Sixty-first General Assembly

Fifth Committee

20^th Meeting (AM)

BUDGET COMMITTEE TAKES UP REPORT ON $35 BILLION UNITED NATIONS PENSION FUND

As the Fifth Committee (Administrative and Budgetary) took up a report on the global operations of the United Nations Joint Staff Pension Fund, which currently consists of 21 member organizations and covers nearly 150,000 participants and beneficiaries worldwide, the representative of Finland, on behalf of the European Union and associated States, said that it was not only the market value of the Fund’s assets that deserved attention and scrutiny, but the fact that those assets safeguarded the secure retirement of all United Nations and 20 other organizations’ staff members.

While welcoming several positive developments in the performance of the Fund, including the growth of the Fund’s market value to an all-time high of over $35 billion, as well as the Board’s decision to establish an Audit Committee, she was concerned about the issue raised by the Board of Auditors and the Advisory Committee on Administrative and Budgetary Questions (ACABQ), particularly the lax monitoring by the Investment Management Service, the deficiencies in the trade order management system and the unfilled positions on risk management and compliance in the Service.

The Chairman of the Pension Board, Vladimir Yossifov, said that, based on recent positive results, the Board had decided to recommend action to reverse some of the economy measures that had been taken in the 1980s.  In particular, the Board had reiterated its earlier recommendation to eliminate the limitation on the right to restoration based on the length of prior contributory service.  It had also recommended that the reduction in the first consumer price index adjustment due after retirement be further lowered, from 1 per cent to 0.5 per cent.

In addressing the overall management of investments, the Board had considered the results of recent studies, he continued.  A significant conclusion from those reviews was that the staffing levels devoted to investments had not kept pace with the rapid growth of the assets of the Fund.  To address that issue, the Board had decided to propose enhancing the existing team of five investment officers and reviewed the possibility of changing the approach to managing the portfolio invested in North American equities from “active” to “passive” management.

The United States representative welcomed the Board’s decision to approve the Secretary-General’s proposal on passive management by outsourcing to a private entity the $8 billion portfolio in North American equities.  The proposal to shift the investment management eliminated the need for the United Nations to maintain a staff of managers, although the efficient use of the required transition services payment of $2.9 million required a progress report from the Secretariat.  He noted the ACABQ’s recommendation of a detailed report to the General Assembly on the financial impact of the move, and that the outsourcing should occur only upon the completion of a comprehensive review.

The Russian Federation also deemed justified the decision to shift to passive management and indexing of the North American portfolio.  Its representative expressed doubts regarding the recommendation of ACABQ that the activity be undertaken by the Investment Management Service itself.  That appeared to be the most costly option, compared to external management.

However, South Africa, on behalf of the “Group of 77” developing countries and China, registered concern and sought immediate corrective measures in connection with the conduct of the representative of the Secretary-General -- the Under-Secretary-General for Management -- who had worked out a new strategic asset allocation formulation and performance benchmark for the Fund without consulting the Pension Board or the General Assembly.  Those actions were in direct violation of the Investment Manual, and raised concerns about the delegation of authority and accountability.  The Group concurred with ACABQ that, before effecting a significant change in investment policy, clear and convincing information on the level of risk involved must be presented to the Pension Board.

South Africa’s representative also stressed the importance of investing in developing countries, noting that Latin America appeared to have lost favour with the Fund.  She was also concerned that only a small team of managers had been given the responsibility to oversee the Fund’s significant assets, and that the risk to the Organization of appointing only one person to manage large portions of the Fund’s investment portfolio.

The representatives of Ecuador and Guyana, speaking on behalf of the Rio Group, stressed their concern over the situation of retirees living in Ecuador, a country that had undergone dollarization.  Ecuador’s representative explained that the United States dollar in Ecuador has lost 60 per cent of its purchasing power due to inflation, and the majority of United Nations agencies in the country had adjusted the salaries for their current employees.  The minimum living wage before dollarization had been $15 per month, and had increased now to $180 a month.

