"After careful consideration by the UKI [that is the UK and the Irish Republic] Leadership team, we are proposing the following: a) The Defined Benefit sections of the IBM Main Plan (C, N, and DSL plans), and IPlan, will close to future accrual (i.e. members will cease to build up further benefits on a Defined Benefit basis) with effect from April 2010. b) There will be no further pensionable salary increases for Defined Benefit memberswhile they are active members of the Defined Benefit Plan. c) Employees who are members of the Defined Benefit Plans will have the option ofjoining the Defined Contribution section of the IBM Main Plan, the M Plan, once their active membership of the Defined Benefit Plan ceases. d) With effect from April 2010, IBM will implement a new early retirement policywhich will restrict the circumstances in which it will give its consent to early retirement on the enhanced terms set out in the Main Plan (C, N and DSL plans). This proposal will not affect I Plan members. If these proposed changes in a) to d) above are implemented, IBM proposes to improve the current Defined Contribution Plan (M Plan) for all current members, and for existing Defined Benefit members who transfer into the M Plan…."
"4. Exclusion by Principal Employer from Membership The Principal Employer may by notice in writing to the Trustee direct that any specified person or class of persons shall not be eligible for membership, or shall cease to be a member or members. Such a notice shall override any provisions of the Plan that are inconsistent with it." ii) Schedule D Rule 6 of the I Plan Rules ("the I Plan Exclusion Power") which similarly provided: "
"IBM United Kingdom Holdings Limited as Principal Employer for the purposes of the Plan hereby directs that all members currently accruing benefits under the Defined Benefit Rules shall cease to be members of the Plan with effect on and from the6 April 2011 ."
"For the avoidance of doubt: (1) … (2) This does not constitute a direction that the persons so ceasing shall not be eligible to join the MPlan pursuant to paragraph 1 of Schedule B to the Money Purchase Rules."
"Where IBM's consent is required to draw a pension prior to Normal Retirement Date, IBM will consider a number of factors in reaching its decision including, but not limited to, the financial impact on IBM and its business needs including the retention of skills. Where drawing a pension early requires the consent of IBM and the granting of consent would permit retirement on terms that are more favourable than cost neutral (e.g. the Early Retirement Discount Factors ("
"After consulting the Trustee may at any time and from time to time with the consent of the Principal Employer alter or modify all or any of the trusts powers or provisions of this Deed or of the Rules and any such alteration or modification shall have retrospective effect....... Provided always as follows:- (a) nothing herein or in the Rules contained shall authorise nor shall this Deed or the Rules bealtered or modified so as to authorise the transfer or payment of any part of the Fund in any circumstances to the beneficial ownership of any Participating Employer (b) no such alteration or modification shall be made as shall operate to effect a change of the mainpurpose of the Scheme as set out in the Interim Trust Deed (c) no such alteration or modification shall be made which in the opinion of the Actuary shalloperate substantially to prejudice the pension payable to any Member or other person who is at the effective date of such alteration or modification entitled to a pension under the Scheme or the pension contingently payable to any person on the death in the lifetime of such person of a Member who at the effective date of such alteration or modification is entitled to a pension under the Scheme (d) no such alteration or modification shall be made which in the opinion of the Actuary shalloperate substantially to prejudice the interests under the Scheme of any Member not being at the effective date of such alterations or modification entitled to a pension under the Scheme in respect of contributions received by the Trustee prior to1st January 1973 except with the consent of the majority of the members certified by the Actuary to be affected by such alteration or modification (e) no such alteration or modification shall be made which in the opinion of the Actuary shalloperate to reduce the aggregate value of the retirement benefits payable under the Scheme to any Member not being at the effective date of such alteration or modification entitled to a pension under the Scheme in respect of contributions already received by the Trustee except with the consent of any Member affected by such alteration or modification (f) … …."
"Power of Amendment 1. The Principal Employer acting in a fiduciary manner may at any time add to, alter or modify any or all of the provisions of the Plan, subject to the consent of the Trustee. Any such amendment shall be brought into effect by the execution by the Trustee and the Principal Employer of a Deed, which may make the alteration effective from a date earlier than the date of the amending Deed itself PROVIDED THAT no such retrospective amendment may be made which would result in the reduction of any rights of a Member, Deferred Retiree, Postponed Retiree or Retiree or an Eligible Child Dependant or Spouse of any of them, unless such retrospective amendment is required as a result of statutory modification or any other overriding requirement."
"a person in Service whose name is recorded in the register specified in the qualifications for members in Sub-rule 3(A) (Joining the Scheme). A person shall cease to be an Eligible Employee on his name ceasing to be so recorded except that a person who is a Member and whose name is transferred to a Participating Employer's register of Part-time employees shall remain an Eligible Employee for so long as he remains in Service as a part time employee and is not transferred to non-pensionable employment. The decision of the Principal Employer as to whether a person is in Service and whether his name shall be recorded or cease to be recorded in any such register shall be conclusive"; "
"in relation to a Member, the number of complete years and Pay Months of Group Service [Service with a Group Company] in the period … until whichever is the first to occur of (1) the date of ceasing to be an Eligible Employee …" ; and "
"An Eligible Employee shall be eligible for admission to membership of the Scheme if in the opinion of the Trustee he fulfils the following qualifications:- (1) his name is recorded in a Participating Employer's register of permanent employees, and …[he satisfied the other criteria set out at (2)-(5)] Any such Eligible Employee who (unless the Trustee otherwise determines) fulfils the above qualifications shall be admitted to membership of the Scheme on the first day on which he is eligible in accordance with this Sub-rule"
"56. A Participating Employer's contributions (a) may be terminated at any time by notice in writing to the Trustee and may be similarly terminated only in respect of persons in a specified category or specified categories ….. In the event of the contributions of a Participating Employer being terminated under this Rule Paid-Up Policies shall (subject as hereinafter provided and to the provision of sub-paragraphs (c) and (d) of Rule 57 (Termination of contributions by all Participating Employers) and Rule 58 (Alternative powers on termination of contributions)) be provided in accordance with Rule 57 …"
"In the event of the contributions of all the Participating Employers being terminated under Rule 56 the Scheme shall, subject to sub-paragraph (B) of Rule 58 (Continuation of the Scheme as a closed scheme), determine …"
"Subject as aforesaid, the Trustee shall apply any balance of the Fund thereafter remaining to augment all or any of the benefits provided under this Rule or to provide Paid-up Policies in respect of any person who, had the Scheme been maintained, would have been entitled or prospectively entitled to a benefit or benefits thereunder, not being a benefit or benefits provided under this Rule."
"to consolidate the existing Rules of the Main Plan into 'a new, modern, single document, using plain English where possible'"
"Mr Quarrell thought that the new version of the Trust Deed and Rules was replicating the 1983 Trust Deed and Rules save in respect of amendments his firm had been instructed to reflect in the drafting (which did not include any change to early retirement conditions)."
"34. In considering the meaning of "interest" in the context of a protection clause in a superannuation scheme, I do not derive major help from cases on revenue statutes, such as Commissioners of Stamp Duty (Queensland) v Livingston[1965] AC 694 and Gartside v Inland Revenue Commissioners[1968] AC 553 553, from which both sides claimed support here. In a superannuation scheme, a clause designed to prevent adverse effect on a member's 'interest' without consent should be construed, in my opinion, in the light of the principle and evidence purpose that, without the consent of the member, benefits which may flow from his or her past membership and contributions should not be altered to his or her disadvantage…."
"4. Exclusion by Principal Employer from Membership The Principal Employer may by notice in writing to the Trustee direct that any specified person or class of persons shall not be eligible for membership, or shall cease to be a Member or Members. Such a notice shall override any provisions of the Plan that are inconsistent with it."
"Counsel for the employers argued that these authorities should be distinguished from the present case on the ground that the relevant provisions in those cases contained restrictions that were clearly intended to be permanent, whereas clause 7.1 did not. I do not accept this argument. Clause 7.1 of the 1977 deed was plainly intended to protect the interests of the members by preventing amendments which had an effect detrimental to their interest. In my judgement it cannot have been the draftsman's intention to permit such amendments by an indirect route when he had prohibited them directly. Accordingly I consider that the reasoning in UEB, Air Jamaica and BHLSPF is applicable to the present case."
"...there are no special rules of construction applicable to a pension scheme; nevertheless, its provisions should wherever possible be construed to give reasonable and practical effect to the scheme, bearing in mind that it has to be operated against a constantly changing commercial background. It is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life."
"[38] What the Announcement sought to do in this case was not the determination of a day for a 'Member concerned' in 'any particular case' but was something different from that. In substance, it was an alteration of the Rules of the Scheme itself. The Rules make express provision for how, and in what circumstances, the Rules may be altered; that is provided for by Rule 41. In my judgement, the alteration of the Rules intended to have effect, as per the Announcement, falls squarely with Rule 41 and does not fall squarely within the definition of NRD in Rule 3. In that case, one should not construe the power in the definition in Rule 3 more widely than it clearly provides (that is, confined to a particular case or particular cases) because one would thereby produce a power to alter the Rules in a most important respect, that is the NRD for Members, without complying with the safeguards expressly laid down in Rule 41. [39] The above reasoning is decisive of this case. Based on that reasoning, I would hold that the result sought to be achieved by the Announcement was not within the power contained in the definition of NRD."
"The wording in the present case, by contrast, is far more general, and is not confined to determination of a particular day in a particular case which then has to be notified to the member concerned. I have those differences well in mind, and it is of course true that a decision on the scope of a differently worded power in the context of a different pension scheme can be of no more than persuasive assistance to me. Nevertheless, I draw comfort from Morgan J's approach in [38] to the relationship between the power in the definition and the general amendment power in rule 41, because it seems to me that a similar approach points the way to the solution in the present case." 238. Henderson J's conclusion and reasoning was given at [59]: "
"Moreover, both Beck and CATL v Gellately were dealing with provisions that were said to be an alternative way of amending the definition of normal retirement date contained in the relevant governing provisions. In both cases, this amounted, in substance, to an amendment to the governing provisions. In such circumstances, it is not surprising that the Court felt compelled to ensure that such a scheme-wide amendment complied with the requirements imposed by the express power of amendment. But that is not what has occurred in the present case. The effect of the exercise of the Exclusion Power is not to amend the governing provisions of the Plans in any way, so the arguments that found favour in Beck and Gellately are of no relevance. This is not the case of an attempt to achieve by the back door of an alteration to a definitions section that which could not be achieved by the front door of an express exercise of a power of amendment. On the contrary, and unlike in Beck or Gellately, IBM has exercised an express power to direct that a class of persons shall cease to be members of the Plans. It has not sought to amend the governing provisions of the Plans. The circumstances are very different, therefore, from those that obtained in Beck or Gellately."
"5. Subject to Clause 4 of this Part, a statement in writing signed by or on behalf of an Employer, to the effect that any of its Employees as specified in the statement is or is not eligible to be or become a Member, shall be conclusive evidence of the truth of the contents of that statement. 6. The Principal Employer may by notice in writing to the Trustees directthat any specified person or class of persons shall not be eligible for membership, or shall cease to be a Member or Members. Such a notice shall override any provisions of the Plan that are inconsistent with it. 7. (i) The Principal Employer may at any time by notice in writing to theTrustee direct that membership of the Plan shall be closed to new entrants, and from then on no person shall be entitled to become a Member without the consent of the Principal Employer. …"
"Optimisation of profit performance was an important part of this transformation. A review of the cost implications of our retirement plans, and in particular our defined benefit schemes, was a focus area."
"A. The commitment was made to me, as I said, was in the sum of the tone of the overall communication. The communication could have said other things. It could have said, 'We are going to close the scheme', it could have said, 'We are going to change the scheme'. It didn't. It said, 'We want to try and keep the scheme alive'. Q. Yes. A. That is, therefore, management giving the commitment that that is what they are going to try and do. Q. A commitment that that is what they are going to try to do? A. Yes. In business all you can do is try to do things. You guarantee very little."
"…management do not make very many commitments, actually because they are like guarantees: they are very dangerous things to give. What you do is say: I have a plan to address the issue, I am trying to address the issue to the best of my abilities. And that is what both these announcements effectively said to me."
