PRESS CONFERENCE ON UNITED NATIONS PENSION FUND

 

While the United Nations Joint Staff Pension Fund was going through a process of change, that change would in no way affect benefits and was not in the direction of adding risk to the management of investments, United Nations Controller Warren Sach said at a Headquarters briefing on the Fund’s management.

Joined by the Pension Fund’s Chief Executive Officer, Bernard Cochemé, Mr. Sach agreed that change was always a source of worry.  The staff had had some real concern about the management of the $37.4 billion fund, including what they considered risky investments.  If anything, the change was a “prudent movement” from an active to passive investment stance, he said. 

Noting that communication had not been “terribly good”, he said the change to passive investments was one of a number of possible changes that had been considered in the last two years.  Others had included privatization and a change in benefit arrangements.  Many valid emotional concerns had been wrapped up with the concern of a passive investment strategy.  “I don’t think we’ve managed to separate out this technical issue of passive investment from these other much more worrying concerns of changing benefit structure,” he said.

Last year, the Secretary-General had ensured staff that there would not be a change in benefit structure, he said.  That message was now going out again:  There would be no change in benefit structure, he stressed. 

The Organization was, however, moving forward on investments to minimize risk and ensure that the Fund had a healthy return, he said.  The decision to move in that direction should have been looked at some time ago, as the loss of one percentage point of return per year on $9 billion was equal to $90 million, which “was a lot to miss”.  Over the last 20 years, the index had been underperforming somewhere between 0.5 and 1 percentage points, which, he repeated, was a lot of money not to earn. 

Providing a background for the Fund, he noted that, at the moment, the Secretary-General was charged with managing the Fund’s investments.  The Fund provided coverage for some 100,000 active United Nations staff worldwide and provided benefits for over 55,000 retirees around the world. 

The Fund was fully funded to cover all recognized estimated liabilities and it had an actuarial surplus of approximately one per cent, he said.  Presently, the principle of the Fund, which was under investment, amounted to some $37.4 billion as of last week.  Those assets were invested over a range of asset classes -– equities, short-term and real estate.  About 38 per cent of the investments were United States-denominated, while some 62 per cent were outside of the United States.

He said that to achieve the best possible performance consistent with the Fund’s criteria of safety, profitability, liquidity and convertibility, the investment management methods had been recently reviewed with the help of outside expertise and with the guidance of the Investments Committee, which was a committee of the Pension Board.

Last year, the Secretary-General’s Representative for Investments had decided, after consulting with the Investments Committee and the Board, to place a part of the Pension Fund portfolio in passive management, he said.  About $9 billion or a quarter of the $37.4 billion would in principle be transferred from active to passive management. 

In 15 of the last 20 years, the North American Equities portfolio had not met the benchmark, he said.  Only in 5 out of 20 years had active management exceeded the benchmark.  In other words, most of the time, the Fund had not done as well as the market.  That performance did not justify the added risk of exposure to active management methods. 

“What we’re looking at is going to passive management so that overall performance of the Fund would improve further and that risk exposure will be reduced,” he said. 

The Fund was financially healthy, he added.  All investments needed to meet the criteria of safety, profitability, liquidity and convertibility when they were entered into and were in surplus.  The $2.7 billion surplus -- or about one per cent -- could be improved, however, and investments returns had exceeded actuarial assumptions of 3.5 per cent per year in real terms over the life of the Fund and in most periods. 

On the change in investment approach from an active to passive strategy, he said that active management was seen as buying and selling of securities with the goal of outperforming a benchmark index -– doing better than the market and “being ahead of the game”.  A passive management strategy, on the other hand, was designed to ensure that the portfolio would at least match the market and was equal to the return of a given benchmark index.

In certain circumstances, when information on companies was available to all investors, it was very difficult to outperform the market on a consistent basis, he said.  In other words, in efficient markets, one did not expect to outperform the market on a consistent basis year after year.  That was particularly the case in the United States equity market, which was recognized as one of the most efficient markets in the world.  In recognition of that, most United States plan sponsors implemented some form of indexing for their equity portfolio.  According to 2003 data, some 60 per cent of equity investments in the major pension funds were invested using a passive index approach.  “What the United Nations is proposing to do is basically catch up with the industry,” he said.