Guyana’s representative said that, despite the mandate given to the Pension Board two years ago in resolution 59/269, no effective action had been taken to ameliorate the situation so far.  The Rio Group wanted to receive a comprehensive and clear report on the proposals to attenuate the adverse consequences arising from dollarization in Ecuador.

A statement was also made by the representative of Nigeria.  The documents before the Committee were introduced by Mr. Yossifov; the United Nations Controller, Warren Sach; and the Chairman of ACABQ, Rajat Saha.

The Committee will continue its work at a date to be announced.

Background

The Fifth Committee (Administrative and Budgetary) met this morning to take up the United Nations pension system.

Before the Committee was the report of the United Nations Joint Staff Pension Board (A/61/9), which contains information on the actuarial valuation of the Pension Fund, the management of its investments, the composition of the Board itself, revised resource requirements, financial statements and schedules, the accounts and operations of the Fund and other matters.

According to the document, by the end of 2005, the number of participants in the Pension Fund increased to 93,683 and the principal of the Fund reached some $23.56 billion.  The net investment income was about $4.37 billion.  The market value of the Fund had grown to over $33.1 billion as of 31 March 2006, and the total annualized real rate of return for the two-year period ending on 31 March 2006 was 8.3 per cent.  The latest actuarial valuation of the Fund also revealed a fifth consecutive surplus, amounting to 1.29 per cent of pensionable remuneration.

After considering this information, the Board recommended to the General Assembly a lowering to 0.5 per cent of the consumer price index adjustments from 1 April 2007, in addition to other adjustments.  The Board further recommended approval of some $2.4 million in additional resources in biennium 2006-2007, related primarily to investment costs to enhance the Investment Management Service, as well as administrative and audit costs.  It also called on the Assembly to concur with the revised Pension Fund-World Bank Group Transfer Agreement, as well as proposed separate new transfer agreements between the Pension Fund and each of the six coordinated organizations, and recommended that the International Organization for Migration be admitted to membership of the Pension Fund.

Among other things, the Board also encouraged the Investment Management Service of the Fund to adhere to the principles of the Global Compact’s Principles for Responsible Investment, without compromising the four established investment criteria of safety, liquidity, convertibility and profitability.  The Board urged the Investment Management Service to intensify its efforts to collect tax refunds from several Member States.  It requested the Secretary/Chief Executive Officer to visit the Fund’s retirees living in Ecuador to analyze and report on the impact of dollarization.  It also found no compelling reason to alter the guidelines of the Pension Fund’s Emergency Fund in order to widen its coverage.

The Board also decided to establish an Audit Committee to provide an enhanced communications channel between the internal auditors, the external auditors and the Pension Board.  It decided, after considering an extensive report, to adopt the six principles for determining the size and composition of the Board, while maintaining its size at 33 members and its current composition and allocation of seats.  It also agreed to review the matter in three years.

Another document before the Committee was the report of the Secretary-General on investments of the United Nations Joint Staff Pension Fund and efforts to increase diversification (document A/C.5/61/2) for the period from 1 April 2004 to 31 March 2006.  According to the report, the biennium ending 31 March 2006 was characterized by a number of economic trends -– such as the emergence of China as an economic powerhouse and surging oil prices due to upheaval in the Middle East -- which will likely have a dramatic impact on the Fund.  The period of low inflation and interest rates is also coming to an end.  While pointing to prevailing uncertainty, the report concludes that the outlook remains tipped to the positive.

The changes to the Fund during the biennium included the adoption of a new long-term strategic asset allocation to reflect the Fund’s long-term asset exposure more accurately.  Additionally, the contract of one of the Fund’s account managers was terminated due to persistent underperformance.  Finally, in 2006, the Fund changed its custodian and master record keeper arrangements and now has only one global custodian.

The report goes on to describe the diversification of assets in which the fund has invested and notes that the investment portfolios are continuously being rebalanced following the quarterly meetings of the Investments Committee to achieve the tactical asset allocation decided by the representative of the Secretary-General.  The geographic diversification of investments is also described, with the proportion of the Fund invested in North America increasing from 43.2 per cent in March 2004 to 44.8 per cent in 2005, European investments shrinking from 37.2 per cent to 32.4 per cent and the proportion of investments in the Asia-Pacific increasing from 10.1 per cent to 14.1 per cent.