"I believed that the guarantee ensured that there would be no further changes for the duration of the guarantee, because IBM World Trade Corporation was standing behind the defined benefit pension schemes and was making a commitment to support the pension schemes." ii) However, when faced with the possibility that the guarantee could terminate early, Mr Turnersought to rely on the guarantee only to give support to those convictions and intentions expressed by Mr Heath in the face of the changes he was making, but this backtracking is unconvincing and contrary to the thrust of his evidence. iii) It was pointed out to him that the guarantee related to funding, and not to accrual. He then reliedon the fact that the funding related to future service accrual as well, which he said was a "strong indication that the company is going to contribute in terms of future service benefits". iv) Mr Turner had no answer to why a guarantee to contribute money in the future prevented thefuture termination of DB accrual. v) The credibility of Mr Turner's alleged understanding of IBM's commitment to future accrual isundermined by his stance on its consequences for the ability of IBM to make changes to the Plans after 2004. He did not suggest that that commitment meant that the benefit structure would remain unchanged at all times in the future, but that it meant that any changes should be: "incremental where possible, and if they are sort of more radical where necessary, then those should come infrequently, with a period of stability following them." vi) Mr Turner confirmed that these changes could occur before 2014. vii) No doubt that is what Mr Turner would have liked, but IBM submits that such an understandingcannot reasonably be derived from Mr Heath's Webcast; and it is a long way from what Mr Turner said in his witness statement: "
"I was also surprised that the pensionability part now seemed that the company could change that, whereas I, obviously incorrectly, had assumed that that could not be changed." ii) Hence, Mr Dalgleish questioned the nature of IBM's commitment during and after Soto. iii) Mr Dalgleish seemed to backtrack from this in re-examination, claiming that he was aware in2004 that the Plans could close, but IBM submits that his answers in cross-examination on this subject ought to be preferred. I agree. iv) Mr Dalgleish readily admitted that Mr Heath gave no explicit commitment in the Webcast that the Plans would stay open to 2014, but stated that that was the overall impression. He relied on a mixture of the guarantee and the words used by Mr Heath. v) Mr Dalgleish agreed with the following as a reasonable summary of his understanding: "
"I wasn't thinking back then in terms of pension and handbooks. It wasn't an area of my life that I was interested in". ii) IBM submits that her recollection of, and understanding from, Mr Heath's Webcast should beconsidered in that light, and in the light of her statement in paragraph 14 of her first witness statement that, in 2004, "
"I expected [the I Plan] to stay in place until 2018 [the date of her (expected) retirement], but I thought it was fundamentally and completely guaranteed until 2014"
"Browne-Wilkinson V-C used the expression 'the obligation of good faith' as a form of shorthand for the implications set out above and in adopting it I should like to emphasise that it is a convenient shorthand only and, in particular, does not carry the implication that a failure to observe the implied obligation would amount to bad faith in the pejorative sense in which that expression is often used." 354. Mr Simmonds refers to it as the Imperial duty, by reference to Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd[1991] 1 WLR 589 ("
"…there is implied in a contract of employment a term that the employers will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee…" 358. This principle is firmly established. One sees it clearly articulated by Browne-Wilkinson J in Woods v WM Car Services (Peterborough) Ltd[1981] ICR 666 (giving the judgment of the EAT). It was approved by Lord Steyn in Malik v Bank of Credit and Commerce International SA[1998] AC 20 ("
"However, at the end of the day, the only relevant test is whether the impact of conduct complained of has, objectively, seriously damaged the relationship of trust and confidence"
"it seems clear that what is significant is the impact of the employer's behaviour on the employee rather than what the employer intended. Moreover, the impact will be assessed objectively."
"101. The issue here is whether the introduction of the MAC clause amounted to a breach of the duty of trust and confidence. In dealing with the relevant law, the Judge cited passages from the judgments of Lords Nicholls and Steyn in the leading case of Malik v Bank of Commerce and Credit International SA[1998] AC 20 and summarised the relevant principles as follows: "…in considering whether the introduction of the MAC clause amounted to a breach of the duty of trust and confidence, it is necessary to consider whether, on an objective view, (a) the introduction of the clause was calculated or likely to destroy orseriously damage the relationship of mutual trust and confidence between the claimants and DKL, and if so (b) whether it was introduced without a reasonable and proper cause."
"Your case is to attempt to elevate what is at best a representation into a legally binding commitment through the interposition of the Imperial duty. Is that what it comes to?"
"In that case [Imperial] it was a very important consideration that the employer was (a) seeking to force members to give up their accrued rights by moving to another scheme and (b) to take for itself the benefit of a surplus which under the rules of the existing scheme would be applied for the benefit of the members and former members of the scheme…In rejecting Mr Mowbray's argument, the Vice-Chancellor was clearly influenced to a large extent by the possibility that the sole purpose of the employer withholding consent to increase benefits out of the fund might well have been to force its present and past employees to give up their accrued rights in an existing fund so as to confer on the employer benefits that it could not enjoy unless the members give up such rights. It was that which, in his judgment, conflicted with the employer's duty to act fairly and in good faith to its employees."
"Things have, however, moved on since then [the decision in Imperial]. As Newey J points out in the Prudential case at [141], "it would make no sense to freeze-frame the duty of trust and confidence as it appeared at the date of Browne-Wilkinson V-C's decision"."
"In Wallace v United Grain Growers Ltd 152 DLR (4th) 1, 44-48, McLachlinJ (in a minority judgment) said that the courts could imply an obligation to exercise the power of dismissal in good faith. That did not mean that the employer could not dismiss without cause. The contract entitled him to do so. But in so doing, he should be honest with the employee and refrain from untruthful, unfair or insensitive conduct. He should recognise that an employee losing his or her job was exceptionally vulnerable and behave accordingly. For breach of this implied obligation, McLachlin J would have awarded the employee, who had been dismissed in brutal circumstances, damages for mental distress and loss of reputation and prestige."
"in short, that an employer must treat his employees fairly in his conduct of his business, and in his treatment of his employees, an employer must act responsibly and in good faith."
"Even so, I agree with Mr Tennet that the obligation of good faith is not to be taken as requiring an employer to arrive at a decision which is substantively 'fair' when exercising a power given to him in apparently unfettered terms by pension scheme rules. No support for such a requirement is to be found in Imperial or the subsequent pension authorities. In Imperial itself, Browne-Wilkinson V-C rejected in terms 'an implied limitation of reasonableness'; he would surely have been no more receptive to a submission that decisions had to be substantively fair. Nor, to my mind, do the employment law cases suggest that there is such a rule. So far as I am aware, there is, for example, no indication that decisions made as to discretionary bonuses must be substantively fair…..."
"While, in any such situation, the parties are likely to have conflicting interests and the provisions of the contract effectively place the resolution of that conflict in the hands of the party exercising the discretion, it is presumed to be the reasonable expectation and therefore the common intention of the parties that there should be a genuine and rational, as opposed to an empty or irrational, exercise of discretion."
"A purpose of the power given to the Company by clause 48 is to provide a means by which the Company may at any time free itself of the burdens imposed on it by the Deed. It is to my mind doubtful in the extreme that exercising that power, even if to free the Company of the burdens of the Deed and thereby improve its prospective financial position, would involve a breach of good faith, particularly given that members would still receive the clause 49 dissolution benefits."
"The applicants do not rely on a term implied in fact. They do not therefore rely on an individualised term to be implied from the particular provisions of their employment contracts considered against their specific contextual setting. Instead they rely on a standardised term implied by law, that is, on a term which is said to be an incident of all contracts of employment: Scally v. Southern Health and Social Services Board [1992] 1 A.C. 294, 3078. "
"146. My own view is that members' interests and expectations may be of relevance when considering whether an employer has acted irrationally or perversely. There could potentially be cases in which, say, a decision to override expectations which an employer had engendered would be irrational or perverse. On the other hand, it is important to remember that powers such as that at issue in the present case are not fiduciary. As a result, the donee of the power is, as Mr Tennet pointed out, entitled to have regard to his own interests when making decisions (see paragraphs 121 and 124 above). That fact must limit severely the circumstances in which a decision could be said to be irrational or perverse."
"185. The question remains whether the 'very strong expectations of members' made Prudential's decision irrational or perverse or otherwise in breach of the obligation of good faith. I do not think they did. My reasons include these. First, and crucially, rule 7.3 of the current Rules (and its predecessors) conferred on Prudential a discretion which was not subject to any express restrictions. ….. Thirdly, whilst there was an expectation among members that pensions increases would be granted, there was also an appreciation that Prudential had not guaranteed or committed itself to increases…..Lastly, there had been changes in circumstances: in particular, investment returns had declined, longevity had increased, and the Scheme's solvency had deteriorated."
"It is plain from these authorities that a decision-maker's discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness.... Laws LJ in the course of argument put the matter accurately, if I may respectfully agree, when he said that pursuant to the Wednesbury rationality test, the decision remains that of the decision-maker, whereas on entirely objective criteria of reasonableness the decision-maker becomes the court itself."
"Furthermore, as it seems to me, that letter was also a breach of Mr French's terms of employment. Anything more calculated to destroy the trust and confidence as between Mr French and the bank is hard to imagine. He had been asked to move. A bridging loan interest-free had been sanctioned to enable him to do so. His expectation would be that the bank would not wish him to suffer financial loss by virtue of the relocation. Now he is being asked to take£40,000 less than the agreed valuation on which he had based the borrowing for and purchase of his new house, or pay interest on his bridging loan which on his salary at the bank he could not begin to pay."
"a fundamental distinction……between, on the one hand, an expectation engendered by words or conduct amounting to a representation as to current intentions, wishes, hopes or expectations; and, on the other hand, an expectation engendered by a representation that amounts to a promise, commitment or guarantee as to future conduct or future events."
"ordinary members of the C Plan would not come to the November 1983 Handbook with the eyes of a lawyer, balancing one phrase against another. Such persons would, I suggest, be left with the clear impression that there was an unfettered right to retire from age 60, particularly persons who had attended one of the road-shows and had therefore correctly understood that he or she would have such an unfettered right. It is difficult to think that such a person, coming to the November 1983 Handbook, would detect that its provisions relating to the C Plan meant anything different from that which had previously been presented."
"……the court is unlikely to be assisted by repetitious evidence from individual consumers, put forward by each party as the embodiment of the average consumer. The task for the court is to inform itself, by evidence, of the matters of which a reasonably well informed and reasonably observant and circumspect consumer of the products would know; and then, treating itself as competent to evaluate the effect which those matters would have on the mind of such a person with that knowledge, ask the question: would he say that the words or word identify, for him, the goods as originating from a particular undertaking?"
"The 'old' IBM had very fixed views about compensation; much of it, I suspect, had been derived from the management philosophy of Tom Watson Jr, the man who created the great IBM of the 1960s and 1970s. Since the company's performance during that time had been so extraordinary, it would be foolish to say it was not an effective compensation system. Let me briefly describe the system I discovered when I arrived. ……there was a heavy emphasis on benefits. IBM was a very paternal organization and provided generously for all forms of employee support. Pensions, medical benefits, employee country clubs, a commitment to lifelong employment, outstanding educational opportunities – all were among the best of any United States company….. Basically it was a family-oriented, protective environment where equality and sharing were valued over performance-driven differentiation. I was well aware of the strong commitment IBM held for its employees long before I joined the company. However, as good as it might have been during IBM's heyday, the old system was collapsing amid the financial crisis that preceded my arrival. Tens of thousands of people had been laid off by my predecessor – an action that shocked the very soul of the IBM culture….. The old system was not only out of touch with realities of the marketplace, but it was unable to satisfy the paternalistic underpinnings of the historical IBM culture. Consequently, it made fixing the company very difficult and made employees sad and cynical. We needed a whole new approach – and we needed it fast….. The final change we made was the least strategic but the most controversial: paring back the paternalistic benefits structure. We did not undertake these changes because we thought the highly generous support system was bad per se. Believe me, I would have loved to continue the employee country clubs and the no-cost medical plans. We cut back on these plans because the company could no longer afford the level of benefits. The high profit margins of the 1970s and 1980s were gone forever. We were fighting for our lives. None of our competitors offered anything close to the IBM benefits package. (Even now, after all the changes we made, IBM benefits programs are among the most generous of any United States-based multinational corporation.)…. Also, we changed benefits because the old system was geared to the company's prior commitment to lifelong employment -- for example, the bulk of pension benefits accrued after thirty years of service. The new IBM was not a place where jobs could be guaranteed for life (nor was the old IBM after it got in trouble). So we had to create benefits programs that were more appropriate to a modern workforce….. Yet the hardest part of these decisions was neither the technological nor economic transformations required. It was changing the culture – the mindset and instincts of hundreds of thousands of people who had grown up in an undeniably successful company, but one that had for decades been immune to normal competitive and economic forces. The challenge was making that workforce live, compete, and win in the real world. It was like taking a lion raised for all of its life in captivity and suddenly teaching it to survive in the jungle….. Of course, enlightened companies and leaders know an institution must outlive any one person or any one group of leaders. Watson realised this and he deliberately and systematically institutionalised the values that had made IBM under his tenure a very successful company…… He summarised them in what he termed the Basic Beliefs: Excellence in everything we do. Superior customer service. Respect for the individual. There is no arguing with these. They should be the standard tenets of any company in any industry, in any country at any period of history. But what the Beliefs had come to mean - or, at least, the way they were being used – was very different in 1993 than in 1962, when Tom Watson had introduced them. Perhaps most powerful of all the Beliefs – and most corrupted – was 'respect for the individual'. I am treading on the most sacred ground here, and I do so gingerly to this day, 'respect for the individual' is the rallying cry for the hardcore faithful - for the True Blues, as they call themselves. But I have to say that, to an outsider, 'respect for the individual' had devolved to mean a couple of things Watson certainly did not have in mind. For one, it helped spawn culture of entitlement, where 'the individual' didn't have to do anything to earn respect – he or she expected rich benefits and lifetime employment simply by virtue of having been hired. Or that is the way it appeared to me at first. Later I came to feel that the real problem was not that employees felt they were entitled. They had just become accustomed to immunity from things like recessions, price wars, and technology changes….. In an organisation in which procedures had become untethered from their origins and intent, and where codification had replaced personal responsibility , the first task was to eradicate process itself. I had to send a breath of fresh air through the whole system. So I took a 180-degree turn and insisted there would be few rules, codes, or books of procedures. We started with a Statement of Principles. 'But what about the basic beliefs?' you may ask. 'Couldn't they have been revived and turned into the sorts of principles you are describing?' The answer is, unfortunately, no. The basic beliefs had certainly functioned that way in Watson's day, then for many decades after that. But they had morphed from wonderfully sound principles into something unrecognisable. At best, they were now homilies. We needed something more, something prescriptive. In September 1993 I wrote out eight principles that I thought ought to be the underpinnings of IBM's new culture and sent them to all IBM employees worldwide in a special mailing. In reading them over now, I am struck by how much of the culture change of the following ten years they describe. Here are the principles and an abbreviated version of how I described each ... 1. The marketplace is the driving force behind everything we do. 2. At our core, we are a technology company with overriding commitment to quality. 3. Our primary measures of success are customer satisfaction and shareholder value. This is another way to emphasise that we need to look outside the company. During my first year, many people, especially Wall Street analysts, asked me how they could measure IBM's success going forward - operating margins, revenue growth, something else. The best measure I know is increased shareholder value. And no company is a success, financially or otherwise, without satisfied customers. 4. We operate as an entrepreneurial organisation with a minimum of bureaucracy and anever-ending focus on productivity. 5. We never lose sight of our strategic vision. 6. We think and act with a sense of urgency. 7. Outstanding, dedicated people make it all happen, particularly when they worktogether as a team. 8. We are sensitive to the needs of all employees and to the communities in which weoperate. This isn't just a warm statement. We want our people to have the room and the resources to grow. And we want the communities in which we do business to become better because of our presence. 528. That is not how everyone saw it. Thus we find Mr Gavin Wilson (a former member-nominated director of theTrustee) emailing in the following way in June 2012: "
"effectively Mr Lamb is seeking reassurances from IBM about its commitment"
"Consequently the Trustee received advice from its professional advisers that these numbers should be brought to your attention and that assurances about the Principal Employer's ability and ongoing intent to fund the Plan should be sought." and "
"As we discussed in our meeting, the board of the Principal Employer spends considerable time discussing the Plan and has given serious consideration to the issues raised in your letter. I am pleased to be able to confirm that the board has approved that employer contributions totalling£157 million should be made to the Plan in 2004, as recommended by David Eteen, the Plan Actuary, following his latest actuarial review. However we do not feel it appropriate at this time to make an additional non-regular contribution in excess of that recommended by the Actuary. It remains the current intention of the Principal Employer to continue to support the Plan through the payment of employer contributions in accordance with the provisions of the governing Trust Deed and Rules. In conclusion, I trust our meeting reassured you that the Principal Employer is committed to meeting its obligations to the Plan and its members."
