Despite Recent Increase in Actuarial Deficits, United Nations Pension Fund’s Long-Term Objectives ‘Still Largely Being Met’, Budget Committee Told
Despite Recent Increase in Actuarial Deficits, United Nations Pension Fund’s Long-Term Objectives ‘Still Largely Being Met’, Budget Committee Told
|Department of Public Information • News and Media Division • New York|
Sixty-seventh General Assembly
10th Meeting (AM)
Despite Recent Increase in Actuarial Deficits, United Nations Pension Fund’s
Long-Term Objectives ‘Still Largely Being Met’, Budget Committee Told
Even as the United Nations Joint Staff Pension Fund posted near record assets of $44 billion as of this month, the increase in the Fund’s actuarial deficit drew the concerns of delegates at the Fifth Committee (Administrative and Budgetary) meeting today.
Carlos Ruiz Massieu, Vice-Chairman of the Advisory Committee on Administrative and Budgetary Questions (ACABQ), said the Fund posted an actuarial deficit of 1.87 per cent for the two-year period ending 31 December 2011. That was the Fund’s second dip into negative territory, after a 0.38 per cent actuarial deficit was posted in December 2009. That had been the Fund’s first actuarial deficit in 14 years of valuation. The Advisory Committee agreed with similar concerns made by the Board of Auditors on this issue. (The valuation, carried out every two years, serves as a gauge to determine whether the current and future assets of the Fund will be sufficient to meet its liabilities.)
As he introduced the Advisory Committee’s report, Mr. Massieu said the body was concerned that, though the Fund’s long-term objectives were still largely being met, it had underperformed for three consecutive fiscal years, thus contributing to the current actuarial deficit. The ACABQ backed the Fund’s move to boost the United Nations normal retirement age from 62 to the age of 65 for new Fund participants, as it would yield actuarial savings and partially offset the actuarial costs stemming from the increased longevity of Fund participants.
The downward trend also had discouraged the United States, whose representative recognized that the Pension Board’s prudent management of investments and its oversight had buffered the Fund from a far steeper slide. She also backed the Fund’s proposal to increase the retirement age, but said more steps were needed to ensure the Fund’s recovery. “It is no longer feasible to assume that pensions will survive by yielding near double-digit annual returns,” she said, welcoming creation of the Working Group.
Warren Sach, Assistant-Secretary-General and Representative of the Secretary-General for Investments of the United Nations Joint Staff Pension Fund, said it was important to note that the Fund was still achieving its long-term objectives, including the actuarial requirement of 3.5 per cent real return and its relative performance against policy benchmarks over the last 10 years.
Regarding the understandable concerns about unrealized losses of $1.5 billion for the two-year period ending 31 December 2011, he noted that unrealized gains for the same period totalled $6.2 billion. “At this juncture, despite uncertainties present in the markets, the Investment Management Division is optimistic about future performance and its ability to safeguard the Fund and build a stronger foundation with the support of the staff and investment tools added during the current biennium,” he said.
The Fund’s value stood at $44 billion as of 24 October, down from its record high of $44.5 billion recorded in September 2012, but up from the $43.1 billion posted on 31 March 2012, the end of the fiscal biennium. That was up from the $38.3 billion reached at the end of the prior fiscal biennium ending in March 2010, he said.
Olusoji Adeniyi, Chairman of the United Nations Joint Staff Pension Fund Board, introduced that body’s report, which included results of the Fund’s thirty-first actuarial valuation and biennium investment performance as of 31 December 2011.
The Committee will reconvene at 10 a.m. Thursday, 1 November, to discuss Administration of Justice and the Capital Master Plan of the programme budget: biennium 2012-2013.
The Committee had before it the report of the United Nations Joint Staff Pension Board, United Nations Joint Staff Pension Fund (document A/67/9), issued by the Board after its fifty-ninth session held from 3 to 12 July 2012 at Headquarters. The 205-page document has 20 chapters and 17 annexes.
The following recommendations and decisions taken by the Board at this session require the Assembly’s action. First, the Board recommends the approval of an amendment to the Fund regulations that would let it use pension entitlements as a possible source of reimbursement for financial losses caused by staff members who have defrauded participating employers.