According to the report, the Fund’s investment returns reached historical rates of some $33.12 billion in March 2006, but that amount was managed “as if it were a few million dollars”, with one person responsible for managing almost 50 per cent of the total fund.  That puts the Fund at considerable risk.  The Fund’s staff requires an increase of at least 25 Professional staff, with each investment team managed by a D-1, but, even then, the Fund cannot offer remuneration packages that are competitive with those offered by investment management firms in New York.  Another problem has been chronic underperformance in North American equities, which resulted in the decision of the Investments Committee to recommend indexing the North American equity portfolio in order to yield lower risk and higher return.

Finally, the report describes continued efforts to invest in developing countries, which amounted to $1.8 billion on 31 March 2006, an increase of 8 per cent from $1.7 billion at cost on 31 March 2004.  The increases were in the African region (13 per cent), Asia and the Pacific (27 per cent) and emerging European markets (101 per cent), with a decrease in Latin America due to the maturity of some bond investments and the sale of equities in some countries.  Additionally, the Investment Management Service continued to explore possible investment opportunities in developing countries, including visits to Africa, Asia and Eastern Europe during the period under review.

In its related report, the Advisory Committee on Administrative and Budgetary Questions (ACABQ) (document A/61/545) reiterates its previous view that the present contribution rate of 23.7 per cent should be retained.  In this connection, it recalls the provisions of Assembly resolution 53/210 that the Pension Board should continue to monitor closely the evolution of the Fund’s actuarial valuation, and that no attempt should be made to reduce the present rate of contributions or change any other features, unless and until a consistent pattern of surpluses emerges.

In connection with the Board’s request that the Secretary-General’s representative report back to it on any changes in the Fund’s benchmarks that might result from the asset liability management study, the Advisory Committee expresses concern that the new benchmarks were not submitted to the Pension Board and the Assembly for approval, as required by the Investment Manual.  Here, ACABQ agrees with the Board of Auditors that the Fund should submit the new investment benchmark to the Pension Board and the Assembly for approval.

Further, the Advisory Committee notes the good results of the Fund’s financial management.  While agreeing in principle to the decision of the Board on the passive management of the North American equities, whereby a portfolio is set up to track a specific benchmark index, rather than trying to outperform it, ACABQ recommends that this activity be undertaken by the Investment Management Service itself.  The resource requirements and cost reductions associated with the indexing of the North American portfolio should be provided to the Assembly.  Any decision to eventually outsource this activity should be taken only after a comprehensive review, with a clear presentation of the objectives, steps involved and a timetable for orderly implementation.

The Advisory Committee recommends that the consideration of any further significant changes in the investment policy be deferred, pending careful evaluation of the situation, including a comprehensive asset-liability management study and a study of the Fund’s governance, with special regard to the relationship between the Fund secretariat and the Investment Management Service.  A number of serious management issues in the Service, as identified by the Board of Auditors, should be addressed, including determination of the level of tolerance of risk and improvement in internal review of performance and the trade order management system.  In that regard, ACABQ also recommends deferral of consideration of additional budgetary requirements for indexation fees and one-time transition costs amounting to some $1.95 million.

In connection with the report of the Board of Auditors -– which issued an unqualified audit opinion on the Fund’s financial statements for the biennium ended 31 December 2005 -- the Advisory Committee observes that, of a total of 23 recommendations for previous biennium, 12 recommendations were implemented, 7 were under implementation and 4 were not implemented.  Of the 4 not implemented, 2 were not accepted by the Board and 2 could not be implemented by the Fund.  The 2 recommendations that remain unimplemented relate to the reconciliation of contributions receivable from member organizations; and the so-called “back office” functions within the Investment Management Service.  The Advisory Committee reiterates that the reasons for not implementing the Auditors’ recommendations should be clearly stated.  ACABQ concurs with the Board of Auditors on the reporting lines for internal audit and also draws attention to its previous observation that an audit committee should be composed of members with relevant experience in internal audit, to be selected as soon as possible.

