Sixty-third General Assembly

Fifth Committee

20^th Meeting (AM)

BUDGET COMMITTEE TAKES UP REPORT ON JOINT STAFF PENSION FUND

As the Fifth Committee (Administrative and Budgetary) took up reports on the global operations of the United Nations Joint Staff Pension Fund, which currently consists of 22 member organizations and covers more than 160,000 participants and beneficiaries worldwide, delegates welcomed several positive developments in the Fund’s performance, but expressed concern about the 29.6 per cent decline in its assets’ market value, from $41.7 billion in January 2008 to approximately $29.4 billion in November.

The Chairman of the Pension Board, Jay Pozenel, introducing the report of that body, noted that, adjusted for inflation, the real annual rate of return on investments was 4.4 per cent, which exceeded the Fund’s long-term actuarial objective of a 3.5 per cent real rate of return.  In today’s uncertain economic times, market conditions might result in varying, higher or lower, rates of return in the short term, he said, but the Fund’s investment objectives and strategies were geared for the long term.  “Even in the short term”, he added, “the Fund’s diverse portfolio had sheltered its returns from swings in the capital markets and the Fund had continued to meet or exceed its key performance benchmarks.”

Noting that rate of return with appreciation, the representative of Antigua and Barbuda, speaking on behalf of the “Group of 77” developing countries and China, nevertheless expressed concern about the recent decline in the Fund’s market value and said that the Group would appreciate hearing more on the possible effects that decline might have on the Fund, given the large number of staff expected to retire in the next four years.  In that context, the Russian Federation’s representative asked for information regarding what steps the Investment Management Service was taking to protect the Fund’s assets, in light of the collapse of securities markets and the global financial crisis.

Several delegations also stressed the importance of coordinating efforts among all competent actors and with the full respect of the four paramount investment guidelines of the Fund:  safety, liquidity, convertibility and profitability.  In that regard, the United States delegate said that the Fund’s two major components –- investing and payment of benefits -- must coordinate their operations and cooperate to the maximum extent.

The representative of Ecuador also participated in the discussion.

Dennis Thatchaichawalit, of the Programme Planning and Budget Division, and Susan McLurg, Chair of the Advisory Committee on Administrative and Budgetary Questions (ACABQ), also introduced reports.

The Fifth Committee will next meet at 3 p.m. Tuesday, 25 November, to continue discussion of development-related activities.

Background

The Fifth Committee (Administrative and Budgetary) met this morning to consider the activities, financing and investments of the United Nations Joint Staff Pension Fund.

The report of the United Nations Joint Staff Pension Board (document A/63/9) shows that, for the biennium ended 31 December 2007, the number of the Fund’s participants increased from 93,683 to 106,566; the number of periodic benefits in award grew from 55,140 to 58,084; and the principal of the Fund increased from $23.6 billion to $30.6 billion (29.8 per cent).  The net investment income of the Fund during the period amounted to $7.1 billion, and its market value increased from $37.6 billion on 31 March 2007 to $40.6 billion on 31 March 2008.  During the biennium, the Fund achieved a real rate of return of 4.0 per cent, which exceeded its long-term objective of 3.5 per cent, adjusted for inflation.

According to the report, the end-of-2007 actuarial valuation of the Fund revealed a surplus of 0.49 per cent of pensionable remuneration, or $1.3 billion, the sixth actuarial surplus over the past decade.  Last year’s asset-liability management study confirmed that the Fund had a sound actuarial process; that its asset allocation was sound; and that the Fund was stable and well funded.  The study also suggested that the Fund should explore opportunities for introducing private equity and real return asset classes into its portfolio.

Among the Board’s recommendations that require action by the General Assembly, the report presents a proposal to include contractual settlement provisions in the Fund’s agreement with its Global Custodian.  This would mean that in circumstances where a trade fails to settle owing to a delay in transferring funds, the Investment Management Service would lend the required amount to the Fund at the standard bank interest rate, so that the trade could happen on the contracted date.

The Board also recommends a total appropriation for the biennium 2008-2009 in the amount of $75.9 million for revised administrative costs, $74.64 million for revised investment costs and $72,700 for revised Pension Board expenses.  The total budget for the biennium would increase by about $2.2 million to $153.2 million.  Of that amount, $134.35 million is chargeable to the principal of the Fund and $18.85 million is the cost-sharing portion of the United Nations.