Providing a chronology for the decision to move from active to passive management, he noted that, since 2004, there had been a number of studies, including a comprehensive study which recommended 50 per cent indexation for the Fund’s overall equity portfolio.  The Pension Board had looked at that in July 2005, requesting further analysis on recommendations that had originally been made on the basis of a study undertaken by Deloitte and Touche.  An RFP (request for proposal) had been issued subsequent to that.  Another consulting company, Mercer Investment Consulting, had been hired for the analysis in 2006. 

The Pension Board’s Investments Committee had received recommendations last May, he added.  The Pension Board had met in July in Nairobi and had reviewed the proposal on indexation.  Against the background of being supported by the Investments Committee, it was submitted to the Pension Board by the Secretary-General’s Representative, not for explicit approval but for consultation.  The Board did not actually approve investments as such, nor did the General Assembly.  The Secretary-General, who was vested with fiduciary responsibility to invest, also consulted through the Investments Committee and the Board.

In 2006, the Investments Committee had again reviewed the proposal as it had come out of the Board, he said.  The General Assembly had received a report of the Pension Board last fall, along with a report by the Advisory Committee on Administrative and Budgetary Questions (ACABQ).  ACABQ had supported the concept of indexation, but recommended internal management of it.  The General Assembly went on to take up a whole range of the Board’s recommendations from the Nairobi meeting and took note of the position of the Board, which had endorsed the Secretary-General’s recommendations.  The General Assembly, in its Fifth Committee recommendation, had made budgetary provision for the external management of the indexed investments.

It had been a controversial issue since the last year, he said.  At Nairobi, 17 members of the Pension Board had voted in favour of indexation to 11 against, with one abstention.  The element of controversy had carried on into the General Assembly.  The Assembly had, however, come down on the same side as the Board and the Investments Committee, namely to go ahead with indexation.   The review process had been extensive, going through various governance mechanisms.  “We ended up with a resolution in December that basically provided for movement forward on indexation,” he said.  While the controversy aspect had not gone away, there had been a firm decision in terms of direction. 

Going back over the timeline of movement, he said the Organization was now moving towards making the decision effective.  The “expression of interest” arrangement through procurement to ensure that there could be external management of indexation had been issued.  The expressions of interest had been reviewed.  The process had been held up, however, pending the Assembly’s review of the Board’s report. 

He noted that, following that process, with about 40 expressions of interest, the Organization had gone on to the next stage in procurement, which was to go for a RFP, or request for proposals.  Of the 40 outside entities that had expressed interest in managing on an indexed basis the North American portfolio of the Fund, a number of bids had been received.  On 16 February, there had been a public bid opening, with 13 bids coming forward.  They were now in the process of technical and economic evaluation.  Once they were completed, the normal process would be for the Headquarters Contracts Committee to look at the recommendation of the evaluation process. 

Following that review, he explained, the recommendation for action would have to be signed off by another senior official to avoid a possible conflict of interest.  In other words, another senior official would have to receive the recommendation of the Headquarters Committee. 

Addressing the issue of an investigation of the Pension Fund by the Office of Internal Oversight Services (OIOS), Mr. Cochemé said he had requested the investigation on 12 October 2005, in his capacity as the Fund’s Chief Executive Officer, after certain allegations by two Pension Fund staff members shortly before they retired in a memorandum dated 4 October 2005.  The OIOS Investigations Division had conducted the investigation into allegations of an appearance of a conflict of interest and favouritism in the procurement of “Sprig, Ltd.” by the Pension Fund and the United Nations Procurement Services. 

On 28 March 2006, OIOS had issued a strictly confidential report of the investigation, he said.  The investigation’s key findings were that neither the United Nations Joint Staff Pension Fund nor Procurement Services had followed all the established rules on procurement in connection with Sprig.  The report also concluded, however, that no evidence was found that the Pension Fund manager concerned had held directly or indirectly any financial interest in Sprig, or that he had colluded with Sprig.  When the former staff members who had made the allegations had been interviewed by the Investigations Division, they had not been able to produce any documentation to support their allegations.