ACABQ notes with concern the observation of the Board of Auditors on lax performance monitoring by the Investment Management Service, stating that the Service will need to improve its activities in that regard.  It also suggests that urgent measures should be taken to bring the investment infrastructure of the Investment Management Service up to the industry standards, and encourages the administration of the Investment Management Service to expeditiously implement the recommendation of the Board of Auditors with regard to the recruitment to the risk management and compliance officer positions within the Risk and Compliance Section of the Service.

The Advisory Committee recommends approval of a number of the Pension Board’s decisions, including those related to the provision of additional resources for general temporary assistance; travel and external audit costs; reclassification of several posts in the Fund’s information and communication technology services; and establishment of five new posts in the Investment Management Service.  The Committee trusts that all existing vacant posts in the Investment Management Service, as well as the additional five posts, will be expeditiously filled.

ACABQ notes that, having considered a report by the working group established to review the size and composition of the Board and its Standing Committee, the Pension Board decided to maintain its size at 33 members, as well as its current composition and allocation of seats.  The Board will also consider a policy paper in 2007, which will provide clarification in respect to membership and attendance at the meetings of the Board and its Standing Committee.  The Advisory Committee trusts that the policy paper will address the guidelines provided by the Assembly on that matter.

Introduction of Documents

The report of the Pension Fund’s Board was introduced by its Chairman, VLADIMIR YOSSIFOV, who said that the document provided extensive information on the global operations of the Fund, which currently consisted of 21 member organizations, covering nearly 150,000 participants and beneficiaries worldwide.  According to the latest actuarial evaluation, the Fund had recorded its fifth consecutive surplus covering 10 years, amounting to 1.29 per cent of pensionable remuneration as of 31 December 2005. In that connection, it should be recalled that the valuation was performed on the basis of the actuarial value of assets and not on the market value.  In other words, the surplus would be larger if it had been determined on the basis of the market value of the assets.  As of the end of October 2006, the market value of the Fund had been over $35 billion.

On the basis of those positive results, the Board had decided to recommend action to reverse some of the economy measures that had been taken in the 1980s, he continued.  In particular, the Board had reiterated its earlier recommendation to eliminate the limitation on the right to restoration, based on the length of prior contributory service.  The actuarial cost of that measure was estimated at 0.17 per cent of pensionable remuneration.  Among other things, the Board recommended that the reduction in the first consumer price index adjustment due after retirement be further lowered from 1 per cent to 0.5 per cent -– at the actuarial cost of 0.15 per cent of pensionable remuneration.  As noted in the report, it also recommended that the Assembly concur with the revised Pension Fund-World Bank Group Transfer Agreement and with the proposed new transfer agreements between the Fund and each of the six coordinated organizations, including the Organisation for Economic Cooperation and Development (OECD).  Another recommendation related to the admittance of the International Organization for Migration as a member of the Fund.

Turning to the investments of the Fund’s assets, he said that the annualized nominal rate of return for the 46-year period ending 31 March this year had been 8.7 per cent.  That represented an annual long-term rate of return of 4.3 per cent for the same period.  That rate, which took into account an adjustment for the United States consumer price index, continued to exceed the Fund’s long-term objective of 3.5 per cent.

In addressing the overall management of investments, the Board had considered the results of recent studies, he continued.  A significant conclusion from those reviews was that the staffing levels devoted to investments had not kept pace with the rapid growth of the assets of the Fund.  To address that issue, the Board had decided to propose enhancing the existing team of five investment officers and reviewed the possibility of changing the approach to managing the portfolio invested in North American equities from “active” to “passive” management.