Also recommended are amendments to the Regulations of the Fund in order to allow a participant’s period of disability to be counted as contributory service, without requiring contributions for that period; and to allow for the purchase of additional years of contributory service by part-time staff.  The Board noted that its decision was not to set any precedent and that the decision was to be monitored in the light of an experience review.  Further, the Board recommends approval of the funding, in the amount of $271,100, for a working group, which would consider various proposals concerning the plan design of the Fund.  Amendments to the Regulations are also proposed to streamline the application of the provisions governing present and former family members.

Following recent elimination of the limitation on the right of restoration for participants, based on the length of contributory service, the Board has clarified this year that revised article 24 (a) of the Fund’s Regulations covered not only participants who had received a withdrawal settlement, but also those who, before 1 April 2007, had elected a deferred retirement benefit that was not yet in payment.  The Board requests approval of a technical amendment to article 24 of the Regulations in that regard.  The Board further recommends that the Special Tribunal for Lebanon be admitted to membership in the Fund, effective 1 January 2009.

Having considered a study, which recommended an allocation of 18 per cent of the Fund’s investments to alternative asset classes, including private equity, hedge fund and hybrid assets, the Board suggested that any such undertakings should be done judiciously and incrementally, taking into account cost implications and upon regular consultation with the Investments Committee.  Considering alternative asset allocations of as much as 18 per cent of the overall portfolio to be overly ambitious, the Board recommends that proposals for alternative investment should be reconsidered.

At the same time, the Board welcomed the Investment Management Service’s initiative for responsible investing, which would allow the Fund to incorporate environmental, social and governance criteria into its decision-making. It confirmed its support for such principles, subject to the criteria of safety, liquidity, convertibility and profitability.  The Board requested the Investment Management Service to continue to implement the initiative within the existing staffing table and make any request for additional resources in the context of the budget proposals for 2010-2011.  The Board also approved the introduction of the Integrated Pension Administration System.  A comprehensive proposal, including detailed costs relating to hardware, software and contractual services for the project, will be presented in the context of the budget proposal for 2010-2011.  The Board recalled that information technology consolidation had already been approved, with budgetary resources, and should be implemented without further delay.

In connection with the impact of currency fluctuations on pension benefits, the Board noted that the sharp declines in 2002-2005 had been levelling off and the current local currency track amounts (and related income replacement ratios) in the locations reviewed did not appear to have reached a point where immediate action would be required.  The Board decided to continue to monitor the situation closely and to review the matter again in 2009.  Variations in the local currency track pension amounts payable to General Service staff continued to remain within an acceptable range and that, although no immediate action would be required, it would continue to monitor the situation.  The Board also took note of the review carried out with respect to a possible change in the base currency of the Fund.

In his report on the administrative and financial implications arising from the report of the United Nations Joint Staff Pension Board (document A/63/363), the Secretary General recommends that, should the Assembly approve the proposals of the Pension Board, it may wish to take note of the present report, and request the Secretary-General to report on the actual expenditures in the context of the second performance report for the biennium 2008-2009.

The Secretary-General recalls that, in reviewing the revised budget estimates for 2008-2009, the Board noted that no additional resources were requested for posts owing to the effect of recosting and adjustments relating to the actual and projected vacancies for the biennium.  In addition, the Board took note of the downward revision in the overall requirements under rental of premises, which resulted in a reduction of $150,600 in the amount apportioned to the United Nations under the cost-sharing arrangements.

Accordingly, the Board recommended that a total of $18.8 million would be the revised share to be borne by the United Nations under the cost-sharing arrangement.  However, since preparation of the Board’s report, revisions to the post adjustment multiplier for New York and the General Service salary scale have been implemented that would give rise to additional requirements for the administrative costs of the Fund for the biennium.  Therefore, no revisions are now being proposed to the current share in the amount of $19 million attributable to the United Nations.