"From that meeting and the letter dated13 October 2003 that he had subsequently received from Mr Hirst he had been given the very strong impression that IBM intended to continue to fund the UK Pension Plan." and where he referred to the last paragraph of Mr Hirst's letter quoted above stating his belief that this: "indicated implicit support by the IBM Corporation for the UK Pension Plan as, from his previous experience as IBM UK CEO, he assumed that Mr Hirst would have consulted with his colleagues in IBM US before making his statement."
"The Company has confirmed to the Trustee that 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 Trustee has welcomed this positive confirmation from the Company."
"That did not mean that we would not address issues around the plan, as a company"
"…by explaining the actions the company is taking to underpin the plan financially and to contribute cash, and link that to the additional contribution we are now asking employees to make to play their part. "
"While this will always remain contentious, I think there is a high degree of realism in the subject here. Naturally, we will not let this deter us from keeping the contention going."
"…whilst securing the funding of the accrued benefits was our primary concern, the Trustee was also mindful of doing its best to work with the Company to ensure its continuing commitment to the Plans and to maintain a relationship with the Company that would facilitate: a continuation of the DB plans (accruals for actives); and a continuation of pension increases for retirees in respect of pre-1997 service"
"Unfortunately, the idea of connecting funding status to employee contributions turns out to be problematic because of the many years when IBM had a funding holiday while employees made contributions"
"assist the Company to find a Plan funding approach that best protects the pension rights of the membership, ensures the ongoing funding of the Plan, and is perceived as being affordable by the Company" and added that: "
"At the 200M level [the proposed annual contribution] we are still likely to have a deficit at the end of the next three years requiring further funding going forward after that. In addition we know that should we be fortunate enough to end up over funded we can shift assets to bonds to reduce risk, something we should do over time anyway as the plan is very mature. My conclusion is to hold at the 200M mark. The UK can fund that level with some adjustments to its financial model, the total WW company is in outstanding financial shape with strong cash balance and strong cash flows expected going forward which put us in a good position to get some of these deficits behind us in an orderly manner. Also for every dollar we put into the plan we get an increase in our pension earnings at 8%, about the equivalent at the EPS line of what we get by using the same dollar to buy back stock, so we are not hurt with investors except for the impact on cash flow."
"It might be useful to have a statement about the UK Team's commitment to the ongoing review of the affordability of the plans in light of business conditions and a recognition that future plan changes could be needed if business conditions deteriorate. Also, we spoke about communications to employees and the need to be clear about this point as these changes are introduced. Obviously this does not need to go into the document [a reference I think to what became the Funding Agreement]"
"Dr. Marks again stated that, in his opinion, the Guarantee was not necessary as the Trustee already had a guarantee under UK legislation. Mrs. Kirkwood suggested that Dr. Marks had overlooked the fact that the Guarantee would provide the Trustee with a deal that would keep the Plan open for future accruals which was something they did not have previously. Dr. Marks said that he thought that the Guarantee did not take away the Company's power to wind up the Plan."
"I would purposely never offer a total guarantee for the future in a business like Holdings because it's a business where things change, and the financial environment around it changes. I would never offer myself as a hostage to fortune by guaranteeing something which I could never be sure of. So was I expecting a further change two years down the line? At the stage, no, I wasn't."
"I would certainly accept that at the time it was not Holdings's intent to close the schemes and that was not on the agenda, and we wanted to reassure people that that was not on the agenda at the time. I was asked in subsequent roadshows specifically the question around: is there a guarantee around the future? I offered the response: no, there is never a guarantee in anything. But – but – we are – our intention is to put these schemes on a more sustainable footing."
"In the circumstances at the time"
"1. Only criteria used today is that the employee is 50 or more and that is [sic] has both 1st and 2nd Line approval. 2. In last 5/6 years, never seen a refusal but possible deferrements [sic] in dates. Current policy, where approved the employee can leave IBM with a reduced pension in accordance with the early retirement factors that apply to the Pension Plan to which they belong."
"I am therefore pleased to tell you that the Trustee has reached agreement in principle with the IBM Corporation that will guarantee company contributions to the fund. The principles of the guarantee are agreed: the legal documentation is being prepared…. …… the guarantee will be for the period up to the end of the first quarter of 2014. This period covers the next three Valuation Reports and roughly coincides with the period in which, if the future experience of the Plan is in line with assumptions, company contributions are expected to extinguish the deficit. The guarantee is excellent news for members. It enhances the security of members' benefits and demonstrates the ongoing commitment of IBM to the plan and its members. It has been agreed in principle that company contributions to the defined benefit sections of the plan will be£181 million in each of the next three years. This compares to£121 million this year…. "
"It is not the role of the Trustee to determine IBM's future remuneration policies nor to negotiate on behalf of employees. The Trustee should primarily have concern to protect the accrued rights of members. The Scheme Actuary has advised the Trustee that members [sic] accrued rights are unaffected by IBM's proposals."
"The company believes that the proposals put forward enhances the security of members' benefits and demonstrates IBM's continuing commitment to the Plans and their members" "
"11.1 What does the IBM corporate guarantee refer to? The guarantee relates to two things. Firstly, the IBM World Trade Corporation guarantees to meet future payments as advised by the Scheme Actuary, in the event that [Holdings] is unable to do so. Secondly, it guarantees that, in the event the funding at subsequent triennial valuations does not improve to the level expected, the Trustee will receive additional funding, spread over the remaining period of the guarantee 11.2 The corporate guarantee is£600M - how is the rest of the£900 + deficit going to be made up and over what period of time? As David Heath outlined in his announcement, ''The guarantee will be for the period up to the end of first quarter 2014. This period covers the next three Valuation Reports and roughly coincides with the period over which the actuarially-assumed investment returns and company contributions are expected to eliminate the deficits".£200 million represents the aggregate contribution to both the IBM Pension Plan (the C, N and Data Sciences Sections) and the IT Solutions Pension Plan. As set out in Jim Lamb's announcement to members, the Company contribution to the IBM Pension Plan for the three years, 2005, 2006 and 2007, amounts to£181 million per year, covering the cost of future service benefits for that year and the contribution towards the deficit. 11.3. Requesting clarification of statement on "guarantee"
"There is almost euphoria amongst people that I've bumped into this morning. There's an almost tangible air of "relief" and they are really appreciative of the open, honest, factual no-nonsense way in which this series of announcement has been constructed and announced. The 1 or 2% increase is clearly less important to people than the (implied) message that the Plans are not being closed, nothing else really nasty is going to happen......and the funding/guarantee is a bonus on top."
"Q. From those discussions which subsequently occurred, is it your understanding that many members did assume that what you were telling them in this telecast was that the ongoing status of the plans was being guaranteed until 2014? A. I don't believe that was the majority view of the members. Certainly in the feedback I have had, and I did have from a wide range of members, I think the majority of members understood what the guarantee was about; that the guarantee was about the funding of the plan, not the future of the plans. However, there were some people who had interpreted it in a different way, absolutely."
"Q. ……… You accept that at least some members took away the impression that the scheme was guaranteed not to close before 2014? A. I think some members may have taken the impression. I don't believe that was the majority of members. And when those members, the smaller number of members, came to me and asked me, I explained what the guarantee was actually about."
"Q. You don't say that you are guaranteeing the plans will never close in future, but you do talk here of a commitment to underpin sustainability. Would you accept that your announcement could have been reasonably interpreted by members to mean that if they agree to pay the increased contributions, which they are not obliged to pay, then IBM was committed to the sustainability of the plans in the UK? A. I would certainly accept that at the time it was not IBM's intent to close the schemes and that was not on the agenda, and we wanted to reassure people that that was not on the agenda at the time. I was asked in subsequent roadshows specifically the question around: is there a guarantee around the future? I offered the response: no, there is never a guarantee in anything. But -- but -- we are -- our intention is to put these schemes on a more sustainable footing. Absolutely."
"without the existence of the Guarantee Watson Wyatt would be recommending a significant and accelerated switch to bonds. However, he stated that with the Guarantee a slower pace of change may be acceptable (e.g. an initial 10% switch followed by 2% per annum)……" 733. Mr Wilson was also well aware of the investment risk, and explained that the: "
"the purpose of the GBF is not intended to match liabilities but is to maximize alpha."
"the pension levels are rooted in a past when IBM faced little competition for its products and services. Today's intensely competitive marketplace, on the other hand, requires that we deliver products and services at competitive rates. When we shoulder benefit cost burdens that few of our competitors experience, it hurts our ability to price competitively… The problem is most acute right now in a handful of countries (Canada, Germany, Japan, Netherlands, U.K., U.S. and Switzerland). In each of these countries, in late 2005, IBM is identifying solutions to help curb the rising pension costs that are threatening the vitality of the business."
"….Randy communicated to these countries and IOT leads that unless they make significant changes to the retirement plan to reduce I&E impact, there will be no SIP/PB/equity funding made available to them. It is their problem and the corporation and other countries without pension issues will not subsidize their largesse. They can choose between spending the money on their active employees/execs in cash/equity or on the retirement plan. Given that in most cases not all of the employees are in the offending plan, we expect that changing the plan will be more attractive than no SIP/PB/equity"
"pretty extraordinary summation of the position in the UK given the actual causes in the increases in NPPC and the long history of profiting from the UK DB Plans. The threat to withdraw any salary increase programme funding (effectively freezing salaries in countries with DB pension schemes until cuts were made), was not consistent with a consensual and collaborative approach by CHQ towards in-country management."
"Now that we have all heard the same message about our need to focus on the 2006 and longer-term I&E impact associated with pensions, we wanted to outline the process that we are envisioning"
"– Key issue is message just delivered a few months ago. What did we say: Argument needs to be pure economics not FAS economics [a reference to US Financial Accounting Standards]"
"Needs solid reasons other than US GAAP ... Need to build"
"You were right when you said that setting a # could distract focus… we have a unique opportunity now to address the costs of pensions – both the level and the volatility – to solve this for the long term once and for all….."
"Any forced change viewed as breach of trust (company "tricked" individuals to sign up to agreement earlier)…Betrayal – poor understanding of economic case"
"the problem I see is the lack of buy-in by local team that there is a problem. Doing "whatever the corp. will ask him to do" is not an attitude that will enable successful execution in a difficult environment… It is clear to me that they feel dragged along unwillingly."
"Our view is that the package of measures we have put on the table are sellable to a broad cross section of our population. There will undoubtedly be a perception amongst a sizeable number of DB Plan members that we have breached the trust they placed in us when we "sold" the previous deal to them last year."
"We have developed the package of measures in order to address the two key issues that the corporation has asked that we focus upon, 1.$92M cost saving for the next year 2. Reduction in long term volatility of pension plans." and "
"so far I have heard exactly the opposite…namely that the priority is 1. 2006 I&E; 2. Longer term volatility; and that the Corporation is willing to use many options including CASH to solve these two."
"higher cash (2006/07)"
"In assessing its financial plans, it has become clear to the company that it needs to address a significant impact on the 2006 Income and Expenditure accounts from its Defined Benefit Pension Plans….. The rising pension expense….is largely the result of volatile economic forces outside the company's control."
"it is now appropriate to put forward to the Trustee proposals which will improve our competitive positioning by reducing long term pensions expense and volatility whilst, at the same time, provide a competitive Defined Contribution pension arrangement for current and future employees."
"The Trustee Directors are disappointed that the Company has made these proposals so soon after the bargain the Company and the Trustee entered into on December 9th 2004; a bargain the Company indicated would secure the sustainability of the defined benefit plans and was a fair balance between the rights and expectations of pension plan members and affordability on the part of the Company."
"As I have mentioned earlier the Trustee entered into a bargain with the Company a year ago covering both past service and future accruals but if the Company is in financial distress then the Trustee is prepared to work with the Company in the interests of all of the members of the Plan and the Scheme."
"Even if they don't go -- you are suggesting that I am saying that things would be continuing even if business conditions changed and things didn't go well? No, I can't go there."
"Look, what I was conveying is exactly what I think Jim was asking me: that he wanted some level of assurance. He put that in his witness statement. I completely agree with that. But I have done this for 42 years. I kind of get it. You can't ever guarantee anything other than something like the funding, because you put that in writing. I said I can't guarantee anything but, from what I can see right now -- paraphrasing -- I don't see this as an issue going forward. I genuinely meant that."