In order for the Fund to remit a portion of the pension benefit to the member organization, the participant must have been subject to a criminal conviction of fraud against that employing organization, as evidenced by a final and executable court order issued by a competent national court. The payment to the member organization would stop upon the death of the participant and the amount paid would not increase the total payments otherwise payable by the Fund. The relevant amendment is in annex XI and the relevant amendment to the Administrative Rules is in annex XII.
Secondly, the Board acknowledges that both the Fund’s consulting actuary and the Committee of Actuaries have determined that, given the serious impact that increased longevity has had on the Fund’s actuarial situation, raising the normal age of retirement to 65 would improve its actuarial situation. Accordingly, the Assembly is being asked to authorize the Board to decide to increase the normal retirement age to 65 years of age for new participants in the Fund, effective no later than 1 January 2014.
The Assembly also is asked to concur with the Board’s approval of two new transfer agreements of the Fund to the Organization for the Prohibition of Chemical Weapons and the African Development Bank. This is set out in annex XIV and would become effective 1 January 2013.
Finally, the Board recommends the approval of technical changes in the Fund’s regulations and the pension adjustment system in accordance with past decisions and amendments adopted by the Pension Board and approved by the Assembly. This is set out in annexes XI and XIII.
The Committee also had before it the Secretary-General’s report investments of the United Nations Joint Staff Pension Fund and measures undertaken to increase diversification of the United Nations Joint Staff Pension Fund (document A/C.5/67/2).
On the management of the Pension Fund’s investments during the two-year fiscal period, 1 April 2010 to 31 March 2012, and provides information on investment returns, the diversification of investments and development-related investments. For the fiscal year ending 31 March 2011, the Fund returned 11.9 per cent and for the calendar year ending 31 December 2011, the Fund posted a decline of 3.9 per cent. During the fiscal year ending 31 March 2012, the Fund returned 0.6 per cent.
For the two-year period ending 30 June 2012, the Fund returned 8.6 per cent. Although the Fund’s recent performance was strengthened with the use of systematic risk management during the last quarter of 2011, much of the 2012 improvement comes from the sharp upswing in the financial markets. Amid this extremely volatile and uncertain global market environment, the Investment Management Division made efforts to reduce risks.
The report concludes that the Fund was achieving its long-term investments objective in the actuarial requirements of 3.5 per cent real return, and the relative performance against the policy benchmarks in the last 10 years.
The Advisory Committee on Administrative and Budgetary Questions (ACABQ) weighed in on the issue with its report United Nations pension system (document A/67/525). It recommends approval of the Pension Board’s proposals, taking into account the observations and recommendations contained in the present report.
Regarding actuarial matters, the Advisory Committee shares the view with the Board of Auditors that addressing the Fund’s actuarial deficit must be done prudently and consider its long-term income and expenditure. The Committee is concerned by the ongoing downward trend of results in the past five actuarial valuations. It reiterates that, since the Committee of Actuaries has recommended an actuarial surplus of approximately 1 to 2 per cent of pensionable remuneration as a minimum safety margin, the actuarial deficit should be closely monitored with the goal of correcting the situation.
The actuarial valuation for the biennium ended 31 December 2011 indicates an actuarial deficit of 1.87 per cent of pensionable remuneration on 31 December 2011. This is the second actuarial deficit, following a 0.38 per cent deficit of pensionable remuneration on 31 December 2009.
Regarding the Fund’s investments, the Advisory Committee is concerned that, while the long-term objectives of the Fund are still largely being met, the Fund has underperformed against the policy benchmark for three consecutive fiscal years. This has contributed to the Fund’s current actuarial deficit. The Committee recommends that with the magnitude of the unrealized losses that were reported by the Board of Auditors, the Representative of the Secretary-General for the Investments of the Fund and the Investment Management Division should take appropriate measures to better monitor the investments of the Fund, as a matter of priority.