In his report on the investments of the United Nations Joint Staff Pension Fund and steps to increase their diversification (document A/C.5/63/3), the Secretary-General concludes that the Pension Fund has performed steadily, in excess of its benchmarks, during the unprecedented volatility of the past year.  Given the serious economic strains in the world economy, the goals will be to focus on profitability and capital preservation through strengthened systems.  The document provides information on the management of Fund’s investments during the period from 1 April 2006 to 31 March 2008 and on investment returns, diversification of investments and development-related investments of the Fund.

The Pension Fund is unique among major pension funds in its commitment to diversification on a fully global basis.  The fixed-income portfolio is invested in 16 different currencies, 11 per cent of which is in United States dollars and 89 per cent in non-dollar currencies.  In terms of geographical diversification, the portfolio is invested in 34 countries and seven supranational and regional institutions, as of March 2008.

Decided upon in 2006, indexation of North American equities has been deferred owing to declining markets in 2007-2008, the report states.  As long as the ongoing financial crisis continues, avoidance of the most vulnerable sectors is especially critical, and this has been achieved, so far, by active management.  During the turbulence of 2007, active management did, indeed, add $1.033 billion to the portfolio.  Active management has continued through 31 March 2008, resulting in smaller losses than would have been experienced had indexation been implemented.  The Investment Management Service is currently monitoring market conditions and reviewing the proportion of each portfolio, which could be allocated to indexation strategies.

In addition to changing the proportions of various asset classes in the portfolio, changes were made to take advantage of new trends and financial markets, as well as movements in currencies and interest rates.  During the credit market crisis, the currency effect from investments in the euro and Japanese yen securities reduced risk and increased the Fund’s return.   United States equities were kept underweight, while European equities and currencies were kept overweight the entire biennium, as Europe benefited from a strong currency vis-à-vis the United States dollar, and the European Central Bank refrained from dropping interest rates for the euro.  Exposure to Japanese equities was kept constant during the biennium.  Increased investments in emerging market equities benefited from strong performance results.  Developing markets, such as India and China, continue to grow much faster than developed countries.

With equities suffering globally from the credit crisis, weakened economic growth and inflationary concerns, the Fund maintained “a modest underweight” in the financial sector and continued to limit exposures, particularly from the third quarter of 2007 onwards.  The Fund has maintained overweights in the consumer staples and industrial sectors.

The Advisory Committee on Administrative and Budgetary Questions (ACABQ), in a related report (document A/63/556), focuses primarily on areas requiring action by the Assembly.

On the market value of the Fund’s assets, the Advisory Committee was informed that it was estimated at approximately $29.4 billion as at 24 October 2008, a 29.6 per cent decline from $41.7 billion as of 1 January 2008.

While sharing the Board’s positive view of the initiative of the Investment Management Service to establish a policy on responsible investment, the ACABQ stresses that the criteria of safety, profitability, liquidity and convertibility remain the Fund’s paramount investment guidelines.  On the Fund’s diversification, it recommends that the Board continue to explore opportunities for investment in developing countries and countries with economies in transition.

The Advisory Committee does not support, at this stage, the Pension Board’s recommendation that the Investment Management Service be given limited borrowing authority to include provisions in its custody agreements for the “contractual” versus the “actual” settlement of transactions, given the absence of clear and compelling information on the terms of such authority.  Also, the Office of Legal Affairs has advised that such borrowing cannot be undertaken without the Assembly’s approval.

Further, the Advisory Committee states that investing in alternative asset classes, including real estate, in the current market should be done cautiously.  Lessons should be drawn from the current financial crisis, and investments should be reconsidered only once the market has stabilized.  The ACABQ encourages the Fund’s secretariat to continue to keep retirees apprised of significant developments regarding investments of the Fund.  The Advisory Committee also encourages the Fund to consult with the Chief Information Technology Officer on technical requirements for an integrated pension administration system.

The ACABQ recommends approval of the Board’s recommendation on the total budget of the Fund for the biennium in the amount of $153.2 million.  On governance matters, it recommends acceptance of the Board’s recommendation to allow participants who return to active contributory service after a period of disability to count such period as contributory service without requiring the participant or the employer to pay contributions for that period.  The ACABQ recommends against an amendment to the Regulations that would allow for the purchase of additional years of contributory service by part-time staff, as that would be a violation of the long-standing principle of income replacement.  Moreover, that would give some staff the option to participate either fully or partially in the Fund, whereas the Fund is based on the principle of full participation.  The Advisory Committee is not convinced that such a decision would not set any precedent.