The Board had not reached that decision by consensus, he continued.  The approval in respect to the passive management of the North American equities portfolio, as well as ensuing budgetary implications, had been reached on the basis of a roll-call vote, without the consent of the participants’ representatives, who had made a formal statement explaining their position on the matter.  That statement had strongly reaffirmed the position that any shift in investment practices should be based on the results of the asset liability management study that had already been approved in 2005 and was currently under way.  In endorsing the requests for the five new posts, the participants’ representatives had also strongly recommended that the posts that had been previously approved by the Standing Committee be filled before the new ones.

He added that the Fund was also currently undertaking an overall asset liability management study, which should provide a more comprehensive understanding of the overall risk/return profile of the total portfolio.  In sum, while there was a consensus at the Board in favour of changing the way the investments were currently managed by the Investment Management Service and the representative of the Secretary-General, dissention had appeared on the approach and the method for change.  Without an investment policy, an asset liability management study and an approved risk tolerance level for the Fund, proposals appeared at best premature and at worst not in compliance with best practices, professional standards and transparency.  In view of that, the participants’ representatives felt that there was no urgency to that change prior to a fuller and more adequate consideration of the matter.

Among other things, the Board had also requested the Chief Executive Officer to carry out several reviews relating to the benefit provisions of the Fund and to provide his findings in 2007, he said.  At its next session, the Board would consider the existing provisions governing special adjustments for small pensions, a comprehensive study on disability matters that would be prepared in coordination with the medical directors and a further analysis of the impact of dollarization on the Fund’s retirees residing in Ecuador.

WARREN SACH, the United Nations Controller, then introduced the Secretary-General’s report on the Fund’s investments.  Reporting on the changes made during the biennium, he said that, upon recommendation of the Investments Committee in 2005, a new strategic asset allocation and the subsequent change in the Fund’s performance benchmarks had been adopted to better reflect the Fund’s long-term strategic exposure to different asset classes, as well as different types of assets within each asset class.  In April 2006, the Fund had changed its custodian and master record keeper arrangements to only one global custodian.  After a global competitive bidding exercise in accordance with the United Nations procurement regulations and rules, the contract had been awarded to the Northern Trust Company.  In May, the Fund had terminated its contract with Lombard Odier Darier Hentsch et Cie, one of the Fund’s European small capitalization account managers, due to its persistent underperformance.  Hiring of a replacement was currently under way.

The Fund continued to be one of the most widely diversified pension funds in the world, he continued.  As of 31 March this year, it had investments in 47 countries and 26 currencies.  The Fund also made direct and indirect investments in developing countries, amounting to $1.8 billion on 31 March.

Turning to the recommended changes and supplementary programme budget proposals, he said that they included an increase in the number of positions at the Investment Management Service by five Professional staff, management of the North American portfolio to the benchmark and hiring a consultant to review the record-keeping of real estate investments and the monitoring of the newly hired global custodian.  In addition, the Office of Internal Oversight Services (OIOS) had recommended last year that the Investment Management Service review the accounting procedure followed by the master record keeper vis-à-vis those required by the manual.  Real estate accounting was of particular concern.  In that regard, a resource request was being submitted to engage a consulting company to provide the Investment Management Service with advice on detailed accounting and reporting procedures, as well as monitoring of the global custodian.

Introducing the ACABQ report on the matter, its Chairman, RAJAT SAHA, noted that the representative of the Secretary-General had decided to adopt a new long-term strategic asset allocation in May 2005.  The Advisory Committee was concerned that the new benchmarks had not been submitted to the Pension Board and the General Assembly for approval.  ACABQ had agreed with the Board of Auditors that the Fund should submit the new benchmarks for approval.

In connection with the recommendations of the Board of Auditors, he said that ACABQ was concerned about its observations on the trade order management system of the Investment Management Service.  The ACABQ also noted with concern that the investment infrastructure of the Investment Management Service was still at the stage where trade orders were placed by facsimile and there was no compliance monitoring system.  Urgent measures needed to be taken to bring the investment infrastructure of the Investment Management Service up to industry standards.  The administration of the Investment Management Service should also expeditiously complete recruitment of risk management and compliance officer positions.