Introduction of Reports
OLUSOJI ADENIYI, Chairman of the United Nations Joint Staff Pension Fund Board, introduced that body’s report (document A/67/9), which included the results of the Fund’s thirty-first actuarial valuation and biennium investment performance as of 31 December 2011, and a variety of issues considered by the Fund’s Board this summer. Chapter II gave an overview of the Board’s decisions and recommendations requiring action by the Assembly and those that did not. The Fund’s thirty-first actuarial valuation as of 31 December 2011 revealed an actuarial deficit in the Fund’s required contribution rate of 1.87 per cent of pensionable remuneration, which was the amount by which the contribution rate required to maintain actuarial sufficiency exceeded the actual contribution rate of 23.7 per cent of pensionable remuneration.
He said that the increase in the actuarial deficit was due mainly to the lower-than-expected investment experience. In response to the Committee of Actuaries’ request for remedial action, the Board had set up a Working Group to consider ways to ensure the Fund’s long-term sustainability, including in governance, investment management and asset-liability management. Regarding the Fund’s liabilities on a plan termination basis, as of 31 December 2011, the Fund was in a soundly funded position at 130 per cent, he said. The funded ratio fell to 86 per cent when future expected cost-of-living increases were taken into account.
Regarding management of the Fund’s investments, he said that the Representative of the Secretary-General for Investments of the Assets of the Fund had reported that the Fund’s market value was $39.7 billion as of 31 December 2011, down from $41.4 billion from the previous year. For 2011, the Fund returned 3.92 per cent, which underperformed the Fund’s market benchmark by 255 basis points. The annualized 10-year nominal return for the Fund was 6.46 per cent, which outperformed the Fund’s benchmark return of 5.88 per cent. But the Fund’s long-term objectives were not met, both in nominal and real terms, in all but one of the last eight years.
Turning to administrative matters, he said detailed information on the Fund’s operations and financial position during the biennium 2010-2011 were discussed in paragraphs 156 to 173 of the report. Detailed statistics on operations were set forth in the annexes in the Financial Statements. Additionally, after a competitive bidding process, the Board recommended and the Secretary-General decided that Buck Consultants, LLC, be appointed for four years, beginning 1 January 2011, as the consulting actuary to the Fund.
Regarding medical matters, the Secretary/CEO recommended that the Board adopt the “fitness for employment” standard, as used by the United Nations for contracts of six months or longer, as the basis for participation in the Fund. The Board had approved an amendment to its administrative rules to extend the review period from three to five years for disability awards where medical evidence indicated a permanent disability with an unfavourable prognosis for recovery. The Board also approved a similar change to the administrative rules to extend the review period from 5 to 10 years for determining incapacity for children or secondary dependents.
He also cited the Board’s activities in terms of investment-related advisory services, accounting matters, the status report on the Emergency Fund, funding of the After Service Health Insurance, the progress report of the Integrated Pension Administration System, the Fund’s business continuity measures, and the revised Enterprise-wide Risk Management Policy. The Board had endorsed the Report of the Audit Committee. It considered matters relating to governance of the Fund, particularly the selection of the next CEO, as well as considered certain benefit provisions as contained in the Fund’s Regulations and Rules.
WARREN SACH, Assistant-Secretary-General and Representative of the Secretary-General for Investments of the United Nations Joint Staff Pension Fund, introduced the Secretary-General’s relevant report on matters under his purview (document A/C.5/67/2) and the Secretary-General’s Note on the membership of the Investments Committee.
He said that global capital markets had experienced extremely high volatility over the two-year reporting period ending 31 March 2012 and the Fund continued to take steps to protect its assets by increasing diversification and acquiring some low-volatility assets. The market’s high volatility was reflected in the change in the Fund’s level from $39.7 billion as of 31 December 2011, to an all-time high of $44.5 billion reached in September 2012, he said.
For the fiscal biennium ending 31 March 2012, the Fund had increased by 12.3 per cent to $43.1 billion, up from $38.3 billion in March 2010, he continued. For the same two-year period, this represented an annualized return of 6.09 per cent, compared with 7.42 per cent of the 60/31 benchmark. For the nine-month period ending 30 September 2012, the Fund returned 10.36 per cent, exceeding the benchmark of 9.93 per cent by 43 basis points.