The direct procurement actions subject to the investigation had started in 1998 when the Fund had exercised its granted authority on direct procurement to obtain information technology consultancy services in order to mitigate the serious risks associated with the year 2000 compliance issues and the associated implementation of a new accounting system.  The initial contract had been renewed and the systems implemented satisfactorily.

An important lesson learned from the investigation, he said, was that prudence should be exercised in any procurement action.  That was particularly important when managers recommend direct procurement for which the Fund had been granted authority.  Even in rare and urgent situations, when it was decided to implement direct procurement, a prudent approach should be followed.

Another lesson was that the Pension Fund could better document its procurement procedures, he said.  All the findings had been discussed with the managers concerned and he had stressed that prudence should be exercised in all future procurement actions. 

To further improve the Fund’s internal control mechanisms, he said he had decided to establish a Procurement Advisory Committee, chaired by the Fund’s Deputy CEO.  Its terms of reference provided for the review of all the Fund’s direct procurement actions, including a methodology and a list of criteria for such a review.  The Committee’s mandate was to issue recommendations on proposed direct procurements.  The Fund’s General Procedure on direct procurement actions had been revised accordingly.

He said those actions had been discussed and reviewed with OIOS.  It had been concluded that they were appropriate and that the Pension Fund had therefore implemented the recommendations of the OIOS investigation report. 

“We can be confident that the Fund continues to be efficiently managed, and that internal control mechanisms have been enhanced with the establishment of a new Procurement Advisory Committee,” he said.

Responding to several questions, including on the issue of timing and the apparent “need for speed”, Mr. Sach said it was not correct to say that had been a rush.  The decision had gone through an elaborate review process that had taken some two years.  If anything, the loss of earnings as a result of delay needed some explaining.

On the question of asset liability management, he said a study on that issue was under way.  That study was being thoroughly and technically researched and would involve the participation not only of the Investments Committee, but also the Actuaries Committee.  The study would come forward to the Board this summer.  The study was not aimed, however, at answering the question as to whether to go for active or passive management.  It would rather address the broader question of matching assets and liabilities in the long term.   While asset management liability was important for the health of the Fund, there was no technical reason to delay the movement from active to passive in light of the study.

Regarding the General Assembly’s position, he said the Advisory Committee had had some concerns that were to be put in a context of further review.  That advice had been reviewed by the Fifth Committee, but not endorsed.  The position coming out of the Assembly had not been the pure ACABQ position.  It picked up on the question of going for indexation, as the ACABQ had, but did not go on the question of internal or external management.  ACABQ had said internal, the Assembly had said external and budgeted for that.  There were some subtle differences.  Those concerned, particularly staff reading the ACABQ’s material, could have well understood that there was to be further review beyond the end of the year.  Member States had not taken that position when they had adopted the resolution, however.

Asked why the meeting had taken place in Nairobi, Mr. Sach said there was a beautiful conference centre in Nairobi that was underused.  Participants in the Fund spread around the world.  A totally concentric approach would not work.  Nairobi was a major centre. 

Investments were the responsibility of the Secretary-General, who designated someone to act on his behalf, he said in response to another question.  It was a process in which there was defined responsibility –- one individual, but requirements for consultation with stakeholders at large.

What would be done to reassure staff in light of the negative resolution adopted by the Staff Council? a correspondent asked.  The Organization was trying to get the message out that there was no movement towards risky investments, Mr. Sach said in response.  A town hall meeting had been held in February to get out that message at Headquarters.

Responding to several questions on the OIOS investigation, Mr. Cochemé said the allegations that he had informed his staff not to speak to the press were nonsense.  People who knew him would know that he would not make such a statement.  Rumours were difficult to kill, especially from people with a vested interest in propagating that rumour.  He had never said not to go to the press.  He also read out a memo that he had sent to OIOS in 2006 regarding the investigation. 

OIOS had left the case open because of its reporting cycle to the Assembly, he said.  When he had returned from Geneva, he had asked OIOS to clarify its position.  It had confirmed in writing that he had fully complied with the recommendations.  OIOS and the investigators had confirmed that they considered the case closed, as the Fund had implemented the appropriate actions.  That was the story.

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For information media • not an official record