The Advisory Committee had supported all the recommendations of the Pension Board on the revised budget for 2006-2007, except for the additional provision of $1.95 million for indexation fees and one-time transition costs.  Consideration of that additional requirement should be deferred pending action on the measures indicated in paragraph 17 of the ACABQ report.

Statements

KATJA PEHRMAN (Finland), speaking on behalf of the European Union and associated States, said that it was not only the market value of the Pension Fund’s assets that deserved attention and scrutiny, but the fact that those assets safeguarded the secure retirement of all United Nations and 20 other organizations’ staff members.  She was particularly satisfied with the Fund’s investment performance, and noted the 24.6 per cent increase in the value of assets when compared with the previous biennium, the fifth consecutive positive actuarial valuation of the Fund, and the Fund’s investment policy’s outperformance of the benchmark.  She also noted the 8 per cent increase of the Fund’s investments in developing countries, and urged it to remain prudent with its investment policy and to manage the current surplus wisely.

She was concerned about issues raised by the Board of Auditors and ACABQ, particularly the lax monitoring by the Investment Management Service, the deficiencies in the trade order management system, and the unfilled positions on risk management and compliance in the Investment Management Service.  But, she was also very pleased to see that the Pension Board had implemented the Board of Auditors’ recommended establishment of an audit committee, and she agreed with the ACABQ’s recommendations pertaining to the management of the investments of the Fund.

KAREN LOCK (South Africa), speaking on behalf of the “Group of 77” developing countries and China, said it was important for current participants, retirees and Member States to have a clear understanding of the aims, structure, functions and activities of the Pension Fund.  She supported the view that it would be beneficial to receive an executive summary of the Fund’s performance and the effects of global economic developments, and that Fund performance issues and difficulties needed to be highlighted.  She also sought detailed information from the Fund administration and the Pension Board on why Board of Auditors’ recommendations had not been implemented.  She appreciated the significant improvement in the Fund’s assets, but said further efforts were required to invest in developing countries, noting that Latin America appeared to have lost favour with the Fund.  She said investments in the region could spur economic growth and job creation.

She was concerned that only a small team of managers had been given the responsibility to oversee the Fund’s $33 billion in assets, and the risk to the Organization of appointing only one person to manage large portions of the Fund’s investment portfolio.  She said it would be prudent to clarify the delegation of authority from the Secretary-General as sole custodian of the Fund to his “Special Representative”, and asked why these responsibilities had not been assigned to a team of first-rate managers who could give these huge sums the responsibility they required.  She also sought clarification of the irregularity of the passive management of the real estate portfolio, and said that competitive remuneration packages should be used as a magnet for experienced managers to deal with this portfolio.  She was concerned that the lack of staff in the Risk and Compliance Section of the Investment Management Service had caused the Fund to lose $8.7 million, and that it appeared that no accountability mechanism existed to ensure disciplinary action against the individual responsible for that significant loss.  She fully supported the expeditious action recommendation by ACABQ to fill all vacancies in the Fund’s secretariat, especially to resolve the Investment Management Service’s lax monitoring, and said that investment managers needed to be subject to regular, independent performance reviews.

She sought a clarification of the investment management strategy of the Investment Management Service based on the submitted report.  For instance, the equities portfolio was being judged against the criteria of the North American equities portfolio because they were “difficult to outperform”.  In contradiction, the “chronic underperformance” of these equities had been noted.  Further, it was odd that no benchmarks were established for small-capitalization equities, even though the Fund’s equity portfolio incorporated them, and she wanted clarification on that matter.

She registered concern at the conduct of the representative of the Secretary-General, in this case the Under-Secretary-General for Management, who had worked out a new strategic asset allocation formulation and performance benchmark for the Fund without consulting the Pension Board or the General Assembly.  She believed that disregard for established procedures was improper, as these actions were in direct violation of the Investment Manual, and raised concerns about the delegation of authority and accountability.  She sought immediate corrective measures.  She concurred with ACABQ that, before effecting significant change in investment policy, clear and convincing information on the level of risk involved must be presented to the Pension Board.  She requested insight on the assumptions that had resulted in the Fund’s actuarial valuations, and greater transparency in selecting the consulting actuary.