"The impression that I left with, and I'm not quoting his words but the sense that I had is that he appreciated my candour and he understood that I couldn't "guarantee" anything, and we got up and shook hands and went our separate ways. There wasn't any adverse dialogue. There wasn't anything that was picking apart what I was saying, so I felt I gave some level of comfort."
"I think about it in terms of testing, challenging. Challenging: are you sure we have to do this? Why do we have to do this? We just did this – give me the facts as to why it is necessary. That is push back. If they convince me, I go forward. If I convince them that it is inappropriate, we don't go forward."
"In response Mr. Hirst stated that it had not been an easy issue for him and his management team and informed the TMM members that he had been asked the same questions by the members of the Employee Forum. He stated that, in his opinion, the Company would not have been able to negotiate the deal which is currently on the table with the IBM Corporation if the negotiations on funding and the Guarantee had not been successfully concluded a year ago. He further stated that getting a commitment on a cash injection to the pension plans was a 'big win' and believed that it would help to ensure that the possibility of getting into a similar position again was more remote than before. Mr. Hirst acknowledged that the revised Proposals did not represent the best possible choice but believed that they were the best possible option available and in his opinion were excellent compared to what was happening in many other pension funds."
" The actions taken in 2005 secured the funding of the plan liabilities over a 9 year period and have helped us to address rising pension costs in relation to improvements in longevity The guarantee remains in place However with hindsight, the actions taken were insufficient to address the underlying volatility of the pensions liabilities and increasing ongoing costs"
"Although there are no guarantees, these actions, along with those already taken, we believe, are sufficient to put our defined benefits pensions schemes on a sustainable footing"
"Now some of you may be sitting there having read the Independent article and have already got it wrong: first of all I ordered you to be here; secondly, we're closing the DB scheme; so what other screw up did they make. Well, they're commenting on what a lot of people will feel. 18 months ago Larry you came to us and said "increase your contribution and in return nine years the IBM company will guarantee the pension fund" and now you are breaking that bargain. Now there's two points here. One, I learned very early in my sales life - perception is everything. I am aware that that is the perception. I need you guys to help me explain why that perception and what we are doing is still in place that we had a deal. The increased costs going forward as opposed to historic costs were what we asked for a contribution for. That's what we asked for - of an increase to six to eight. And in return the IBM company over a nine year period would fill the hole that currently sits in the pension plan. That bargain is still in place and I'm going to pause on that point because David is going to talk about it when he speaks towards the end of his presentation and I'm going to come back- you can ask any questions that you like. But the bargain we signed is still on the table and the reason that the World Trade Corporation had to put that guarantee on the table is because IBM United Kingdom and IBM United Kingdom Holdings do not have sufficient funds to cover the pension and the pension deficit - we need the Corporation because of the losses that we have made and declared in the past as a company. So, David, I want you to come up and go through the detail."
"And the final element – component – within the proposals is to address funding. The company has agreed to fully fund – fully fund – the current deficit and to inject cash to the tune of close to$1 billion into the UK pension plans by the31st March 2006 . That in and of itself gives us a much greater stability, fully funds the plan and it enables us to move forward with much greater confidence. The next question that might be asked is okay well so the company is going to do this; but wasn't one of the criteria in terms of setting up the guarantee over 9 years last year that we were in deficit and if the company ever did balance the plan that the company could then pull out of that guarantee? Yes it was but what we have negotiated with the company is to maintain the World Trade Guarantee for the period through to 2014. I am just going to go into what we agreed last year because I think it is important, as Larry said. So the corporation will maintain the guarantee that was put in place last year through to 2014, irrespective of the funding status of the plan. Employee contributions will remain unchanged. We are not planning any changes in employee contributions as part of this package. However we did say as part of the package that we put last year, that every 3 years, the triennial valuation of the plan, we would look again at the cost of future service benefits and we would then look to increase or decrease employee and employer contributions on the basis of a 50-50 sharing dependent upon whether that was increased, whether future service costs continue to increase or whether there is a change of future service costs decreases. We are hoping that the package and measures we have put in place puts us on a better footing in relation to the triennial valuation but that's not due for another, I guess, another year or so yet. But that deal that we did last year, the agreement we put in place last year remains intact; no change, World Trade Corporation guarantee in place, and will remain in place supporting the UK company until 2014."
"What this gives us is it does help IBM to address the long term cost and volatility issues that we have got within the plans and it does that in 2 ways, through the pensions in payment changes and through the defined benefits changes that we are proposing to make. It meets the trustee concerns about long term stability and the funding of the plan going forward, and hopefully for many employees it will meet employee's objectives as well for protecting the pension fund that they have already accrued and to get some choice in terms of their future. What you have already got, as I said [is] protected, the choices [are] in respect of the future….."
"Earlier this week, I wrote to tell you that IBM UK is proposing to make changes to its pensions plans. During the last two days I have outlined these proposals to UK managers. I am now outlining these proposals to all employees. We will be working in consultation with the UK Forum to move forward with these proposals in the coming weeks. As you know, pension schemes around the world are being reassessed by many companies for affordability and long-term sustainability in a volatile economic environment. For IBM UK, rapidly rising pension expenses are placing direct pressure on our ability to invest in future growth, maintain profitability and operate in a market where global competition is ever more intense. Last year we took a number of actions to share the increased cost of longevity in the future service costs of our Defined Benefit pensions plans. Now we have developed a balanced package of proposals which address broader cost and volatility issues. Let me say some things right up front: We are not proposing to close any of our Defined Benefit Plans (C, N, DSL & I Plans) in the UK. Instead, our proposals are focussed upon the future, ensuring that the pension you have already saved is protected. We have developed a balanced package of proposals with the intention of offering choice So what are we doing? We are proposing to limit the pensionability of future salary increases to those who stay in these Defined Benefit plans. We are proposing to allow employees in Defined Benefit Plans to transfer into our Defined Contribution Plan (M Plan) on enhanced terms with no restriction on the pensionability of future salary increases. We are proposing to make improvements to some aspects of the Defined Contribution Plan (M Plan). We are proposing to change the basis of pension in payment increases. IBM is proposing to make a significant cash injection to our UK pensions fund which will clear the current deficit by31st March 2006 . The IBM World Trade Corporation Guarantee agreed last year remains in place. …..Whilst many of you who are already members of the Defined Contribution schemes may think that these proposals are of little relevance to you, I believe they are relevant to all IBM UK employees since they address the future stability and security of our pension fund and our overall competitiveness……. …… I believe the proposals outlined here are balanced. They address IBM's need to reduce pension expense, risk and volatility – and position our business to compete in a sustainable manner….."
" Today we are providing your manager with the presentation that was used in our manager meetings over the last two days. In the next seven days, we will make available a Webcast, and Q&A to help you better understand details of our proposals. During February, we will begin education sessions to help all Defined Benefit Plan members understand how their schemes currently operate, and how they would operate in the future under these proposals. ..... To assist Defined Benefit Plan members in making informed choices about their pension provision, we will then run a series of workshops during April and May. These will be supported by modellers, seminars and access to independent financial advice on preferential negotiated rates. Alongside this formal programme, it is vital that we maintain open and frequent communication so that questions and issues can be quickly identified and resolved. You can address questions regarding your current scheme to EMEA ASKHR/UK/IBM ?You can address questions regarding the consultation proposals and communications to the UK Forum at UK Forum Employee Rep/UK/IBM or access the UK Forum teamroom Link where minutes from consultation meetings will be published."
"The Trustee has carefully considered the Company proposals, has taken legal and actuarial advice, has been instrumental in IBM reshaping and improving its proposals, and for the reasons set out below has agreed in principle to the changes IBM intends to make."
"IBM has agreed to contribute sufficient cash into the Plan to eliminate the estimated deficit at the end of 2005. This amount will be around£500m and will be paid into the Plan before the end of March 2006. IBM has agreed to pay all of its 2006 defined benefit contributions by this date. The support agreement negotiated with IBM World Trade Corporation last year will remain in place."
"If the plan is wound up the pension in payment guarantee will fall way"
"The Trustee is disappointed that IBM has found it necessary to bring forward these proposals a year after the Trustee agreed to increase employee contributions (or reduce accrual rates) to reflect a fair share of the increased cost of longevity on future service. The Trustee was led to believe that these changes made the Defined Benefit Plan affordable for IBM and sustainable. However, IBM has made it clear to the Trustee that making no change to pensions benefits is not an option given the very competitive UK marketplace, the higher cost of doing business in established geographies, and the fact that many of its competitors do not have the same level of pensions costs as IBM. These factors are particularly relevant in a services business where people cost is the major cost driver. Clearly members would prefer that their pension benefits remain at least in line with their expectations. For the reasons I have explained it has not been possible for the Trustee to secure this. However, the Trustee has secured for the members the best possible deal in the circumstances. Employees are being offered choice. The defined benefit plan remains open for future accruals, the opportunity exists for employees to transfer to a much enhanced M Plan, and pensions in payment will be guaranteed for the foreseeable future albeit at a lower level than established practice. The funding position of the Plan has significantly improved. A deficit at the end of 2003 of£900m has been reduced to around£500m at the end of 2005. The£500m cash injection I referred to above and the existence of the WTC support agreement will put the Plan on a much stronger footing, and in an exceptionally strong funding position relative to the overwhelming majority of defined benefit plans in the UK. The Trustee believes members will welcome the security of benefits this enhanced funding position brings. Although IBM is unwilling to give a commitment to the Trustee that there will be no further changes to pension benefits it has told the Trustee that it views these changes as long term and has no plans for further change."
"David, if these changes are not long term then you need to confirm this and I will need to reopen the discussion with the non conflicted directors. The long term nature of these changes was an important factor in the trustee's decision process. No guarantees but we intend the changes to be long term is what I recall. If you are not intending them to be long term then speak up now. With regard to no current plans Randy McDonald told me he had no plans for change and would push back on anyone who wanted to revisit this topic during his watch."
"You have to set goals, you have to set targets, you have to set standards, and at the top of an organisation you have to lead in many different ways, and one of those ways is to establish some level of pressure, to keep the pressure on so people understand the importance of what it is all about. It is not something that you can just take willy-nilly and expect that it will just happen."
"responded by taking my security identification card from my jacket pocket and placing it on the table between myself and Randy and saying to him, "you tell me"
"we often set targets for accomplishment. It does put some pressure on the recipient to achieve a goal"
"I can say we haven't decided anything or I can go silent and leave it to you. How would you like me to respond?"
"Q. What guarantees do we have on this offer – will IBM guarantee to keep the C plan active for a period (e.g. 5 or 10 years) or do we have to go through the uncertainty and trauma every couple of years? IBM cannot offer any such guarantee that it will not make changes to its pension plans in the future. However, we believe that actions being proposed now will reduce the expense and volatility of the pension plans and therefore our current expectation is that it will provide a platform for future stability."
"Q. How do we know IBM will not close the DB plans in the future? A. IBM cannot offer any such guarantee that it will not make changes to its pension plans in the future. However, we believe that actions being proposed now will reduce the expense and volatility of the pension plans and therefore provide a platform for future stability."
"Q. How do we know IBM will not have to do this again one year later? A. We believe the following factors will mitigate the current expense and volatility Anticipated transfer of employees to the enhanced DC plans Restriction on pensionability of future salary increases for DB members One off cash injection by IBM further secures pension scheme Reduced, but guaranteed future Pension in Payment Increases for a fixed period Although there are no guarantees, these actions, along with those already taken, we hope, are sufficient to put our pension schemes on a sustainable footing" "
"We believe that actions being proposed now will reduce the expense and volatility of the pension plans and therefore our current expectation is that it will provide a platform for future stability. However, if in the future there is a need to make further changes to the Pension Plans, IBM could not guarantee that an opportunity to transfer on the same terms and conditions would be offered at that time."
"The proposals put forward by the company seek to address future long term pension expense and volatility to put IBM's pension plans on a sustainable footing" "…. we can confirm that in developing the current proposed package of measures, IBM has reviewed in depth the impact these changes will have on their future cost base and are satisfied that they achieve the aim of reducing the current costs and future volatility that the company faces with regards to its Defined Benefit plans. We believe that the proposed changes represent a fair and balanced package that will help ensure the future security for the plans in question." "
"Q….. I too would like to understand what "volatility" means. So I have two sub-questions: (1) What is it that is so volatile in the context of long term (multi-decade) investments that it is now unacceptable to IBM. (2) Is the volatility problem to do with long term investment performance; or is it short term balance sheet volatility made visible because of FRS 17 accounting requirements? A1. The short term volatility which has impacted the Company's pension expense primarily relates to falling long term interest rates. This has the effect of increasing the present value of the Plan's future liabilities, which in turn results in increased expense in the Company's accounts. A2. As referred to above, the volatility problem is primarily due to falling interest rates, rather than long term investment performance. FRS 17 is a UK Accounting standard but IBMs Corporate results are governed by the US FAS87 accounting standard. They use long term interest rates to value the plan's liabilities and the cost of providing pensions."
"Q. What is driving the increased costs that IBM is experiencing that could not have been foreseen during the round of changes made in 2005? A. The primary driver is lower long term interest rates since the start of 2005. These mean that the value of the accumulated pension liability in the Company's accounts is higher in today's money than it was. A report from Mercer Human Resource Consulting, published in January 2006, reported that pension deficits at the FTSE 350 companies rose by almost a quarter last year to£93 billion , despite strong equity performance."
"The Comparator Tool is intended to be used as one of several sources of assistance you can use in making your decision on whether to transfer to the enhanced M Plan, and its results should not be taken in isolation. I would urge you to consult the pensions Changes Website, particularly the Webcasts and the Q&A sections. You are also being given the opportunity to attend Roadshows, and to take advantage of one to one consultation sessions with external advisers."
