secretive, did at least say something about the amount of the 2002 increase proposal.

 - The juxtaposition of sentences could be misleading.  You probably know that a majority of US citizens believe that Saddam caused 9/11, even though the administration never said so and the relevant authorities have pronounced otherwise.  The administration achieved this effect by repeatedly following their statements about the horrid nature of 9/11 by statements about the horrid nature of Saddam, thus inviting the listener to believe a link.  In the chairman's statement we have a less momentous example of similar juxtaposition.  Jim Lamb tells us what the trust knows about what members would like (omitting mention of those members who would like what they were promised) and immediately follows with a sentence about what the Trustee has proposed.  Thus, without saying it, the impression could be given that the proposals are driven by what the Trustee knows about your views.  (Perhaps it is actually the case that proposals are driven in that way - the Trust has never told us the rationale for its proposals.  However, we must hope that the rationale is not actually as flimsy in reasoning as that.)

- Nothing answers the obvious question - how can it be in the best interests of the scheme members not to tell them what the 2003 proposal actually was? 

On "Dispute Resolution", extra light is shed by the complainants viewpoint.

It is nice to find amongst the bureaucratic "Statement of Trustee's responsibilities" a mention of the trust's raison d'Ítre, albeit as the last bullet.

Does page 5, "Independent Auditors' statement to the Trustee of the IBM Pension Plan", deserve the space it is given?  Surely we would expect Pensions Administration to have copied numbers correctly from the Annual Report to the Members' Report, without having PricewaterhouseCoopers tell us they did?  And "is consistent with" is not much of an endorsement for the bits of the Members' Report that are not addressed in the Annual Report.  Most of this page seems to be PwC backside covering.

Financial review - DB sections.  This is straightforward until the bottom of the first column.  Will members know what "full buyout cost" means, if they haven't been following AMIPP's descriptions (each of these)?

Some members may not recall AMIPP's comment about the 2003 regulation: "windups by solvent companies have just changed from being attractive propositions for the company to being unattractive ones".  Although IBM has the power to wind-up (and the Trustee has that power also), the scheme will not be wound up while IBM stays solvent and financially astute.

The same issue of IBM not going broke makes the last two paragraphs of the DB financial review largely irrelevant.  Priorities only matter when there isn't enough money and 2003 regulation ensures a solvent company will provide enough money for buy-out.  So unless you think IBM will become insolvent before mid-2005 (when the new arrangements about pension protection come into play) there is little point in worrying about priorities now.    

It is worth commenting on "The valuation method is explained in the Actuarial Report, a copy can be obtained, on request, from Pensions Trust".  The sentence is ambiguous - is it the valuation method or the Actuarial Report that can be obtained?  More importantly from the point of view of informed member decisions, it is false.  A copy cannot be obtained, all you can do is put your name down for one in a few months time.

Financial Review DC sections.  This is straightforward, except for "credits made on behalf of the Company".  This legalese is used instead of "Company payments" or "Company contributions" because the company retains the power to use funds accrued for the DB section to fund the pensions for a different set of people in the DC section (without needing the trustee's approval).

The "Plan membership" and "Income and expenditure" display a natural progression except for the special events like early retirement programs and buying/selling staff in bulk. 

The "five years at a glance" page is useful but the reader has to be careful because some statistics are under the control of the company (eg whether pension increases are comparable with other leading companies) whereas "total return for the year" is largely outside of the company's control.  "Year end membership" is a mixture because natural progression is perturbed by company purchases.  (Less than half of UK IBMers actually joined IBM - the rest arrived with companies purchased and outsourcing contracts.)

The "Investment report" is a good account of why the Trustee's job is more complex than just trying to pick winning investments.  The heart of it is in "alternative asset mixes that are likely to meet or exceed ...".  One of the alternatives has to be chosen.  For any trust, there is a tension between approaches.

One approach says "The pension fund's job is to pay pensions".  Proponents of this approach therefore plump for the least risky way of matching assets to anticipated pension payments.

An opposed approach says "Ultimately it is the company paying the pensions".  Proponents argue that as the company provides (the majority of) the money and has the obligation to ensure the pensions are paid, it is allowable for the company to treat the pension fund as an investment vehicle, and have asset classes and funding levels to match the company's risk-reward aims.

If the company has the capability and commitment to back the fund, this second approach can make a scheme cheaper to run (and maybe some of the gain would be returned to the members as extra benefits).  If the company does not have the capability and commitment necessary for long-term backing of the fund, then members will be more secure under the first approach.

In the particular case of our trust, the formal commitment is weak, although many would say that the capability (backed by IBM Corp's billions and long term prospects) is strong.

On the issue of the closeness of our trust's investment performance to that of others, you can form your own opinion of the reasons.  Is it that winner-picking is too difficult, and all the funds are simply responding to the same market conditions?  Is it an example of the herd instinct, where they all go the same way seeking least scope for blame?

