It’s been an eventful start to 2010. On returning to work, I discovered via a link to a news story in the local paper from the site homepage that my MP has asked the government to boycott the company I work for, IBM UK, because of the changes it is making to its final salary pension schemes.
Since I found this quite worrying, I sent the following letter to Sandra Gidley. I have not yet received a reply (other than an acknowledgement from an aide that it was received). I want to say up front that this is a deliberately one-sided missive: I am assuming she has heard the plight of DB plan members from them but has never had a conversation with a DC plan member. I am making my letter public because her statements are public and I think it’s in the public interest to have a public statement of an alternative view.
My attention has just been drawn to a statement in the Daily Echo and on your website to the effect that you are urging the Government to blacklist IBM from contracts in response to the changes IBM is making to its defined benefit pension schemes. I do not understand why that recommendation is in the best interests of your constituents, including myself.
As I understand it, less than a quarter of IBM employees are adversely affected by the pension changes which are being made. The rest (including myself and my wife) are directly or indirectly better-off as a result of these changes, as the funding which would otherwise have been committed to shoring up the defined benefit pension schemes for the benefit of a minority in the future can be (and is being) spent on things which benefit all employees. In the midst of this recession, IBM’s defined contribution pension scheme is being significantly enhanced (which immediately benefits over 70% of current employees), jobs are not being lost en masse, sites are staying open, and many employees received pay increases late last year.
It should also be remembered that the employees who are negatively affected now are those who have been, for the last 12 years, on a more valuable pension scheme than the rest of the workforce. The pension changes being made mean that from April 2013 these employees will be on the same pension scheme as everyone else. You have called on IBM to promise “a fair deal to their longest serving employees”: can you please explain to me why you do not consider providing the same pension scheme to all employees is a fair deal? Assuming you can do that, would you please also explain to me why you believe an employee who joined the company in 1996 deserves a pension scheme worth 15-20% more than an employee who joined the company in 1997?
Defined benefit pension schemes in IBM UK and other British companies are not being closed to punish long-serving employees. They are being closed because a series of changes in the law have made them too expensive to maintain. When the defined benefit schemes were opened there was no legal requirement to fully-fund the scheme, and money could be taken out of the scheme as well as be put into it. Legislation in the 1990s and earlier this century meant that funds could only flow one way and that companies have to ensure that their DB schemes are never in deficit.
The initial effect of this legislation was that companies closed their DB schemes to new members to try and limit their future liabilities. The stock market fall in 2008-2009 of around 40% meant that even this reduced liability corresponded to a huge amount of money to find, especially in the middle of the worst economic crisis since the mid-1930s. In the past, when companies could put money in during the bad times and take it out again when the market conditions improved this was not so bad, but now that funding is a one-way street there is no way to sell this to shareholders. Schemes are being closed to future accrual to prevent the same problem re-occurring.
Occupational defined benefit schemes were the first attempt at providing pensions, and we are seeing that they don’t work because the risk is too great for the companies to bear. Occupational defined contribution schemes are the second attempt at providing pensions, and they are not popular with employees because their value is tied to the ever-fluctuating value of the stock markets which makes it impossible to make concrete plans for the future. I do not yet know what the successor to occupational DC schemes is, but I believe one needs to be found. We need a system which gives employees a predictable income, and which is provided at a predictable cost to employers (and that cost is constrained to the period during which the employee is employed).
I would prefer to see my elected representatives applied to finding this solution rather than attempting to boycott my employer and thereby placing my job at risk.
I hope I get an answer, and I hope it’s one I can post here.
After I mentioned this on Twitter, other IBMers have written to their MPs to express similar sentiments. No doubt those MPs will have received more input from the affected DB members, but at least now they should know that this isn’t as simple as they may have thought.
There is a debate scheduled for 16.30-17.00 this Wednesday in Westminster Hall with the subject “Supervision and regulation of the IBM pension scheme”, sponsored by Sandra Gidley. I shall be watching it courtesy of Parliament Live TV with any luck. It will be interesting to see how knowledgeable or not our elected representatives are about pensions.
Very useful – will be watching the debate myself: thanks for the info.
Phil,
When you join or choose to remain at a company, you do so partly on the basis of the package of remunerations offered and the prospects of future remunerations. When you (and your wife) agreed to work for IBM, I assume you had compared various options and found the deal IBM were offering acceptable to you. I doubt very much that you considered the pension provisions of your new colleagues at all relevant to your decision. You were then able to happily plan your life and ultimately make provision for your retirement based on reasonably firm expectations.
The reason that suddenly moving to a common pension plan for all is not fair, is that your expectations have been maintained, whereas another group of employees have had theirs decimated. ( I don’t believe that the minority / majority consideration is relevant to whether this is fair or not ).
A trivial example of this would be if certain people had taken out a 3% fixed mortgage and another group a 6% fixed mortgage. would it be fair to suddenly and arbitrarily shift everyone onto a 5% mortgage? It would penalise some and benefit others in the same way, but I don’t for one moment believe it is fair.
The person who joined in 1996 knew exactly what they were signing up for (or so they thought) and so did the person joining in 1997. The DB pension was one of the few reasons that a lot of people remained with IBM through the horrific decade of salary erosion that took place after 2000. Higher salaries were available elsewhere but they did not outweigh the value of the DB pension, so decisions were taken accordingly. Those without the DB pension would have found it much less difficult to up and leave.