"The information used to illustrate your benefits under your occupational pension plan is based on data as at6th April 2006 . It does not take account of any future changes to legislation, financial and employment conditions or your pension plan, nor does it consider any alternative methods of saving towards retirement such as ISAs or stakeholder pensions."
"In summary, When making your decision some of the areas you need to consider are: The defined benefit scheme is ultimately financed by IBM therefore you are not directly exposed to investment or annuity purchase risk. However, the benefits are not absolutely guaranteed and it is possible for the terms of the pension promise for future service to be changed at any time in the future……"
"There was a general expectation that IBM would amend/close the DB Plan in the future"
"However, many were of the view that they would rather accrue another 5-10 years in the DB Plan rather than switch to the M-Plan."
"What did you believe about future availability of the DB Plan at the time when you made your decision in 2006?" followed by multiple-choice answers with a box for an individual answer under the heading "
"Is it material to the Corporation from an earning standpoint?"
"Q. You fully understood and accepted the trade-off between volatility and EROA which you were trying to maintain? A. Yes. Q. You understood that volatility was a risk to NPPC? A. Yes. Q. You understood it was a potential risk to IBM's equity? A. Yes. Q. And you understood it was a risk in relation to the funding of the scheme? A. Yes. Q. You took those risks with your eyes open, did you not, because of the income that was potentially generated by the pension assets? A. Yes. ……… Q. IBM's strategy in relation to volatility was that it would not change asset allocation in its schemes to mitigate volatility unless the changes were consistent with the maintenance of the EROA assumption; is that a fair summary? A. It is kind of a sweeping statement. I am thinking – as I say, we have agreed to changes in asset allocation, but we have been considering what is the effect on the EROA. So I am trying to say over a period of time we have not been absolute and unbending, but we have been moderate or, let's say, wishing to proceed very gradually on such changes, and considering other things."
"Looking forward in time, even on an annual basis as opposed to an interim basis for the year, yes, the same forces are at work and that is really the -- that is kind of an illustration of, at least in this case, the discount rate effect on the NPPC volatility."
"…. effectively your first concern was to maintain the expected return of assets, EROA, and within those parameters was where you were prepared to look at volatility. Yes."
"Q: Can I ask you, Mr Koppl, was that relationship and this preference for the EROA assumption to be maintained before you did anything about volatility, was that your personal view or was that something which – A. It was me and my management, Jesse Greene and Mark Loughridge. I wouldn't say Mark gave us specific direction on every plan, I doubt that did on this, but he had seen the volatility analysis that I had done, and so we were thoughtful in terms of where we would propose to take down the asset allocation from equities to bonds, so ..."
"Q. If we then move to 8.3 of your statement, you say: "
"I would like to put this in the context from an investor's eye view. IBM each period, each quarter and each year, is reporting externally our results, in terms of profit and earnings per share, so while it is true that these plans can deliver profit in periods, prospectively each coming year the amounts can change, they can change up or down; that is the volatility element. So in the event that even if earning a profit, it is a smaller profit going into the next year. Then the issue is that the Company has to figure out a way to offset it in order to deliver what it otherwise would have without the pension in terms of profit growth. So the volatility is an issue that, without the ability to predict which direction those costs go based on movements in the financial markets, that the Company could be faced with adverse conditions that would cause it to operationally have to take actions that it otherwise wouldn't…… Here, DB Plans can deliver either a cost or a profit, and in spite of that we are choosing to move away from them, for the lack of predictability." 950. As he had put it in his witness statement: "
"we are thinking of this from an investor perspective, and they look primarily at year-to-year performance. So we don't think about 2004 [NPPC] as having been low in a relative sense; the issue for us was the year-to-year change. The primary issue"
"I have to say to you, I understand the point about accruals, benefit accruals, but we don't think about it that way. It is clear that benefit accruals represent the value of the benefit being earned. We think about it in the total context. We are required under US GAAP to report six lines of cost, including with the ones that are made volatile by financial market performance, how the assets are invested and so forth. So from our standpoint we don't have a baseline that says the one true line of cost is the benefit the participants earned. Even though I can understand from the members' standpoint that may be how they think about it, from our standpoint we think about the total, and we have to deal with the total. If we could just deal with that one line, our life would be easy. DB Plans would be DC Plans and we wouldn't be in such a mode of trying to move away from them."
"Q. Just to look at those volatile economic forces, the first of them is that you were taking -- the NPPC improvements depended upon discount rates staying constant – A. Yes. Q. -- did they not? Would you agree with me that those discount rates had, in fact, been quitevolatile at the time of Soto? A. Yes. Q. It had been the case that you had had difficulty forecasting the NPPC savings from Soto in six months' time because of the discount of rate volatility. A. Yes. Q. Effectively, what you were now doing was producing a road map target which was not just six months ahead, it was a three years ahead. A. Yes. Q. So there was a correspondingly greater chance of volatility in that time period. A. Yes."
"Q. You say: [in his witness statement] 'If this trend (low bond yields coupled with low asset returns) continued, the value of liabilities would increase, with no balancing increase in the value of the plan assets.' Then you deal with the NPPC effect. It is always true, isn't it, that if you extrapolate any bad trend for long enough, there is going to be a problem? A. I'm not sure what your point is. Is it the case that from -- I think this was looking from 10th June forward through the calendar year, so -- well, I mean, yes, if you forecast a bad trend, it's a bad outcome. I will answer that question. Q. If you make the hypothesis the bad is going to continue, you will end up with a problem. A. I take your point. Q. If you are constantly going to speculate that short periods of bad returns are going to continue long-term, then DB pension schemes are doomed, aren't they? A. Are they? Yes, I think they are. Q. They are – A. They are doomed. There is a trend here. Q. Yes, but my point is they were doomed at this stage because if you have a requirement to deliver consistent growth to investors – A. Yes. Q. -- and that is what is driving you – A. Yes. Q. -- and you can't predict, as we have agreed, DB costs in pension schemes, and the pressure is to deliver quarter-by-quarter good results – A. Yes. Q. -- you simply cannot run DB pension schemes consistently with the corporate aims, can you? A. No, [Mr Koppl clearly uses "
"Just a thought for your back pocket as you go into the discussions with Randy and Mark. While we have been focussed on the 2006 P&L impact, in most countries we have also come across opportunities to reduce ongoing P&L and get IBM out from further long terms exposure & variability. In each case this comes with one time cost on the P&L and also cash implications. At this stage in each country we are trying to make changes that will involve a lot of effort and noise and we are not really solving our future volatility in each case (related to the past). If the changes don't add up to enough to get out of the P&L hole in 2006 I think we should consider the "nuclear" option i.e. wind up where possible, push/buy conversion to DC and settle as much liability as possible."
"Q….. The problem which Towers Perrin correctly identify there is that your volatility problem is a function of your past liabilities. A. Yes. Q. That is what they are saying. A. Yes. Q. In a very mature closed scheme, those past liabilities substantially outweigh future liabilities; yes? A. To put it another way, service cost is maybe adding 1 per cent to the liability per year." 973. Later on he explained that NPPC volatility would continue: "
"4..15 IBM's NPPC could have been expected to be highly volatile. The impact on NPPC of fluctuations in asset and PBO values could be significant, as I have shown in section 3.2. 2.16 Project Soto would not have been expected to address aspects of the volatility related to the investment strategy (see section 3.2). IBM was not able to address a large part of this risk through benefit changes, as UK legislation protects against changes to past service benefits. 4..17 However, the Project Soto benefit changes would have been expected to reduce IBM's exposure to changes in long term inflation expectations (due to the COLA change and the reduction in future pensionable salary increases). Project Soto would also have been expected to reduce the build up of DB benefits over time. 4.2.18 In my opinion, therefore, I would have expected the Project Soto changes toreduce IBM's exposure to volatility in NPPC. 4.2.19 Notwithstanding that there would be a material impact on volatility, I considerthat significant volatility in NPPC would have remained following the Project Soto changes due to the absolute size of the assets and PBO of the UK DB Plans. This would not have been addressable through benefit changes."
"… when I was commenting on a factor being material, it was because I felt it was material by relevance to the size and scale of the UK profits and therefore, presumably, the decisions that UK management would take about the business and the pension scheme. I wasn't focused on whether it was material to an auditor who had to sign off a true and fair view of accounts."
"Q. Just talking about the amortisation period for a second, as we now know, one of the effects of Soto was to reduce the amortisation period, but the question of whether the amortisation period in Soto would have been reduced is a function of a comparison between the demographic of the scheme before Soto and the demographic of the scheme after Soto, isn't it? A. It's a point in time measurement that would just really be the measurement after. Q. Exactly, but if the period were -- if you imagine the demographic of the scheme before Soto and you imagine that numerous members had left but the members that had left fitted exactly the demographic of the scheme before Soto, then you would still have the same amortisation period, wouldn't you? A. Yes."
"…..to address future long term pension expense and volatility to put IBM's pension plans on a sustainable footing" "….IBM….. are satisfied that they achieve the aim of reducing the current costs and future volatility…" "
"Q. Would you accept that the impression you are giving to the UK team here is that CHQ was looking to be satisfied that any solution they had come up with would solve the pension problem long-term? A. That was our ultimate objective. Yes. Q. That was the impression you were giving to them, that is what you wanted their solution to achieve? A. That is what we started with, and they have come back with different proposals, saying they thought this was more appropriate. Q. Can you see why the UK would have come away from this meeting believing that you were looking to solve the pension problem long-term? A. It wouldn't have been just this meeting. I have been consistent on that. Q. If we go…… A. "
"Q. Would you agree what you are really saying is, look, you are pushing UK management to go as far as it felt it could go? You weren't saying what level of legal risk is acceptable; they had to decide what level of legal risk they were satisfied with. A. Yes, I think that is correct." ii) That is all very well. But what Mr MacDonald meant by the "pension problem" is not at all clear. I amdoubtful that he had any real understanding of volatility. iii) Mr Heath's email to Ms Salinaro of12 October 2005 shows that the UK thought it was addressing volatility.In that email, Mr Heath set out some questions which Ms Salinaro had asked and gave his responses. He explained in answer to question 1 that "we" (ie UK management) had developed the package of measures to address two key issues that IBM had asked them to focus on namely (i)$92m cost saving for the year and (ii) reduction in long term volatility. Question 8 and the answer were as follows: "8. How was the$59M cost reduction related to RPI change calculated? And same question for the$29M savings to then go from this reduced DB to DC. The$29 should be net of an increase to bump pay increase assumption back up for the group opting for DC, if I understand the proposal correctly. I'm having trouble getting to these numbers based on what I've seen before. I would imagine that these numbers are very sensitive to the demographics of those who stay in the plan. We need to understand that sensitivity and how far off our estimates could be. What will the UK business do, if the estimates turn out to be off and are producing lower savings than anticipated? How can the UK business make up the difference in fiscal 2006 and beyond to make its plan? The numbers are shown below the$29M saving moving from DB to DC is offset by the cost of providing DC. This particular proposal is designed to reduce volatility rather than reduce cost and it is that basis that we have used for designing the DC option to make it reasonably attractive that we encourage people to take the leap. There is limited cost increases/reductions based on the numbers of people who take the option the real prize here is volatility. The only significant issue is the early sign up bonus. We can take you through this tomorrow, will be easier face to face." iv) So clearly Mr Heath saw Soto as reducing volatility. In spite of the mass of material I have seen, I do notknow what he relied on in saying what he did. v) Mr Koppl agreed that volatility reduction "was one of the stated aims of the project". vi) Mr Hirst explained in his witness statement that the UK team tried to put together a package "which wouldresolve the issues of volatility and competitiveness", and that "the Soto changes were always intended to be…a long-term solution to the pension problem identified"
"Q. Was it correct that your view and the view of management was that those factors or elements would operate to mitigate volatility in the plan? A. Yes, to mitigate. Not to eliminate. Q. No. The reason for that is, if DB members transfer – MR JUSTICE WARREN: I'm sure you both know what you are talking about but I really am confused by the word "volatility"
"the actuaries would do that for me"
"Perhaps in my naivety, but when the finance people tell me that we are investing$1 billion and we are taking the funding that we need to do for that year and putting it into that$1 billion up front, they gave me a comfort level that indeed we were doing the right thing. I have to rely on their representations."
"CHQ repeatedly told me that the problem had been solved and I received numerous congratulatory messages, both oral and written, to this effect…If I had known that the very issue that was meant to be addressed by the changes was still considered unresolved by CHQ, then I would not have agreed to the changes, because, in those circumstances, it would have been obvious to me that CHQ would have wanted to revisit the issue in the future." ii) He also said: "... that the position was that which I understood at the time, namely that in terms of the underlying volatility of the scheme, it had been de-risked to CHQ's satisfaction, and the UK management considered the changes to be right for the business. I also said that the proposals met the Trustee's concerns about long-term stability and the funding of the plans; my understanding accorded with that of the Trustee." iii) As with all of Mr Hirst's evidence, I must treat what he said in his witness statement withcaution since he was not available to be cross-examined. iv) Mr Heath confirmed Mr Hirst's evidence, saying that he made the communications to membersand the Trustee because "that is absolutely how we felt at the time". v) Mr MacDonald maintained that if he had known the facts that he now knew he "would havemade the same statements [to the Trustee about sustainability etc]" adding this: "but then put additional statements around it so that people understood what I was saying"
"It will often be the most appropriate description of the person designated by the relevant attribution rule, but it might be better to acknowledge that not every such rule has to be forced into the same formula."
"If there were absolutely no expectation in this case engendered of any sort, then I would not be saying of the first three elements [closure of the DB section, change in ER policy, 2009 NonPensionability Agreement] that of themselves they were a breach of the duty to maintain trust and confidence."