If you are in a position to judge whether the particular changes in fund managers were wise or not then you are one of a few in millions.  Presumably the section is there so we get some feel for whether there is unnecessary churn or undue inertia in the trust's approach, but can one really tell?   

The AVC Investment performance is given for different companies, and that is what the individual will be most interested in.  You might also have some general interest in how much is with each company in aggregate. The DB AVCs of £104.0M comprises £49.8 with Friends Provident, £38.4 with Equitable Life and £15.8M with Legal and General.  The DC £21.6M is £0.8M with Friends Provident and £20.8M with Legal and General.  (In case you want to follow the herd instinct:-)

Describing the "New legislation" in a page and a half (when the Bill has several hundred pages) inevitably leaves things out.  Here are a few of the many associations with our schemes that might be made.

Bullet 1 will not apply to us unless IBM fails, and even then we might be allowed to continue running our scheme on its own, without input from (the disappeared) IBM.

In bullet 2, "have to pay" could be misunderstood.  The increase amount is not fixed by regulation.  It can be more than the formula, but not less.

In bullet 3, few readers will know what a scheme-specific funding standard is.  The key point about it is that it is an agreement between the trustees and the company about the amounts the company will pay into the fund. (With mediation and arbitration if they cannot agree).  This a big change from the current setup of our scheme where the deeds say the company decides.  The new regulations will make the deeds ineffective in that area.

Bullet 4 is one of those "devil in the detail" matters.  How will the member's new pension rights compare with those (s)he had in the old scheme?

In Bullet 5 "a minimum level of knowledge" doesn't imply examinations or the like.  It is more a matter of having enough working knowledge to be able to make the expert advisers explain themselves.

Omitted from bullet list are simplifications of the Internal Dispute Resolution Process (IDRP) and the Member Trustee arrangements.  Other descriptions of the new legislation that AMIPP has seen include these, because "simplification" was the government's banner in proposing the new Bill.

No doubt IDRP was omitted because the trust has always refused to acknowledge that the regulations contain a requirement for IDRP and hence the IBM trust has one. 

Arrangements for deciding who the Member Trustees are can now be changed, almost at will of the trustees.  Omission from the list is perhaps an indication that our trustees plan no big changes from existing arrangements.

The penultimate bullet in the "Inland Revenue simplification" is important.  Have you asked your manager what IBM will do about it, and when you will be told?  Do you know who IBM is consulting with about these prospects?

As in previous years, the "Members' information" doesn't mention IDRP.  If complaining, you might want to ask for IDRP to start.  That will avoid a delay when you are told it has not started, and it might be a criteria for whether the Dispute Resolution Committee gets to consider your points. 

The I-Plan has its own Members' Report, much of it the same as the non-I-Plan Members' Report.  The description of the scheme is a bit simpler since it is entirely a final salary scheme.  The same number of Trustee Management meeting and Investment Committee meetings were held but fewer Benefits Allocation meetings.  (That is to be expected - fewer members leading to fewer decisions for the Benefits Allocation committee to make.)

The chairman's report is mostly the same.  It differs on increases because the I-Planners got 2.8% on all their service.  It has an added "Asset allocation - In recognition of the long term nature of the Scheme obligations and its relative immaturity, during the year the Scheme's fixed interest investments were sold and the proceeds invested in equities and property".   Does that tell you why the fixed interest investments were bought in the first place, when the scheme was even more long-term and immature? 

The chairman says only that the I-Plan is in deficit, not that it is a large deficit.  However, looking at the numbers, it would seem that the deficit is much the same as for the non-I-Plan, as a proportion of the size of the fund.  The deficit has small impact in IBM terms, since the total fund size is only £202K.  There will be an I-Plan actuarial report, presumably at much the same time as the non-I-Plan one.

Pages 4 & 5 of the Members Report are the same as in the non-I-Plan report.  The Financial review is very similar although, of course, the actual numbers for company contributions are different because there is a different membership.  There are fewer members (3624 of them) and the age distribution is similar to that of the M-Plan (although with a lesser proportion of under-30's).  The same statistics are given, although the money sums are expressed in thousands rather than millions of pounds.

The investment report is very different because there are only two fund managers - Legal and General for an index tracker and CBRE investors for property.

The "New legislation" and "Members' information" are the same. The trustees and the various advisers etc. are the same.  The I-Plan report is coloured with more of a blue than the turquoise of the non-I-Plan report, but we doubt there is any significance to that:-)


Our trustees work hard, much of it outside of meetings.  On meetings alone, one can judge from the account in the reports that their hours of meeting exceed the average.  (Department of Work and Pensions Research found that trustees average 10.6 hours per year in board meetings).  It is a measure of our trustees' disdain for the scheme members that time was not found for an adequate review of the Members' Report, before publication.


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