No.13 Summary of the 52 nd Session of the Board of the United Nations Joint Staff Pension Fund (UNJSPF) (Montreal, 13-23 July 2004) August 2004 The ILO delegation to the 52nd meeting of the UNJSP Board 1 consisted of Mr. W. Ringkamp, representative of the International Labour Conference, Mr. A. Busca, representative of the ILO Director-General, and Mr. J.V. Gruat, representative of the Participants. Ms. C. McGarry, Secretary of the ILO Staff Pension Committee, accompanied them. Mr. A. Busca, representative of the ILO Director-General, was elected Chairperson of the Board. Investment Management The market value of the assets of the Fund had experienced negative real returns during the years from 2001 to 2003. By 31 March 2004, the market value had risen again to US$26.6 billion, from US$21.8 billion on 31 March 2002, representing a total annualized real (inflation-adjusted) rate of return of positive 8.7 per cent. The comparable return for the previous biennium had been negative 9.5 per cent. This performance was fairly close to the benchmark (comparison with other institutional investors), although the Fund had a better risk return profile. The major contribution to performance came from bonds, especially non-us dollar denominated bonds, real estate, and short-term investments. At 30 July 2004, the Fund was valued at US$26.0 billion and the equity allocation was 60 per cent. During the 44 years that the performance of the Fund has been measured, the cumulative total annualized real rate of return has averaged 4.1 per cent, which is higher than the long-term objective of 3.5 per cent. Over the past decade, the assets of the Fund have grown from US$12.5 billion to US$26.5 billion. Benefit payments first exceeded contributions in 1994, and for several years the Fund has been becoming increasingly dependent upon actual investment income. Therefore, the Fund is more sensitive than it used to be to short-term investment volatility and variations in inflation and exchange rates. The management of investments continues to rely on broad diversification (by currency, asset class, and geographical area) as the safest means of 1 The Board has a tripartite structure, which consists of equal representation of Member States, Executive Heads, and Participants, from a variety of organizations across the UN family. It meets biennially and reports to the UN General Assembly, which acts as its general supervisory body. Pension Fund money is invested by the UN Secretary General on behalf of participants. This money must be kept separate from all other UN funds and is used exclusively in accordance with the Regulations and Rules of the UNJSPF.
- 2 - reducing risk and ensuring that returns meet actuarial assumptions. The Investments Committee continues to believe that the long-term viability of the Fund is best sustained by maintaining a higher proportion of equities than bonds and that present investment allocation guidelines are appropriate - although in view of the maturing situation of the Fund this opinion is not unanimously shared by all members of the Board. In 2002, the ILO Staff Pension Committee had requested the Board to recommend an investment policy that respected ILO standards on forced and child labour. The Board examined a proposal from its Executive Secretary on the UN Global Compact, which includes a reference to the ILO Declaration on the Fundamental Principles and Rights at Work. This was supported by the Investments Committee, with the understanding that existing investment criteria (those of safety, profitability, liquidity, and convertibility that are common to most funded pension schemes) and fiduciary responsibilities would not be compromised. Several Board members noted the importance of a gradual approach as this is essentially a new practice for the Fund. Other members emphasized the need to implement this initiative with minimal delay and to encourage governments to enforce these instruments within their own countries. Actuarial situation, recommendations of the Board The Fund had exhibited a positive actuarial surplus for three consecutive actuarial valuations: 1998: 0.36 per cent, 2000: 4.25 per cent and 2002: 2.92 per cent of pensionable remuneration. In July 2002, the Board had recommended by consensus that the UN General Assembly adopt certain improvements to the benefit provisions of the Fund, primarily those related to economy measures that had been taken in the 1980s to address an actuarial deficit. However, the UN General Assembly had decided to defer adoption of these recommendations until the Fund exhibited a clear upward pattern of actuarial surpluses, however this might be interpreted. The new actuarial valuation at 31 December 2003 exhibited a surplus of 1.14 per cent. The smaller surplus was mainly due to the continued impact of earlier poor investment performance and, to a lesser extent, the weakening of the US dollar. As the Fund still exhibited a surplus, the Participants representatives wished to implement the package of benefit improvements that had been recommended in 2002. However, several representatives of the Governing Bodies and the Administrations wished to proceed more cautiously considering that the full impact of a weak US dollar might not have been fully realized and that the current unstable economic situation might have a negative impact on future actuarial valuations. In the meantime, other studies had been completed related to longer term aspects of benefit provisions, such as the situation in countries with high inflation/frequent local currency devaluation. Therefore, as a compromise the Board decided to recommend: a) that paragraph 23 of the Pension Adjustment System be amended to provide for an adjustable minimum guarantee at 80 per cent of the US dollar track amount (effective for new pensions awarded from 1 April 2005); b) that the 1.5 per cent reduction of the first adjustment applicable to pensions after separation be reduced to 1.0 per cent (applicable to all pensions), and that in 2006 the Board would address the elimination of the balance, in a phased approach, subject to a positive actuarial valuation at 31 December 2005;
