The Association of Members of
IBM UK Pension Plans (AMIPP)
|Members' Report and Annual Report on 2005 (This page created 28 July 2006)|
Members should have received the Members' Report on the calendar year 2005 and those who ask can obtain the Annual Report on which it is based. Comments on the corresponding documents for the years 2004, 2003, 2002, 2001 and 2000 are on this website and many of the recent comments are still very relevant. Here we comment on the documents for 2005, in the light of the current pensions scene.
The purpose of a Members' Report is to summarise the Annual Report, which relates to the calendar year, but it also covers more recent matters because it does not come out until the third quarter. We noted that the 2004 Report dropped some dross, such as the whole page devoted to giving the auditor's opinion that the Members' Report does not contradict the Annual Report. This 2005 Report continues a trend to be more pertinent each year. The trustees should be congratulated on the reason for the improvement - study of the "best in class" reports from leading pension plans. Any move away from previous insular attitudes will tend to benefit scheme members.
Considering the Chairman's Report, in order:
There is room for doubt about what "fully funded" means. It does not mean that the company could wash its hands of the scheme without putting more money in. It does mean that if all the assumptions made about future returns on investment etc. come to fruition then our pensions can be delivered.
However, these numbers are obsolete anyway. Since they were calculated, there has been significant degrading of the benefits to be delivered from the Defined Benefit plans. The implication is that the new degraded arrangements will be more than "fully funded", unless the assumptions made about returns etc. are changed. It is good to see a commitment to tell us about the 2006 figures by Summer 2007. The corresponding figures for 2003 were not available to members until 2005. (You may think nine months excessive to do some calculations on known data but that is not unusual for Actuarial Valuations by trusts.)
Investment Performance and Strategy
The investment return of £710m illustrates that the movements of the market often have a bigger effect on the fund than changes of contributions.
The issue of bonds versus equities is one that effects most trust funds. There has been a general move towards bonds. Because of supply and demand this has led to bonds becoming more expensive. Good news with respect to bonds already held, but it has led to criticism of trusts for buying more bonds when the price was high.
The phrase "measured approach" means "more risky" in this context. If the sponsor of the scheme was shaky there would be more reason to go for the reliable delivery of returns that bonds offer. The guarantee, by making it more difficult for the US parent to default on what it owes the trust if investments go wrong, provides the trustees with more leeway in investment choices.
The increases are correctly described here, avoiding the reference to "pro-rated" which flawed the original announcements. Jim Lamb trusts you will have no more questions. That seems unlikely. For more than a decade the protection against inflation has been the worst amongst comparable companies. For the next 14 years the mandated minimum will be worse than that policy.
In recent years the trust has recognised best practice and recommended full RPI increases. The obvious question now is about what steps the trust is taking to be aware of impacts on the value of pensions, and to make IBM aware.
Last year we discussed the dogma behind IBM's rejection of the trustee proposal to "guarantee annual increases". It is a good aspect of the new arrangements that increases will be annual and in a guaranteed relation to the RPI.
One small side effect is that this year will be the last time AMIPP will be criticising the Members Report for comparing increase numbers that are in different units. The chart in the report for C and N Plan members does not have any facts wrong but by its use of columns invites a wrong comparison. A particular percentage increase over two years is not as valuable as the same percentage over one year. Annual increase is a suitable unit for comparisons. One route to sound comparison is to use the annual percentage equivalents shown in AMIPP's record of the increases. Alternatively the percentages in the report can be compounded to give the five-year effect. For service before 6th April 1997 this is 9.2% related to a period of 66 months, for LPI with 5% cap it is 12.6% over 60 months. The latter rate matches inflation, as intended, and the former rate is a fraction (about 2/3rds) of inflation. In short, recent minimum increases set by statute closely mirror the RPI, whereas increases set by IBM for earlier service are noticeably worse.
The report describes the LPI increases as "statutory increases" rather than "statutory minimum increases". There may be no intention to mislead but it is worth repeating AMIPP's comment of last year: "... the text attempts to give the impression of something that is simply untrue - that the degradation of the scheme for members now earning increases with a 2.5% LPI associated was required by the legislation. The fact is that the legislation allowed the degradation but did not require it. (Analogy can be made with the Minimum Wage - the government sets a minimum wage but that does not mean the government wants or requires all wages to be at just the minimum level.)"
In considering what the report says about legislation, what the report omits is noteworthy. There is no mention that companies are now required to consult with employees before making pension scheme changes. (You might question whether IBM's idea of "consultation" matches that of Parliament.)
There is no mention of the introduction of age discrimination law. Many parts of a pension scheme are not influenced by this law, but some parts are. IBM will have to do something by October 2006, although theoretically it could be no more than "objectively justifying" its age discrimination.
(As an aside on age discrimination, the global view isn't encouraging. Job adverts in India are allowed to ask for "young" applicants. IBM CEO Sam Palmisano recently said the average age of IBM's India employees is 24.)
One bit that could have been said last year but was not, is the "Members may be able to take their pension early and carry on working for IBM". The use of "may" instead of "will" is because the company has to put arrangements in place. Firms that already allow flexible retirement include British Airways, BT, BBC, Asda, J Sainsbury, Tesco and Marks & Spencer. Perhaps the inclusion of the point this year heralds a move by IBM.
Commenting on the year 2000 Members' Report we said "The section in the Members' Report about what to do if dissatisfied continues to avoid mentioning the Internal Dispute Resolution Process, despite the fact that it is a legal requirement for the Trust to have one". We have made a similar comment each year since until now. Now this 2006 Report does mention the Internal Dispute Resolution Process. (Although it does not say it is by regulation. If you use the mechanism it is important to tell Pension Services that you are doing so, otherwise you can lose the protections against delay etc. provided by the regulations.)
The Annual Report breaks out more detail than is apparent from the totals in the Members' Report. Thus the statistics of 513 employees becoming retirees and 410 becoming deferred, contrasted with 98 and 80 in the previous year, tells us 2005 was a big year for staff reductions.
The detail on membership has been improved this year, by making "deaths" into a separate line. Previously deaths were hidden within the "leaving Plan" total.
There is some evidence of better book-keeping by Pension Services. There is an adjustment for 11 deferred members found. (Last year the adjustments were 40 deferreds found and 80 pensioners lost). Such adjustments do not mean that the wrong people were being paid pensions or not paid - they only mean that there were inconsistencies in the records that needed "cleaning".)
The Annual Report is a bit clearer that there is a "guarantee that increases will be awarded annually for the next fifteen years".
The breakdown of the fund's investments shows that when the trustees say "overseas equities" they mean, to a very large extent, investment in the US and Japan. They don't mean investment in the current economic successes, China and India for example.
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