Finally, she was concerned with the lack of action taken by the Board in response to the General Assembly’s request in 2004 to provide information on “the special situation of pensioners living in countries having undergone dollarization and on possible proposals to attenuate the adverse consequences arising there from”, and mentioned Ecuador as worthy of deep analysis.  She was concerned that the Board had only now tasked its Chief Executive Officer to visit Ecuador.  She looked forward to expeditious action and expected elaboration of measures to reduce the adverse consequences of dollarization on retirees and beneficiaries living in Ecuador.  She was also concerned that many beneficiaries faced reductions in their compensation due to banking transfer fees.  That problem had resulted from centralizing the banking services in the United States, which resulted in undue fees collected by third banks from the compensation of the beneficiaries.

TROY TORRINGTON (Guyana), speaking on behalf of the Rio Group, supported the position of the Group of 77 and China and welcomed the increase in the investment performance of the Pension Fund and recognized the successful work that had been accomplished by the Board in the current biennium.  He was confident that it would improve even more in the future.  He encouraged the Secretariat and the Board to ensure that it complied fully with the established regulations, as approved by the Assembly, and to improve the working methods of the Fund, in order to avoid in the future conduct that extended beyond the mandate given by Member States.

In particular, he said that the Rio Group wished to stress its concern to the Board on the specific case that directly affected Ecuador.  Despite the mandate given to the Board two years ago in resolution 59/269, in order to provide information on the particular situation of pensioners living in countries having undergone dollarization, he noted with concern that no effective action had been taken so far.  The Rio Group concurred with the previous statements on the need for a comprehensive and clear report on the proposals to attenuate the adverse consequences arising from dollarization in Ecuador.

Also, while welcoming the efforts to increase the investments in developing countries, he asked for clarifications in connection with the information regarding investments in Latin America.

BENJAMIN GARCIA ( United States) was pleased that the market value of the Pension Fund’s assets had increased to an all-time high, which he called great news for the 85,000-plus participants, and demonstrated what could be accomplished through sound longer-term financial planning and strong management.  He welcomed the Board’s decision to approve the Secretary-General’s proposal on passive management by outsourcing to a private entity the $8 billion portfolio in North American equities.  He supported the shift in investment management, but strongly hoped that members of the governing body returned to the usual practice of consensus decision-making, in place of going to a vote.  He said that the proposal to shift the investment management eliminated the need for the United Nations to maintain a staff of managers, although the efficient use of the required transition services payment of $2.9 million required a progress report from the Secretariat.  He noted the ACABQ’s recommendation of a detailed report to the General Assembly on the financial impact of the move, and that the outsourcing should occur only upon the completion of a comprehensive review.

He was pleased that the actuarial valuation showed a surplus, which reversed earlier downward surplus trends.  He agreed with the view of the Committee of Actuaries that moderate inflation levels and changes in participant growth assumptions that drove that surplus could not be relied upon outright.  He sought further clarification as to why the Board allowed the Fund to dip below the prudent 1 per cent surplus level.  He also opposed the Board’s decision to send the Fund’s Chief Executive Officer to find out more about the plight of “economically disadvantaged” United Nations retirees.  The trip was a waste of the Fund’s resources, as the General Assembly had already decided not to approve any benefit improvements until benefit reductions were fully restored.

He said he did not understand why the Board did not respond to the General Assembly’s request for proposals that would result in a more equitable distribution of seats on the Board, based on participant rates.  The Board’s statement that it would review the matter again in three years and produce a policy paper addressing membership issues next year was not acceptable, and he planned to pursue the Board’s non-compliance with other delegations.  He supported and appreciated other measures taken by the Board to improve governance.