- 3 - c) that the Board would address in 2006, on an equal footing, the elimination of the limitation on the right to restoration (the case of former participants who rejoin member organizations and start new periods of contributory service after having received reimbursement of their own contributions for the prior period of contributory service); d) that the other outstanding recommendations from 2002, for which the Board had recommended immediate implementation, be considered as priority items in 2006 (application of the cost of living differential factor to deferred retirement as from the date of separation and application of the cost of living adjustments to deferred retirement benefits as from age 50). These recommendations will be considered by the UN General Assembly in December 2004. Other technical issues related to the purchase of additional years of contributory service (at no cost to the Fund), the transfer agreements, the method of calculating the final average remuneration, and the elimination of the one-year time limit for validation remain on the table for future consideration. Some of these items would enable the Fund to provide for greater flexibility in light of changing work patterns and trends towards shorter term employment. Thus, they are generally supported by representatives of Participants and Administrations alike. The ILO Staff Pension Committee had proposed the introduction of a partial invalidity benefit and had made other suggestions in relation to invalidity such as unlinking disability status from separation from the Organization, examining third party liability and validating years while in receipt of a disability benefit for the purposes of accumulating a retirement pension upon recovery and re-employment by the Organization. These inputs will be taken into account in an in-depth study of invalidity matters, including cost implications, which will be considered by the Board in 2006. The Fund s Secretariat had, however, already indicated that it was prepared to respond favourably to the validation of periods of disability upon recovery. Review of general service pensionable remuneration (GS PR) The Pension Board is to cooperate closely with the International Civil Service Commission (ICSC) on working methods and technical matters during the next comprehensive review of GS PR that will begin later this year, following a decision taken by the UN General Assembly at the request of the ICSC. The Board decided that its officers would form a tripartite contact group to follow-up on the coordination between the UNJSPF and the ICSC Secretariats at the beginning of the Review - i.e. until its Standing Committee considers the first results of the Review. A formal tripartite working group will henceforth be established by the Standing Committee of the Board. The Board decided that the following matters should be included in the review: methodology for the calculation of final average remuneration (FAR); non-pensionable component; double taxation; reverse application of the special index for pensioners (at high-tax locations); and impacts of steep devaluations of local currency and/or high inflation. The Board also noted that a number of technical issues required close attention: monitoring of income replacement; comparability between the UNJSPF and the US civil service pension plan; and possible impacts of the ongoing pay and benefits
- 4 - review on PR and pensions. The Board proposed a detailed timetable for this cooperation. The UN General Assembly will consider the (expected joint) ICSC/UNJSPB recommendations in 2006. Survivors benefits for unmarried couples (domestic partners) As discussions in the Board on the possible introduction of survivors benefits for domestic partners had not made much progress, the ILO had proposed an amendment to article 38 (residual settlements for unmarried persons upon death). In light of the other implications of modifying article 38 and UN human resource policy developments this year, the Board will examine this and alternative proposals, with cost estimates, in 2006. At that time, as requested by the ILO Staff Pension Committee, the Board will also review the whole issue of family benefits arising from the Regulations. Pensioners from the former USSR The Executive Secretary of the Fund continues to encourage the reinstatement of the pension rights of our former colleagues, in proportion to their years of service and the amount of contributions that had been transferred to the (now) Russian Government. As the UN General Assembly had stated that it no longer wished to consider this issue, in 2003 the Standing Committee agreed that the ILO Staff Pension Committee might examine changes to the Emergency Fund guidelines that would enable this group of former participants to be eligible for assistance. The suggestions submitted by the ILO were generally supported, provided that the extension would not be limited to any specific geographical region and conditional upon costs estimates that will be presented to the Standing Committee in 2005. Former ILO beneficiaries who fall into this group of pensioners receive a small amount of financial assistance from the ILO Administration and the Staff Union. Structure and meetings of the Board After extensive discussions on a proposal to increase its size, the Board had requested a working group to examine its composition and structure, taking due account of the need for tripartite and democratic representation. While noting the value of the study that had been done, the Board requested the group to examine the matter further and to develop alternative proposals. Mr. J.V.Gruat and Mr. D. Macdonald from the ILO are members of this working group. The Board also discussed how it might improve its working methods, convene on an annual instead of a biennial basis, and reduce the duration of its meetings, in line with directives in member organizations. Other administrative matters The Board discussed other administrative matters, including the report of the medical consultant, relevant UN AT judgements, new membership applications, revised budget estimates, auditing recommendations, and the establishment of an external audit committee. Mr. J.V. Gruat will serve on a tripartite search group that will select the new Deputy Executive Secretary/CEO.
- 5 - The Standing Committee held a meeting to review cases of appeal against the Fund. With one exception about an administrative decision, the Committee confirmed the action that had been taken by the Executive Secretary of the Fund. Over the past decade, the number of benefits in payment has risen by more than 40 per cent and is expected to increase at a greater rate during the next four years. The number of participants has increased by 24 per cent during the last two bienniums. During the last biennium, ILO participation increased by 11 per cent. The Fund continues to strengthen communications with its membership. The website www.unjspf.org enables members to access various publications, obtain annual statements, and calculate retirement benefits under different scenarios. Although the home page is presently only available in English, many publications are available in French. A French version and other improvements will be introduced later this year. The Board unanimously expressed its thanks to the chair for his very efficient conduct of business. (Signed: ILO Staff Pension Committee delegation to the meeting of the UNJSP Board and Standing Committee)