"Q. Last year we had changes. This year we have changes. Does IBM rule out any further changes in future? A. IBM cannot offer any such guarantee that it will not make changes to its pension plans in the future. In order to remain competitive IBM will continue to monitor pension expense and benchmark our employee total reward package against that offered by our competitors."
"the risk reduction benefit of just doing the proposed£500 million tranche is immaterial and it only makes sense as a first step on the way to a bigger programme."
"I know equity reductions have implications for RoA but I'm not sure the company looks reasonable if it insists that some allocation to bonds (up to 20%) isn't warranted particularly when we have at least that in all of our other DB plans." ii) Mr Koppl's reaction was that such a move to 20% bonds would be "premature"
"Finally the Company welcomes the Trustee's statement that agreement to its requests will put the Trustee in a better position to consider requests from IBM for the Trustee to invest in reward seeking assets which would be expected to lead to improved investment returns. We look forward to a positive discussion on these matters over the coming months. Like you, we believe that agreement on these points is very good news for the Plans and their membership."
"I am pleased to tell you that following discussions between the Company and the Trustee IBM has agreed to: • transfer the obligations under the Funding Agreement from World Trade Corporationto IBM Corporation • extend the period covered by the Funding Agreement by three years to March 2017 • not use the£228m surplus to reduce the Company's contributions to the Plan over thenext three years • make the contributions recommended by the Scheme Actuary and documented in the Schedule of Contributions I am sure members will welcome this demonstration of continuing commitment to the Plan from IBM."
"The current asset allocation is heavily skewed to equities, 61%, with bonds at 33% and property, 6%. The equities are held as return seeking assets but are a poor match for the liabilities" against which under the heading "
"The key issue is financial volatility • Volatility comes from movements in the financial markets as they affect both the pensionliabilities, for future benefit payments, and assets The liability ……… • Small movements in bond yields make big difference in liability, example: • 25BP decrease, ¼ percentage point, worldwide increases liability$2 +B • From Y/E 1999 to 2005 US discount rate dropped 225 BP, increasing liab$10 +B. Similar ratedrops in many non-US countries occurred….. Funding - Rating agencies treat unfunded pension liabilities like debt, so they reduce the amount of money the company could borrow to do acquisitions or any other investment one-for- one. • Goal is to fully fund the plans to PBO but subject to tax efficient contributions.Assets ….. • Volatility example - 1 bad year in the markets (2002) -10% ROA in US, worldwide loss was$7 B "
"Finally, we would note that the position has changed materially over the last six months and particularly sharply over the last few months. We expect this to create further demand for bond purchases, which unless met by either willing sellers or more issuance could see the opportunity reverse as quickly. Whether or not you believe it is appropriate to de-risk at the present time, it would be sensible to establish a means of monitoring this issue and consider a dynamic approach to managing asset allocation to capture future opportunities."
"About a year and a half ago I visited with you and Don and Larry (together with Cecil Hemingway) to talk about de-risking IBM on the pension side. We were thinking that now that IBM had done a lot to curtail future benefit accrual in DB there could be a play on the finance side. You said that IBM was comfortable riding the risk for a while but could be open to relooking it in the future. I think that it bears a relook at this juncture - particularly in the UK as your second biggest DB market where there have been a number of developments. The big opportunity is to settle or refinance some or all of the inactive benefits….."
"[Mr Wilson] reminded the TMM Members that NPPC was a measure of looking at pension costs from a US accounting perspective and noted that the chart in the agenda set out the combined position between 2006 and 2008. Mr. Wilson summarised the key points from the chart and explained the effect that the movements in the discount rate and the credit crunch were having on the NPPC. He noted that the numbers on the chart took into account the mortality assumptions from the 2006 Actuarial valuation. Mr. Lamb reminded the TMM Members that it was important that the Trustee was kept aware of the NPPC numbers as they had been cited by the Employer in 2006 as part of the reason why it needed to introduce changes to the IBM pension plans. He stressed that it was important that the Trustee looked at these numbers periodically to ensure that IBM's accounts were not getting back into a situation where the Company felt that it would need to revisit the Plan costs…."
"Q. You are obviously a very intelligent man, Mr Koppl, and you obviously are aware of all these facts. You must have realised that there was a very substantial risk that, in fact, things would not work out over three years as planned. What did you envisage would happen in that situation, if things did not go according to projection? A. I have to say, if there were minor perturbations the Corporation might have just dealt with it, but it was the severity of what happened that caused the Corporation to act. Q. What were you envisaging? Let's just not focus on the severity at the moment; what were you envisaging would happen if the road map targets weren't going to be achieved by the pension schemes, in the event that it was going to cause you to miss the target? A. From a CHQ standpoint, the desire was to achieve the target, so there was a potential that I would be expected to develop actions to try and overcome that. Q. By "actions" you mean – A. Something within the domain of the retirement-related costs. Just to put this in context, when the financial crisis began in 2008, I had started to develop actions on defined contribution plans and retiree medical, for example, that could have helped to offset the adverse impact of the crisis. …….. Q. It certainly wasn't the case, was it, that DB pension cuts were off the agenda in that situation? A. No. Q. At this time, you are suggesting that that would have been within the range of actions to ensure that the pensions element of IBM's business achieved -- I am quoting now -"its own 2010 EPS road map targets"? A. Yes." iii) So, as Mr Koppl explained it, he was addressing in 2008 the shortfall of the retirement related costs from the2010 EPS Roadmap projections and not the relationship between operational running costs of retirement related benefits and the actual cost. iv) Mr MacDonald agreed that "when the DB schemes failed or looked like they were going to fail to produceprofits in 2010 that IBM was expecting, [I] looked to DB members to accept reduced benefits to make up some of the shortfall in the profits"
"It was not the case that pensions were asked to make any larger than previously expected contribution to the costs savings as a result of the rapidly-changing financial environment, but rather that all areas of the business, including pensions, were required to take steps to ensure that they would achieve the levels of savings that had been set out in the 2010 EPS Roadmap, despite the financial crisis." v) Mr Tennet asked him about that: "
"The biggest driver of the drop to$0.70 EPSis weak pension YTD [year to date] actual ROA"
"Clearly the recent market turbulence (fall in equity markets, rises in inflation in some countries and instability in bond markets coupled with hugely uncertain outlook) has forced many companies to rethink and look into strategy to reduce or mitigate exposure to DB obligation. The work you are embarking on is the natural next step of [what] was started a few years ago (2005/06/07 - first wave of Soto work). The majority of the cost and risk exposure for these large pension plans is related to the older active (but mostly inactive) participants. We understand that IBM has once again assembled a cross functional team (HR, Finance and Legal) to quickly look into country specific opportunities to help reduce risk exposure and reduce long term costs."
"I also initiated Project Whisper in October 2008 in response to the deepening financial crisis. Lehman Bros had just collapsed and we could see that we were in an economic crisis or were about to be. In light of this, we were looking at various possible scenarios and considering what could be done to stabilize the 2010 EPS Roadmap. We were seeking a creative approach to reducing costs in the short term and the long term, and pensions were just one part of that discussion. Project Whisper was a comprehensive exercise initiated by me and led by Federico Castellanos, with other senior HR executives in attendance, including Jonathan Ferrar, who was by then the UK Director of HR. The team that I had nominated met in Armonk, New York for several days, beginning on15 October 2008 . I asked the team to consider all available options from a HR perspective (JRM tab 21). I asked them to compile a menu of options dealing with what could be done quickly in order to rein in costs. For example, I recall that following these discussions, we looked at the company's car program worldwide and committed to reduce the annual cost of it by US$120 million ."
"Exactly why the benefits team were determined the [sic] end DB accrual in the UK is not clear, since it would have a minimal effect on volatility. Larry Koppl's "
"Mr Alexander [of Watson Wyatt] said that for strategic reasons it was reasonable to retain the bond policy weight at 44% but on tactical grounds not to bring the actual weight back to 44%. It was therefore agreed that the policy benchmark for bonds be fixed at 44% and that asymmetric trigger points be set around the benchmark. The normal 3% drift range would be appropriate for the lower trigger point but there should be no upper trigger point…."
"…… Project Whisper was the 15th, my involvement finished on Sunday, 19th, I flew back on the 21st, night of the 21st, arrived 22nd, meetings on the 22nd, TMM 23rd. I got an email from Kathleen Roin on the 24th which indicated quite clearly that there was some action starting. I had a meeting with Stephen and Brendon on the 27th, at which I was talking about labour costs there, and we got the NDA signed on Sapporo and that is when we really -- I personally started thinking: we need to have options, we need to start this, we need to make this a UK thing."
"I think of annuitization to an insurance company as a longer term action because of the time it would take to structure a deal and to comply with regulatory requirements, I would expect the other actions which focus on reducing service cost or offering lump sums to be near term."
"Stephen told me that such an action [closure] would not be possible in relation to the IBM UK pension plans, or that it would trigger a section 75 liability."
"made me seriously question Stephen's judgment and commitment, as I felt that he had given me advice that did not appear to be in the best interests of the enterprise. Following this incident, I came to the conclusion that Stephen should be moved on from his role as CFO for the UKI business, and I communicated that view to Mark Loughridge."
"My reaction was – and it has being very candid – is that "
"I did not relish going back to redesign the DB Plans….. There are no legal inhibitions [to suspending DC plans], it would be pretty straightforward, and it is potentially a very large saving that we could execute quickly and without difficulty from a business standpoint. That was the basis for my thinking for why this might be a potential candidate." ii) Mr Loughridge appears to have regarded DC changes as a perfectly acceptable route to getting back on thetrack of the 2010 EPS Roadmap. Mr Koppl's notes of the meeting record that Mr Loughridge preferred suspension of the US DC plan to permanent change; he was clearly open to the possibility of suspension. iii) Mr MacDonald accepted this: "
"restriction to pensionable salary increases already implemented in SOTO… Employers duty of good faith to be considered". iii) Mr Ferrar also thought that compulsory cessation of DB accrual might not achieve the cost and volatilityobjectives. On cost, his summary said there would be a curtailment loss of$60m to I&E, and that the basic savings were projected to be only$5m pa with a "
"Difficult to offer morethan last time (people who took DC last time would feel cheated)". ii) In relation to termination of DB accrual: a) Mr Wilson pointed out that "the statutory books were not at a loss"
"last time IBM based argument on US FAS method"
"Stephen Wilson was assigned the task of considering the UK business justification for each alternative, along with a consideration of the potential trustee reaction... I made no requirement as to the outcome of that analysis, but Stephen refused to even undertake performing it. I was well aware that any pension re-design is difficult for local country management and employees. However, in all my years of experience within IBM I had never come across such an outright refusal from an executive to analyse alternatives. When I returned to the US, I reported to the senior executive team on my meetings and I told them about the incident with Stephen. Subsequently, it was decided by the senior executives that Stephen would no longer be involved in the project."
"I was tasked with the creation of a Trustee negotiation strategy and business justification for each of the options being considered. I found this difficult as it was not apparent to me in the meeting what the justification would be other than the increases in NPPC IBM was facing, with the resultant effect on EPS, and the associated concern about future volatility of pensions costs. We debated for some time the potential other justifications such as IBM UKI business performance, and particularly how the business had progressed since the Soto changes. However the facts as I saw them at the time did not support a view that the business had materially deteriorated since the time of Soto…. The problem as I explained above is that I could not at that moment see what grounds there were for change other than NPPC resulting from the financial crisis. I was certainly frustrated, as I felt I was being given a task that I simply could not see at that time how to complete. My recollection is that we parked the point and Larry said he would give it further consideration and come back to me."
"The pronounced volatility of the massive liability and related assets has a profound impact on the financial performance of the business"
"DB is volatile but contributes income to earnings" in contrast with DC which has "steady cost and cash"
"Each yearservice cost increases the pension liability by 0.8%. Ending service cost would cap the liability… The large liability and supporting assets is the source of pension cost volatility"
"I briefly spoke to Jane given my amazement at the difference in mindset vs. previous pension discussions. Things that we had been told in the past were not doable are now doable. She indicated that it is the new leadership and who was in the room -- I interpreted that as the fact that it was key to remove Steven Wilson and Larry Hirst from the discussions -- I inferred that they were directing the rest of the team on what had been said. It will be important for us to limit Steven's and Larry's knowledge of what we are analyzing. I fear that they will work against this initiative behind the scenes with Jim Lamb et al.-- of course I have no facts, but I think it is a concern that we need to figure out how to protect against. Had Steven Wilson been in the room today it would have been a very different meeting."
"• A robust rationale for change will be needed for trustee and employee engagement/communications that demonstrates that ultimately the action being taken is in the best interests of both the business and its employees and therefore pension plan members • Develop a comprehensive story board that contains collateral supporting the case for change and is used as a reference point for consistent messaging to all stakeholders" "
"…. the anxiety that i feel is reserved for the pension situation.... to be specific, and as we discussed the other night, i was working under the impression that i could actually speak with some folks on the team about this - at least to develop an historical perspective. given that stephen is not disclosed and david newman apparently is "conflicted", it's been a little lonely..... ….. here is the reality.... pensions is a specialized skill within the finance community and i could only be considered a novice involved in a hugely important issue for the ibm company. so, i am meeting with jesse today to discuss 3 primary things.... 1) help in the construction of a case for change. i mean, we can't walk into this meeting and justdeclare that we want to make a change because we want to - it must be framed 2) i need to understand what the negotiation strategy is and who are the players. last time, randy wasdirectly involved. like you, i am happy to stand in front of the train but given the importance of this issue to the ibm corporation, we need to know who is going to do what to who and we might need some heavy hitters. 3) i need to better understand my "unique" role in this process. specifically, i expect that i will be onthe board while also being the cfo. i am struggling to understand the balance that i am expected to have between my board role and the uki cfo in building this case for change... we will explain that the financial position of the pension has deteriorated (like every other company) and in order to support the liabilities of the plan we feel the need to reform the structure. my concern here is that the trustees could have an emotional response to this as they believe that ibm talked them into staying more heavily invested in equities and this is the reason, not the structure, that we are under funded.,… to me, it's critical that we take the conversation to a higher level and attempt to relate the changes the to the uki business model. what i mean to say is that we should articulate that the economics of the current db plan are inconsistent with a major market imt that has to deliver >10% pti growth on small single digit revenue. said another way, illustrate that the projected db growth (existing scheme) does not support our need to drive year over year productivity improvement. in point of fact, ibm is pursuing pension changes to most of the major market imts this year.... i am not certain how comfortable the chq guys will be allowing us to share the business model discussion but i think it's important. further, we should be able to develop a line of logic that points out the inequity (80% of benefit to 20% of population) that the existing db plan drives. having a fixed element of award/compensation that is this large would seem to be inconsistent with other elements of ibm pay / reward model. finally, there is nothing wrong with looking at what the team developed the last time these changes were proposed.... perhaps there are supplemental arguments we could use again."