I believe that IBM should have been prevented from taking this action, which is at very best a breach of trust placed in the company by its longest serving employees.
From my point of view it will be as if an IBM Executive (dressed in a hoodie if you like) breaks into the home of a defenceless pensioner and steals £10 from his dwindling purse. This would be bad enough, but I will have to endure this every single day of my retired life (lots of estimates in there, but you get the picture).
I don’t believe you are being particularly equitable when you to state that is it OK for the company to arbitrarily take money from Dave and his ilk, because my wife and I will directly benefit. you could achieve a similar effect by stealing £100 from my wallet, but thankfully that isn’t considered legal, whereas IBM’s execrable actions unfortunately seem to be.
Tolerating a lower salary in return for future security was a gamble on my part. Providing this security was a risk on IBM’s part. In the event IBM lost the gamble. It is hugely dishonourable of them to kick over the card table and demand their money back.
I do however as a shareholder, agree with you that a boycott of IBM would appear to help no-one in particular, other than maybe TCS, EDS, BT, ORACLE et al.
Kind regards, Dave M.
Dave,
Thanks for your comment.
Unfortunately it is not the case that the existence of the DB plans have no effect on the remuneration of the DC plan members. The law changes of the mid 90s and early 2000s which I alluded to, and of course the establishment of the pension protection fund (which means anyone trying who is running and has run their DB schemes in a responsible way has to pay for those who are and have not) have combined to make the DB schemes much more expensive to run than anyone anticipated them being.
I am ignoring these new costs for the rest of this paragraph and just considering the relative cost of funding the DB and DC schemes we’re talking about (for DC this is easy and for DB I am using an estimate based on published figures). While it is possible for DC members to evaluate the deal they are offered at the time they join; they are unaware at that point that the existence of the older pension schemes is going to impact their salary in the years after they join. I estimate that the difference in funding costs has so far cost me around £4000 in the six years I have worked for IBM, of which £1200 this year, and if I extrapolate this into the future (assuming my salary growth continues at its average over those years and I retire at my expected retirement age) I would lose around 1.2 million pounds over the course of my career, not counting the consequent reduction in my pension income. I don’t want to discuss the basis for these estimates in public, but I can take you through them in the office if you like.
The new situation is (for the most part) hurting DB members in a way the members had not anticipated when they joined the company. The previous situation was hurting DC members in a way the members had not anticipated when they joined the company. Choosing either, and choosing inaction is still a choice, is ‘unfair’ to someone.
What DB members have ‘lost’ is the opportunity to accrue further DB pension rights past April 2011; no-one has taken anything they already had a ‘right’ to get away. They have 15 months to recalculate plans and accrue further DB benefits, following which they are able to contribute to their DC plan to fill the gap between their previous expectations and the new reality if they choose to do so. Or of course they can choose to move to a job with a better compensation package, if such is to be found.
My reason for informing Sandra of the relative proportions of employees involved was not to support a fairness argument but because as an elected official she has to represent us all and she needs to know (a) that she has thus far been acting in the interests of a minority and (b) that this is against the interests of a majority. I do not think that it is right to victimise a group of people to benefit others just because one is bigger than the other.
Best regards,
Phil
The debate has now occurred and can be replayed by following this link. The IBM pensions debate is roughly the last 35 minutes.
There are some factual errors in Sandra’s speech, which is almost certainly a result of her constituents getting it wrong rather than anything to do with her. The most obvious example is in the ERDF calculations she quotes – since ERDFs are not compounded additively but multiplicatively the final discount factor (t) is not given by:
t = e * n
which is what she cited, but in fact the rather more complex:
t = 1 – (1 – e)^n
Sandra stated that 6% ERDF for 9 years reduced the pension by 54%; in fact the correct answer is 42.7%. Of course, the figure she gave for 3% over 6 years is also calculated with the same flaw and should be 16.7% rather than 18%. For any number of years greater than one the erroneous additive method gives a larger gap between the two than the more correct multiplicative method. I suspect a lot of people have got this wrong in their own calculations, which is particularly unfortunate if they would otherwise have reached a different decision.
One other interesting deviation from the facts as I understand them was the statement, repeated by a couple of MPs, that the trustee is suing the company; my understanding is that the trustee has gone to court to obtain a declarative judgement for or against itself to determine whether the members can sue the trustee if they enact the proposals. I am not certain whether my knowledge is correct as the trustees statement on the matter is open to interpretation.
Phil
Phil,
Just to make you feel happier about things, you may be interested to hear that the Sandra Gidley and the Liberal Democrats have a very nice little policy designed to make the pensions of all higher-rate taxpayers a lot worse.
They plan to start levying 20% income tax on the pension contributions of higher-rate taxpayers. Go work out what THAT will do to your pension pot. As a hint of how big a deal this is, I have a “Tax Plans” paper from the Liberal Democrats that shows a sum of £4,590 million per annum to be raised through the levying of this tax on pension contributions. Nothing trivial then. And guess who’s paying?
Yours, Mike.
Taxing higher-rate taxpayers 20% on pension contributions will do nothing to affect my pension pot, but thanks for asking.