Over the last few years, he said, the Fund had striven to update, develop and strengthen its technology infrastructure and systems to support its implementation of International Public Sector Accounting Standards. It also had fine-tuned its investment techniques to handle the high volatility in capital markets and had deployed some limited indexation arrangements. Those systemic improvements would create an infrastructure that would reduce transaction costs and enhance the security of fund transfers.
“With an improved infrastructure, the Fund is now a safer client, meeting the highest industry standards”, he said, adding that the Investment Management Division also had expanded its use of “Riskmeterics” by using various stress tests and scenario testing to guide its asset allocation decisions and portfolio balancing.
Regarding investment diversification, the Fund was committed to a policy of broad diversification of investments by currency, type of asset class and geographic area, he said. That remained a reliable method of improving the risk return profile of the Fund’s portfolio over the long run. In terms of geographical diversification, Fund investments in North America had increased to 45.7 per cent in March 2012, up from 43.1 per cent two years earlier; investments in Europe dropped to 25.4 per cent from 29.3 per cent as a risk management measure; and the share of investments in Asia and Pacific declined slightly to 18 per cent, from 18.5 per cent.
The Joint Staff Pension Fund continued to make every effort to increase investments in developing countries while being mindful of its overall investment criteria and strategy. The portfolio was invested directly and indirectly in more than 40 countries worldwide, including 10 African countries, he said. Direct and indirect investments in developing countries increased 23 per cent to $5.9 billion on 31 March 2012, up from $4.8 billion on 31 March 2010. Those increases were in the developing Asian, African, European and Latin American regions. He said that Investments Committee meetings had been held in Botswana and South Africa in February, while the staff visited and searched for investment opportunities in Ghana, Kenya, Mauritius, Nigeria and the United Republic of Tanzania.
Regarding the membership of the Investments Committee, he said the Secretary-General intended to reappoint the following three members: Emilio Cardenas (Argentina) as a regular member through December 2013, when his 15-year membership maximum would be reached; Linah Mohohlo (Botswana) as a regular member for a three-year term; and Ivan Pictet (Switzerland) as an ad hoc member for a one-year term.
The Fund’s value stood at $44 billion as of 24 October and had returned 10.36 per cent so far this year, Mr. Sach said. It was important to note that the Fund was still achieving its long-term objective, both the actuarial requirement of 3.5 per cent real return and its relative performance against policy benchmarks over the last 10 years. Turning to concerns about unrealized losses of $1.5 billion for the two-year period ending 31 December 2011, he noted that unrealized gains for the same period totalled $6.2 billion. The Investment Management Division was optimistic about the Fund’s future performance and its ability to safeguard the Fund and build a stronger foundation.
CARLOS RUIZ MASSIEU, Vice-Chair of the Advisory Committee on Administrative and Budgetary Questions, introduced the Committee’s related report on the status and work of the United Nations Pension Fund, saying that the Committee agreed with the view of the Board of Auditors contained in its report, included as annex X to the Board’s report.
The actuarial valuation for the biennium ended 31 December 2011 indicates an actuarial deficit of 1.87 per cent of pensionable remuneration on 31 December 2011, the second actuarial deficit after a 0.38 per cent pensionable remuneration on 31 December 2009. As such, he said the Advisory Committee shared the Board’s view that addressing the Fund’s actuarial deficit must be done prudently and consider the Fund’s long-term income and expenditure. The Advisory Committee was concerned by the ongoing downward trend of results in the past five actuarial valuations. It welcomed the Pension Board’s creation of a Working Group on Sustainability, which would focus on areas such as governance, investment management and asset-liability management. He said that the Advisory Committee urged the Pension Board to ensure the Working Group pursued all possible measures to strengthen the Fund’s actuarial position.
He was concerned that, though the long-term objectives of the Fund were still largely being met, it had underperformed for three consecutive fiscal years, which had contributed to the current actuarial deficit Fund. It recommended that the Secretary-General’s Representative take appropriate measures to better monitor the Fund’s investments. Regarding diversification of investments, the Committee welcomed the progress in this area but encouraged additional investment in emerging markets and developing countries.