"Full approval received via Federico Castellanos on 22 April. In addition to the pension actions and the green light to initiate Trustee discussions these approvals include the DC Plan change to a matching scheme for all employees w.e.f April 2010…and approval of the early retirement window."
"….the board meeting was important to get the buy-in and the understanding of the senior management team, that is what Brendon wanted to do with the board meeting. He wanted to get them on side with aspects, and all aspects of what we had to do."
"I don't think it was part of the corporate decision-making process. I think Brendon wanted to do it to make sure his senior management team was on board …"
"Thedance has begun….") sent on1 May 2009 , Mr Riley wrote: "
"IBM UK's low (and declining) profit contribution to its ultimate shareholder IBM Corporation, the interests of IBM Corporation shareholders; IBM Corporation's requirement that IBM UK meets the business model objectives set by IBM Corporation; IBM Corporation's strategic move away from defined benefit pension scheme and towards defined contribution schemes; long term prospects for IBM's business in the UK; IBM's continued commitment to investment and employment in the UK; the interests of IBM's employees; the desirability of greater parity among IBM UK employees in terms of pension benefits; increased and increasing pension costs; risk and volatility in pensions investments and funding; general and competitive market trends and ongoing economic uncertainty."
"MR JUSTICE WARREN: Shouldn't they be informed of everything at a voting meeting? Isn't that rather important, if it is a vote rather than simply a discussion? A. Perhaps. Perhaps so. MR TENNET: Surely it is kind of relevant that the country general manager has already agreed this back in February and March with CHQ? A. I don't know that Brendon didn't discuss that with the members. I wasn't aware when he had that discussion. Q. But it is not mentioned in this – A. It is not. It is absolutely not. Q. That is all completely explicable if this is a preview of a communication strategy. It is inexplicable if this is intended to be an ab initio board decision on whether to proceed or not. That is right, isn't it? A. I would accept that we could have mentioned earnings per share as one of the dual motivations, yes. Q. I suggest to you that you would have mentioned it. A. Pardon me? Q. I am suggesting to you that, had this been a full voting decision of the board, you would have mentioned it, not that you could have mentioned it. A. Why would I have mentioned it? Q. Because it is plainly relevant to their decision. A. I should have mentioned it, yes."
"…the interests of IBM Corporation shareholders; IBM Corporation's requirement that IBM UK meets the business model objectives set by IBM Corporation"
"Today I met with Jim Lamb. Fairly predictable, he is committed to using every means possible to evaluate options and preserve the status quo (my words). Wanted to send you one quote 'I have been deceived by Randy, it was a clear act of deceit' referring to the SOTO negotiations."
"profit performance is declining"
"is not strictly true I think... or at least it is not how we have been communicating to employees for the past 2 quarters. We have been positioning UKI performance as making some improvements, but not achieving the rate of improvement needed. I think we should major on competitiveness, the need to improve a balanced business performance to enable investment in people and the UK business."
"~ UKI business is undergoing a period of transformation to improve our competitiveness ~ UKI is not achieving business model objectives (relative or absolute) ~ Change is imperative: Improve profit contribution margin by 11 points by end of 2012 ~ Must realise sustainable/repeatable improvement regardless of economic conditions ~ All elements of spending are being examined < Margin/Mix improvement < Expense productivity through management of fixed/variable terms ~ Need to revitalise our reward structure so that it supports our business model ~ Need to create a parity of reward across all employee groups ~ Pension cost introduces a risk and volatility that must be mitigated" ii) Global reward slide "
"Liability size drives pension cost, cash, and stockholders equity volatility which are a competitive disadvantage" [This is the only reference to volatility as meaning stockholder equity volatility of which I am aware.] iv) Summary slide: "~:} Need to dramatically improve UKI competitiveness and therefore profitability ~:} Current pension costs are not sustainable ~:} Move to a new platform for future service benefits that: > fits with the business model > provides parity of reward across all employee groups ……………."
"• Most of liability is with participants who have left IBM or are not earning benefits. • Volatility is primarily driven by former employees"
"The annual service cost represents less than 1% of the PBO liability and the plan freeze does notmake a material change to the liability profile for some time": see his email dated30 April 2009 to Mr Koppl and Mr Greene. ii) Mr Koppl: "
"3. Listed Changes The changes on which IBM is required to consult include: a. Cessation of accrual of DB benefits in the C, N, DSL and I Plans from April 2010, except forcertain members of the I Plan (see above); b. Restriction on increases to Pensionable Earnings / Salary for DB Plan purposes; c. Introduction of an improved DC contribution structure for the M Plan where members choose toincrease their contributions from the required minimum; and d. Where current DB members are paying less than 3% contribution and choose to join the M Plan,such members will be required to pay at least a 3% contribution. … …… 5. Dates All the listed changes above are intended to take effect from6th April 2010 ."
"There are persistent rumours that IBM has already prepared a number of sweeteners to be offered as minor concessions following the consultation to make it appear as if IBM has responded to the consultation. IBM should reveal its true proposals prior to the start of consultation, negotiate in good faith and if it announces subsequent changes it should be prepared to reopen the consultation."
"you may want to spend a few mins scanning them in advance of when we go back to them with our solutions"
"Which modifications are to be attributed to the Trustee, which to the PCC, and which to both"
"Verification of the facts, legal advice and planning are likely to require some time if they are to be done properly. This may well have an impact on the PCC timescales. However, it is important to ensure that due process is followed. I am sure that we all agree that it would be morally wrong, and also practically very unwise, to put perhaps over a thousand employees (who by definition have given over a quarter of a century of service to IBM since the inception of the C Plan) under pressure quickly to make a decision affecting their future and their retirement planning, when there is a significant inaccuracy in the underlying original Trust Deed and Rules and therefore in the terms they are offered."
"Jonathan, I think it is extremely important and urgent that you confirm that the one time gain in 2009 is not deteriorated by this development. As of the early retirement saving impact, I understand the complexity but we need a sense of how big could it be. At the end of the day we have to solution a given number and, if this goes down, something else needs to go up."
"will not change the approximately$130M one time income in 4Q09 provided IBM proceeds with the decision in 4Q09 to end benefit accruals in April 2011. This one time income is not driven by the early retirement change."
"…..the Company has undertaken some preliminary work in reviewing this matter. However in order to give it the right level of consideration IBM will not be in a position to respond to the affected employees immediately. We are aware that our position on this issue will have an impact on any decision individuals may be contemplating in connection with the early retirement window which will shortly be opened. Our suggestion is that in order to have the opportunity to be considered for early retirement, individuals register their desire to do so via the early retirement tool we are launching. If they receive an offer to retire early from the Company, they have until 11th December to accept it. We confirm that by that time we expect to be in a position to respond with our view on this matter as we will use the period between now and 11th December to fully review the issues which have been raised."
"As stated at the Trustee meeting on 11 June, the Company should take care that the information provided to Members is full, accurate and not misleading. In this regard please note that any change to asset allocation may impact on early retirement reduction factors."
"Q. How will you re-build employee trust? A. Trust is a word that has been used a lot in the communication - probably the word that appears the most. Again, if I'm really honest, I think I would say that we probably won't be able to re-build trust with some employees, and, as an IBMer who has been with IBM for 25 years, I don't say that with any sense of pride at all. But I think that's a reality, not only from the changes we are talking about here but other changes that have been made in past years which have also been referenced a lot."
"I am writing to you to explain that any salary increases offered as part of this and any future ESP will not be pensionable as long as you remain a member of a Defined Benefit pension plan, even if such salary increases are backdated. … If you do agree to accept that any further salary increases will be non-pensionable for Defined Benefit plan purposes (by ticking the acceptance box in the tool below), further salary increases will be included in the calculation of pensionable salary for the purposes of an IBM Defined Contribution Plan. If you do not agree to this term (either by ticking the non-acceptance box in the tool below or by not responding in accordance with the deadline set out below) you are advised that you will not be eligible to receive any salary increases. Please find the tool below to register your acceptance or not of the terms described above which must be submitted no later than 5pm GMT on Tuesday 10th November."
"Q. So would you accept that these six countries were selected because of their defined benefit liabilities, not because of their profitability? A. Yes, I would. Q. In the mind of CHQ, therefore, this was nothing to do with profitability, was it? A. I think in the minds of CHQ it was two things: it was moving out of defined benefit pension schemes, which it was trying to do globally; and it was about continuing to meet the EPS road map of the Company. It was about those two things together. Q. I think you have accepted that the primary motivation of the changes, the thing that started all the primary motive was meeting an EPS target by achieving some urgent DB cost savings? A. That was certainly – yes."
"…we are running a business and we have committed to investors a certain earnings per share. I think we wanted to make sure our investors got the return of the money they put in our Company."
"These are extraordinarily difficult decisions, gut-wrenching decisions that nobody likes to have to make, but we have made commitment to Wall Street, and the Corporation needs to meet those commitments."
"was played out against the backdrop of a financial crisis of almost unprecedented and unpredictable magnitude. Global stock markets fell between 30% and 40%, and the value of IBM's global pensions assets fell by 25%. It was aptly described by Watson Wyatt, one of the Plans' investment advisers, as a 1 in 60 year event."
"there is the motivation of solving the earnings per share problem and there is a motivation of saying: look, the UKI is not delivering in line with the corporate model, and now you have got pension headwinds that are going to be added on top of that. Again, I clearly read from that there were dual motivations."
"double-digit PTI growth year after year. The revenue is growing 3.7 per cent when the market is growing at a similar -- in a similar way. The global financial crisis of 2008 puts us in a situation where we can no longer depend upon that revenue growth continuing, and we have to make profit improvement through productivity." ii) The UK business was not performing well in comparison with the other regions as was shown by thecomparison chart created by Mr Chrystie for the board meeting of Holdings on29 April 2009 . iii) This was not just a matter of brand mix: the margins for the individual brands in the UK were significantlylower than the margins achieved for the same brands in other regions. This appears from the table for UK brand margins by comparison to worldwide brand margins referred to by Mr Chrystie in cross-examination. He says, and I see no reason to doubt, that these figures had been obtained by him from CHQ so as to ensure that he was comparing like with like. Mr Wilson accepted that the comparison of regional performances was an important tool for CHQ. iv) As to the suggestion of poor performance, Mr Simmonds refers me to one of the slides for the Holdingsboard meeting on29 April 2009 . This presentation was made to make out the case of "
"Insufficient contribution to NPPC cost = No investment"
"A………….. What this is telling us is back in 2007 and 2008, just if you stay in the upper left [of the chart], the prospects for revenue growth in the market were very good. But because of the financial crisis of 2008, we are now speculating that for 2009 all the way through 2010 we cannot depend upon revenue growth as a way to help us drive our additional profit. Q. You are speculating. The fact is UKI revenue growth did continue to grow, didn't it? A. I don't believe in 2009 -- we were given a plan that was minus 2, okay, it is possible it could have, but at the time we were putting this together, this was the information we were looking at; it was a huge valley, and no reasonable person could have expected to be able to get PTI leverage out of revenue growth when this is happening in the markets." 1372. And later on he described his approach this way: "
"The discussion then focused on the UK's revenue growth and PTI margin and Mr Hirst referred to the data on chart 2 of his presentation which covered the period 2004 to 2006. He noted that in 2006 revenue had only grown by 1.5 per cent whilst the marketplace had grown by 4.1 per cent. It was noted the PTI margin had increased from 9.1 in 2005 to 10 in 2006 and that the changes to the IBM pension plans had in fact avoided a decrease of 1.6% in PTI. Mr Hirst stated that over the last 5 years the PTI margin had grown from 5% to 10% and noted that for the last 2 years the UK had made its profit plan. He advised the TMM Members that despite this the UK still had to fight to have mission sourced [ie investment] in the UK by the corporation. Mr Hirst noted that the corporate model targeted double-digit PTI growth and a 15% PTI margin over the coming years. " ii) The minutes of the TMM of23 October 2008 record the following during the corresponding presentation byMr Riley: "
"…The situation with regard to revenue and profits is, from my own experience, and has always been difficult in the UK because of the structure of the market; the very high level of competition that IBM faces in this country; the fact that the IBM business in the UK is more developed towards services, which have lower margins than hardware, and particularly software. So I'm not surprised by what Mr Riley told me. It was always my experience that it was a struggle..." ii) As is recorded in the minutes of the TMM of7 May 2009 , when the Project Waltz Changes were presentedby Mr Riley and Mr Chrystie: "
"During the years leading up to 2009, I was aware that IBM UK was seen to be underperforming in relation to other countries. I would see quarterly reports which continued to stress the need for costsaving drives and in particular for individuals to reduce their expenses. "
"local strand of what?"
