Contents

1. Dave Budd's Questions to Pension Services Manager
2. Answers from Kevin Waller

Letter to Pension Services Manager

IBM UK Pensions Trust Ltd
Mail Point F3S
PO Box 41
North Harbour
PORTSMOUTH
Hants PO6 3AU

I should be grateful if you would help me with the following query, or pass this letter on to the appropriate person.

My concern centres around the payment of money from the C Plan surplus to the M plan. I also understand that these plans are different, especially with regard to annual increases. Can you possibly answer the following for me and provide any other information that you feel may help:

1. Can you give me very brief details of the M Plan with respect to employee and company contribution and retirement benefits etc - including annual increases allowed under the plan?

2. How much has been taken from the C Plan surplus and moved to the M Plan over each of the last five years?

3. How much was the C Plan Surplus over each of those 5 years

4. What proportion of the C Plan was gross (total of all prior years) company contribution and what proportion was the Employee contribution over the relevant years that transfers took place to the M Plan?

5. Has there been any other funding of the M Plan such as administration charges, taken from the C Plan surplus over the last five years?

6. How many members of the C Plan moved over the M Plan?

D J BUDD

Reply from Kevin Waller, Pension Services Manager

Thank you for your letter dated 12 September 2000, the answer to your questions are as follows:

1. The M Plan was established in April 1997. It is a Defined Contribution Plan under which the benefits that members are entitled to are expressed as a rate of contribution invested on their behalf. Employees contribute 3% of their pensionable earnings and the company contribution rate is 6% for employees under age 35 and 8% for employees aged 35 and over. On retirement the fund that has been built up is used to buy the member an annuity. That annuity must, under statutory legislation, include increases to pensions in payment of the lower of 5% per annum or the rise in UK inflation. The member, therefore, is effectively buying this level of pension increases themselves out of their fund. You will appreciate that this means the starting pension payable to a member will be lower than it would have been had discretionary increases, for example, been purchased.

2. In the three year period to the end of 1999 the total contribution transferred to the M Plan has amounted to £24 million. Details of the annual amounts are disclosed in the Annual Report & Accounts and the Annual Members' Report.

3. At the last formal actuarial valuation, carried out as at 31 December 1997, the Scheme Actuary advised the Trustee that the surplus amounted to £548 million. Formal Annual Valuations are carried out every three years.

4. I am not sure that I can answer this question quite in the way that I believe you have asked as the surplus is not calculated by reference to employee and/or employer contributions. It simply represents the difference between the actuarial value of the assets of the pension plan and its underlying liabilities. At this point, I feel that it may also be worth commenting on the overall principles of the pension plans that we administer. The C Plan, for example, is a Final Salary or Defined Benefit Plan under which the entitlement of members, as set out in the plan rules, is expressed as a formula based on a member's pensionable earnings, pensionable service and age at retirement. The responsibility of the company is then to ensure that there are sufficient assets in the pension plan to meet this commitment. It there are insufficient assets, then it is the responsibility of the company to make contributions to meet this. Conversely, if the pension plan has sufficient assets (or more than are required, as we have at present) then the company contribution may be reduced or suspended. It is the company, therefore, that carries the risk in ensuring that assets are sufficient. When the M Plan was established in 1997 this was set up as a separate section of the IBM UK Pension Plans, as opposed to a separate plan. Therefore, when the Scheme Actuary advises what, if any, company contributions are required he considers the pension plan sections, both the Defined Contribution section (i.e. M Plan) and the Defined Benefit section (i.e. C Plan) together.

5. Investment fees under the M Plan are met by members themselves. These are taken into account in the buying and selling price of units in the M Plan. The administration expenses of all our pension plans, covering the day to day expenses of the Pensions Trust Department, legal and actuarial advisers, for example, are met out of the fund.

6. To date we have seen very little movement between the C Plan and the M Plan with something in the order of 12 people transferring.

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