Regarding the proposal to increase the normal retirement age to the age of 65 for new Fund participants, he said that the Committee noted that increasing the normal retirement age would yield actuarial savings, partially offsetting actuarial costs that had arisen from the increased longevity of participants. It considered that the Pension Board’s actions would mitigate the actuarial deficit and had no objection to increasing the normal retirement age for Fund participation to 65.
He said that the Advisory Committee welcomed the Fund’s progress in implementing the Board of Auditors recommendations with respect to accounting for unrealized losses and gains and noted the Board had issued an unqualified audit opinion with respect to the Fund’s financial statement for the 2012-2011 biennium, he said.
AISHA SABAR ( United States) was discouraged by the continued trend of the actuarial deficit, but recognized that the prudent management of investments and oversight of the Board buffered the Fund from a far steeper slide. She agreed that more steps were needed to ensure the Fund’s recovery, such as the proposal to increase the retirement age. But that alone would not ensure the United Nations pension system’s viability. According to the Pension Board, the new mortality assumptions annually cost approximately 2 per cent of pensionable remunerations. The proposed increase in the normal retirement age could result in an annual savings of approximately 1 per cent of pensionable remuneration.
“It is no longer feasible to assume that pensions will survive by yielding near double digit annual returns,” she said, welcoming creation of the Working Group tasked with finding ways to ensure the Fund’s long-term sustainability and its focus on governance, investment management and asset-liability. She supported increasing the working group’s mandate to consider the annual financial benefits that pension members received in relation to the Fund’s overall state.
She strongly supported the recommendation to increase the mandatory retirement age to 65 for new staff effective no later than 1 January 2014, and was pleased that the International Civil Service Commission (ICSC) supported it as well. “The Fund’s current actuarial deficit demands that we remain proactive and seek all viable cost-saving measures”, and she added that mandatory retirement at such a young age depleted the Organization of skilled staff with institutional knowledge. She also supported the Board’s recommendation that would allow for the recovery of a portion of pension entitlements in cases of proven fraud. The United States had long advocated for avenues of restitution in cases of proven fraud and theft. She welcomed as a “responsible and welcome change” the amendment to the Regulations which would allow for the use of pension entitlements as a possible source to reimburse financial losses caused by staff members who had defrauded their employing organizations.
Taking the floor again, Mr. ADENIYI pointed to paragraph 11 of the ACABQ report, in which that body expressed concern that the Fund’s long-term objectives were still unmet and that it had underperformed against the policy benchmark for three consecutive fiscal years. In that paragraph, the ACABQ recommended that the Representative of the Secretary-General for the Investments of the Fund and the Investment Management Division take appropriate steps to better monitor the Fund’s investments.
But the problem was not a lack of monitoring. Currently, multiple arrangements existed to monitor the Fund in real time, he said. Reporting on them was tied to specific portfolios and several investment advisories. Monitoring procedures were formalized in the mandate of the investment manual. The Fund had monthly, weekly and quarterly update reports, as well as quarterly reports of portfolios reviewed by the Investments Committee, in addition to the annual report of the investment portfolio’s annual performance. The Fund’s monitoring arrangements were “industry standard” and “quite tight”.
Rather, the issue was how to address high levels of uncertainty and volatility in markets when traditional returns from fixed-income assets, such as sovereign bonds, were highly diluted, he said. That situation had to be managed in terms of long-term actuarial assumptions, rather than tracking whether benchmarks were being met each year. As long as the Fund’s risk profile was similar to that of the market, performance would not deviate greatly. He stressed that the Board was carefully monitoring the Fund’s investments and working to maintain its long-term investment. But it was working in a difficult market and could not meet investment targets each year. That was the case with all funds. “I recommend a little bit of caution in interpreting all figures that you see,” he told delegates.
DMITRY S. CHUMAKOV ( Russian Federation) said the pension Fund report had not been issued in Russian. He would have hoped a formal presentation would have followed the formal rules, including that such documents be issued in all official languages.
* *** *