"for the base case in Soto we should use a projection which keeps the assumptions constant, particularly as in some cases we will be modelling the impact of changing the asset allocation."
"…we did a three-year unfavourable case as well. And I will just say for my part that we didn't know how long the crisis would last, we didn't know the depth or the duration…One can look back in retrospect and say that we were at the darkest days after Lehman Brothers, and that wasn't our sense of it. We didn't know"
"Moral: once the economy has reached bottom, much of the return has been experienced."
"…I was fully aware that we were taking away an immediate profitability to change a long-term future cost problem. "
"…We have a requirement to go from 23 per cent to 34 per cent, and the part that you haven't noted in that the NPPC year over year growth is huge as it moves into the out years, right at the same time when I have a requirement to go from 23 per cent contribution margin to 34 per cent. So I will grant you that this wasn't a reason for our poor profit performance in 2008, and in fact 2009, but we were solving the problem moving forward."
"…in some of the earlier KPMG analysis I know the I Plan was broken out; but from my standpoint, both the Main Plan and the I Plan were adversely affected in terms of the asset impact of 2008, and we were seeking to save costs, and from a financial standpoint I would have intended to include both plans for that reason."
"The issue we were concerned about was the EPS Roadmap…I don't have that on this page, but I am imagining that after…the events of 2008, that this is worse than where it would have been in the EPS Roadmap….The rationale that we started with for all of these was relative to the EPS Roadmap."
"Q. Isn't it simply the case that the poor old I Plan got lumped together with the M plan, and at that point no one gave it any thought, it was just part of the UK figures? A. I would say I didn't focus on it individually as part of the decision process, no."
"…..what is really happening in 2009 is that IBM has moved the goalposts. The scheme is performing better than it had been expected to perform, and IBM has actually just changed its mind as to what it regards as a sustainable level of cost in relation to this scheme. It has changed its mind despite, in fact, members of this plan having already made choices based on IBM's earlier pronouncements as to sustainability and commitment. We say that behaviour can fairly be described as perverse and it can fairly be expected to undermine trust and confidence."
"Could have been. I'm just -- from my standpoint, and I will set aside how the members might regard it, of some members being treated one way and another, that wasn't my domain, but from a financial standpoint, this plan was adversely affected just like the Main Plan was. So yes, it is a lot smaller, you could make a materiality argument and say these numbers aren't very material to the whole of the UK."
"I think we had – I certainly had – more confidence on some of the things that we were doing around profitability, but you have to understand that we are still (a) a long way behind in terms of our rank to other units and (b) we weren't growing our PTI at double-digits, so relative to the other units you are falling behind…"
"Q. But your answer as to how you were going to do it was driving to fix with the transformation strategy, that we have already looked at, wasn't it? A. Yes, transformation was one of the key strategies, yes. Q. So it wasn't to do with pension changes, was it? A. I think we were starting to see at that point in this meeting the pension changes being discussed, the requirement for corporate to move and change on pensions, and then following this meeting and other meetings it became a bigger issue for us to deal with."
"Q. But at this point in time [as early as November 2008] wasn't the reality that it was all being driven by CHQ? They were insisting upon the changes, weren't they? A. Yes, yes, CHQ were very strong on wanting to make the changes on pensions. We have still got -- I have still got a role -- at that time, had a role to play in leading the continued growth and success of the business, and growing PTI at double-digit, so ... Q. But doesn't it follow from what you have said before that but for CHQ's insistence on these changes being made, there wouldn't have been pension changes implemented? A. Not necessarily. Not necessarily. Q. You had worked up your transformation strategy – A. Yes. Q. -- by23rd October 2008 and there were no changes to pensions there. We have been through that. You have accepted that the primary motivation for these changes was CHQ's insistence on fixing NPPC? A. Uh-huh …….. Q. But the primary motivation was fixing the NPPC problem. You have accepted that. A. Yes. Q. Isn't it right that it was inevitable that the changes were going to be made from the point at which CHQ required them of you? Isn't that right? A. Yes, there was a lot of pressure from CHQ to make the changes and implement the changes, yes. ….. Q. Let's look at it in two different ways then. Even if there had been no productivity -- we looked at Germany and Canada, and the fact that they were hugely profitable and that they still had these changes imposed on them because of their DB liabilities. A. Yes. Q. So it is right, isn't it, these changes would have been required by CHQ even if there had been no productivity problem with the UK? A. Yes, CHQ would have definitely pushed for those changes."
"…….I guess, my Lord, it was the fact that we were at -- the business at that time was severely challenged from a profit perspective, and we had done a lot of work and analysis on the profitability of the business, and that's more my reference to that."
"UK had a bit of a crisis, because we were going to fall off a cliff from a PTI perspective" and "
"Bearing in mind that these risks to operational effectiveness and productivity were entirely antithetic contrary to the objectives of the transformation strategy and your concerns about profit, doesn't it indicate that you would not have made the changes but for CHQ's insistence? You said that it shows you had thought about the risks. You didn't entirely answer the question, Mr Riley. Doesn't it indicate that you wouldn't have made these changes but for CHQ's insistence? A. Yes, CHQ had a very strong influence on where we were up to that point of time. Q. Is the answer "yes"? It's a "yes" or "no" question. A. Yes, most likely yes."
"Randy – what is impact of$100 million pension savings on closing PTI growth gap"
"the facts as I saw them at the time did not support a view that the business had materially deteriorated since the time of Soto."
"I felt at the time that a justification for the pension changes, if it was to rest on factors other than the increase in NPPC, ought to consider changes in the achieved business performance over the time period since Soto."
"A……….I am trying to describe here that we did have a substantive debate in the meeting for quite some period, I would say, around about an hour, back and forth, about what the possible grounds for justification could be. It may be that there were smarter people who could think of different reasons. What I am describing is that at that time, in that meeting, I was not coming up with those grounds. Q. That is a fair point. This is a matter on which reasonable people could disagree…… A. Well, I think that depends on the data that one has, as to whether reasonable people can disagree or not. Q. I think the evidence you gave a few moments ago was that you accepted there had been a deterioration in terms of profits but you didn't consider it to be material. That is a question of judgment, isn't it? A. Yes, of course it's a question of judgment as to what you regard as being material. Q. That is -- sorry to interrupt. That is why I said that is a subject on which reasonable people could disagree. A. Potentially that may be the case. Q. The other thing is you are looking in terms of deterioration of the business. Whether there is potentially a business case to support change or not may depend on how one frames the scope of the inquiry. You decided that that is where you set the bar, if I can put it like that. A. We had a debate where we talked about a lot of different angles that one could take, which could form a possible basis of justification. I can't recall all of the details of every angle that we discussed, but there was, as I say, quite a substantive discussion back and forth about what the potential rationale for further changes could be after the 2006 Soto changes. What I have recorded in my witness statement is that, at that time, in that meeting, I was having difficulty coming up with a reason that I found intellectually satisfying as a justification. That is not to say that there couldn't be such grounds; I am just saying that is the position that I found myself in, in that meeting. Q. That is really the point I was probing. Because, clearly, when one looks at Mr Chrystie's charts from April of the following year, clearly one of the things that he considered to be important was the fact that UKI had not been meeting targets. We saw that from slide 4 and the conclusion drawn from it. A. …… I would point out that, of course, the pension costs number within those performance figures was actually the frozen capped amount, not the actual pension cost that the Corporation was booking. Which was just one of the many factors that, for example, we did debate in that meeting, as to what was the right standard for measuring PTI when you are suggesting a change in pension provision but measuring the business against a number that is not the actual NPPC being recorded by the Corporation.…….. I did not come to a point of being able to clearly see a rationale that did not just go back to the fact that we had an NPPC problem that was going to come at us because of the falling financial markets. If others have come up with better analysis since then, then that is for them to speak to."
"[the RBs] are saying there is a breach of an Imperial duty of good faith which lay on the company, which through its decision makers was acting in perfectly good faith, albeit ignorant of some material factors. But if they took the view that it was in the interests of IBM UK to make these changes, for the reasons that they thought were good reasons, how does one go behind that?"
"When we have heard all the evidence things will be clearer, but if the scenario were different from the one that you perceive, IBM Corporation might have thought 'we want to do this for NPPC reasons. Unfortunately we can't do it. Ah, but there is a very good business reason for doing this, so we can actually validly achieve what we want to achieve by reference to some perfectly valid justifications which would have been sufficient reason as if NPPC weren't a problem at all. So we can have a win/win for us'."
"The risk was that, if the Company switches over for purposes of this long-term commitment on earnings and the investors don't accept it, that they feel it is manipulative or not a fair representation of the Company's results, the Company could lose credibility with investors. So there was a great deal of work to try and get the Company comfortable that this approach would be acceptable, and we announced it in 2010, in May of 2010."
"the proportion of growth assets held by the IBM Main Plan was at all times within the spectrum adopted by other UK DB schemes."
"In the real world employers cannot announce closures, leading to several hundred redundancies, without giving at least some indication of the reason for the closure decision itself. In any event, if the employer chooses to give the information, it is important that the information should be true and should be given in good faith. The whole purpose of the consultation process would be subverted if employers could with impunity give false information in the formal section 188 letters."
"The tribunal then dealt with various issues raised before it. First, it found that there was no credible evidence that the reason for the dismissals was safety. This was entirely and deliberately misleading and involved a breach of section 188(4)(a). The real reason was economic. The tribunal said that the company 'was prepared to give whatever reasons suited it at the time'. The tribunal was not prepared to accept that this was simply a technical matter, at para 36: 'We take a very serious view of this deliberate breach of its obligations by the respondent. It is difficult to see how there can be constructive and meaningful consultation with an employer if the information given by that employer, in a formal document provided for the purpose of the consultations, is deliberately falsified. Furthermore, the mutual trust which needs to exist between the employer and the unions, if there are to be successful consultations, is put at risk if the unions have cause to believe that they have been given false information.' "
"We agree with the unions' submission. The employers failed to comply with their obligations under section 188(4)(a) by giving a false reason; it cannot be the case that there is compliance when a deliberately misleading reason is given."
"Furthermore, the mutual trust which needs to exist between the employer and the unions, if there are to be successful consultations, is put at risk if the unions have cause to believe that they have been given false information."
"Q. You said to me that it is actually a better solution for IBM UK. That is your evidence. A. What I said was that would have been attractive to me, yes. Q. It's five years of savings. A. Yes. Q. It puts the savings at the time when you have your rising pension costs. It is clearly financially viable as far as the IBM UK is concerned, is it not. Indeed, it is better than the solution which is being imposed? A. It would offer more savings in the out years. Q. So what the PCC is being told here is incorrect, isn't it? ............. Q. You would accept that is incorrect? A. It wouldn't accord with my thinking."
"IBM wants to cut costs in order to make more money available for dividends, buying back IBM shares and acquisitions."
"It is alarming that IBM would consider a properly run consultation to be a foregone conclusion: if it were a foregone conclusion, it would not be a proper consultation at all, since IBM would not be keeping an open mind. There is no telling what additional proposals might be put forward by the new PCC, or how IBM UK's current management would respond, particularly in the light of the reams of further information now available following this trial (such as the detailed I Plan data now available to members, and the extremely positive investment performance experienced from 2009)."
"(1) Regulations may require any prescribed person who is the employer in relation to an occupational pension scheme and who - (a) proposes to make a prescribed decision in relation to the scheme … to consult prescribed persons in the prescribed manner before the decision is made. … (3) The validity of any decision made in relation to an occupational pension scheme is not affected by any failureto comply with regulations under this section. (4) Section 261 contains further provisions about regulations under this section." 2. Section 261: "(1) In this section "consultation regulations" means regulations under section 259 …. (2) Consultation regulations may – (a) make provision about the time to be allowed for consultation; (b) prescribe the information which must be provided to the persons who are required tobe consulted; …". (Occupational and Personal Pension Schemes Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (SI 2006/349) 3. Within the Consultation Regulations, Regulation 3(1) provides that the Consultation Regulations apply torelevant employers (and to the trustees of the scheme). Regulation 6(1) then provides that no employer (or trustee) "may decide to make a listed change that affects an occupational … pension scheme unless such consultation as is required by regulation 7(3) has been carried out". 4. Regulation 8(1): "(1) Listed changes that affect occupational pension schemes are - (a) to increase the normal pension age specified in the scheme rules for members ormembers of a particular description; (b) to prevent new members, or new members of a particular description, from beingadmitted to the scheme; (c) to prevent the future accrual of benefits under the scheme for or in respect ofmembers or members of a particular description; … (g) to make any change specified in paragraph (2) or (3). … (3) Listed changes affecting only benefits which are not money purchase benefits are - (a) to change to money purchase benefits some or all of the benefits that may beprovided under the scheme to or in respect of members or members of a particular description; (b) to change, in whole or in part, the basis for determining the rate of future accrual ofbenefits under the scheme for or in respect of members or members of a particular description; … (d) to make any other reduction in the rate of future accrual of benefit under the scheme for or in respect of members or members of a particular description. (4) "
"(1) In relation to a proposal to make a listed change affecting an occupational or personal pension scheme, each relevant employer to whom regulation 7(3) applies must provide information about the proposal to - (a) such of his employees as appear to him to be affected members of the scheme, and (b) any representatives of such members who are to be consulted under regulation12(2)(a) or (3) or 13(2). (2) The information provided under paragraph (1) must - (a) be in writing, (b) be provided before the start of consultation under regulation 12 or 13, (c) describe the listed change and state what effects it would (or would be likely to) have on the scheme and its members, (d) be accompanied by any relevant background information, (e) indicate the timescale on which measures giving effect to the change are proposed tobe introduced, and (f) be given in such fashion and with such content as are appropriate to enable, inparticular, representatives of affected members to consider, conduct a study of, and give their views to the employer on, the impact of the listed change on such members." 6. Regulation 15(2): "