He commended the Board for creating an Audit Committee, and sought to understand how the Board had assured itself that the Committee was composed of “experts” in the appropriate fields, and whether the résumés of the Committee members had been circulated among Board members.  He added that effective oversight needed to be a cornerstone of the Fund’s operations and called on the Audit Committee to prioritize the monitoring of the internal audit arrangements for the Fund.  He believed the General Assembly had primary authority over budget and other issues related to the Fund, so Member States needed to have full and adequate access to audit and oversight information.  Finally, he expressed satisfaction with the Board’s decision to approve Fund membership for the International Organization for Migration.

RODRIGO RIOFRIO ( Ecuador) noted that, six years ago, the Government of Ecuador had formally adopted the policy of dollarization, and all United Nations pensioners living in the country were affected adversely because the Fund continued to adjust the pension for inflation based on the local currency, not on the United States rate of inflation.  The Federation of International Civil Servants in Ecuador had contacted the Fund and stated clearly that, during the 1990s, the pensions received by international civil servants had remained below the consumer price index in Ecuador. 

He explained that the United States dollar in Ecuador had lost 60 per cent of its purchasing power due to inflation, and the majority of United Nations agencies in the country had adjusted the salaries for their current employees.  He said that the minimum living wage before dollarization had been $15 per month according to the Ministry of Labour, and had increased now to $180 a month.  After tedious and bureaucratic correspondence between the Federation of Former International Civil Servants and the Fund’s Secretariat, he said the issue was not deemed to be an urgent matter.  The process had been bogged down, and no specific recommendations to mitigate the problem had been offered, in spite of the mandate of the General Assembly two years ago and article 1 of the United Nations Pension Adjustment System, which said the System’s spirit was to preserve purchasing power.  He called on the head of the Pension Fund to visit Ecuador as soon as possible.  Such a visit could provide information that would lead to the adjustment of pensions to keep pace with reality, so that retired Ecuadorian international civil servants could have a decent retirement.

ANDREI KOVALENKO ( Russian Federation) noted the increase of the Fund’s assets to over $35 billion as of 31 October 2006, as well as the fact that, as of 31 December 2005, the Fund had recorded an actuarial surplus, amounting to 1.29 per cent of pensionable remuneration.  That had enabled the Pension Board to recommend a certain liberalization of the pension benefits system through a reversal of some of the economy measures that had been previously introduced.  In particular, the Board had recommended to reduce the first consumer price index adjustment due after retirement, from 1 per cent to 0.5 per cent, and to eliminate the limitation on the right to restoration, based on the length of prior contributory service.  He trusted that the Board would continue to monitor closely the evolution of the Fund’s actuarial valuation and that any recommendations involving changes to the parameters of the pension system and the rate of contributions would be made according to those two elements as a whole, taking into account further evolution of the actuarial balance.

Given the indicators on the return on the investments of the Fund and the lag between the return on the North American equities portfolio and market indicators, he deemed justified the decision of the Board to shift to passive management and indexing of that portfolio.  He had some doubt regarding the recommendation of ACABQ that the activity be undertaken by the Investment Management Service itself.  That appeared to be the most costly option, compared to external management.  Nevertheless, he was prepared to have a focused discussion during informals to find the best possible solution in that regard.

He added that the Board, in a calm and businesslike manner, had agreed on the issues related to the Audit Committee, which would soon begin its work.  In conclusion, he noted the Board’s fruitful work and supported its decision to shift to an annual work format with a shorter session, which would allow it to carry out its job more effectively.

Mr. SACH said that, because there was broad interest in issues of substance, he would like to respond in detail, as he was not in a position to respond to a great number of the points.  He said those issues required very careful response, and he hoped to provide them to the Committee within a week or so.

NONYE UDO ( Nigeria) said she appreciated the improvements to the Fund.  In the past, she had highlighted the risk of having one person manage $15 billion, and she hoped that would be urgently addressed.  Regarding investments in developing countries, she took note of the 13 per cent increase in investment in African countries due to the investment in Egypt.  She called Africa a vast, untapped market, so she trusted that further increases would be made in Africa.  She hoped that future meetings would continue to occur in Nairobi to give the Pension Fund further awareness of the opportunities in Africa.  She was encouraged that the outlook for the Fund remained tipped to the positive.

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For information media • not an official record