The Advisory Committee further recommends acceptance of the Board’s recommendation on proposed amendments to the Regulations regarding benefit provisions with respect to current or former family members, as well as the technical amendment regarding the right to restoration as proposed by the Board.

Introduction of Documents

Introducing the United Nations Joint Staff Pension Fund report, JAY POZENEL, Chairman of the Joint Staff Pension Board, said the document provided extensive information on the global operations of the Pension Fund for its 22 member organizations and over 160,000 participants and beneficiaries around the world.  Explaining the results of the Fund’s last year’s actuarial evaluation, he said that the actuaries had determined that the Fund’s actual rate of contribution of 23.7 per cent of pensionable remuneration was 0.49 per cent above the rate of 23.21 per cent of pensionable remuneration that was actuarially required to meet the Fund’s long-term obligations to its participants and beneficiaries.  The Fund’s consulting actuary and its Committee of Actuaries were of the opinion that the present contribution rate continued to be sufficient to meet long-term liabilities under the pension plan and that, as of 31 December 2007, there was no requirement for deficiency payments under the Fund’s Regulations.

The surplus revealed by the actuarial evaluation was all the more notable because, in 2007, the Board had adopted new mortality tables, which reflected improved longevity rates for the participants.  Moreover, in 2008, the Board had agreed with the Fund’s actuaries that, with effect from 1 January 2009, the commutation factors, transfer values and other factors, such as those relating to survivor benefits, should be modified to reflect the new mortality tables.

With regard to the management of the Fund’s investments, he reported that the annualized nominal rate of return for the 48-year period ending 31 March 2008 had been 8.8 per cent.  Adjusted for inflation, that represented a real rate of return of 4.4 per cent, exceeding the Fund’s long-term actuarial objective of a 3.5 per cent real rate of return.  In today’s uncertain economic times, market conditions might result in varying, higher or lower, rates of return in the short-term, but the Fund’s investment objectives and strategies were geared for the long term.  But, even in the short term, the Fund’s diverse portfolio had sheltered its returns from swings in the capital markets, and the Fund had continued to meet or exceed its key performance benchmarks.

Because diversification of the Fund’s portfolio was key to continuing its successful investment performance, the Investment Management Service had informed the Board about options put forward by consultants concerning expanding the Fund’s investments into alternative investment classes, such as private equity funds, fund of funds and hybrid assets.  Of course, the concept of “alternative investment classes” encompassed some of the Fund’s current investments in real estate, as well as small cap and emerging market investments.  Ultimately, the Board had suggested to the representative of the Secretary-General that continued diversification into alternative investment classes should be done judiciously and incrementally, taking into account cost implications and upon regular consultation with the Investments Committee.  The Board had also requested that proposals be submitted to it in 2009 for the resources required to have sufficient in-house expertise and outside investment advisory support to effectively implement and manage a portfolio having alternative investment classes.

Under other matters, he said that the Board had taken note of information pertaining to the new system of administration of justice at the United Nations.  More specifically, should there be substantive changes to the Statute of the Appeals Tribunal or other conditions under which it would exercise jurisdiction over Pension Fund participants or other applicants, as defined in article 48 of the Fund’s Regulations, the matter could require negotiations with member organizations, as well as changes to the Fund’s Regulations.

The statement by the Secretary-General’s representative for the investments of the Pension Fund, Warren Sach, was distributed in the room, as Mr. Sach was unable to attend, taking part in the quarterly meeting of the Investments Committee.

DENNIS THATCHAICHAWALIT, Chief of Service I of the Programme Planning and Budget Division, introduced the Secretary-General’s report on the administrative and financial implications arising from the Pension Board’s report.

The report of the ACABQ was introduced by its Chair, SUSAN MCLURG, who said that the Advisory Committee had recommended acceptance of all but two recommendations of the Board.  Recognizing that the present world financial situation was “perhaps unchartered waters” for the Fund, the Advisory Committee urged it to remain faithful to the principles of safety, profitability, liquidity and convertibility.

Statements

CONRAD HUNTE (Antigua and Barbuda), on behalf of the “Group of 77” developing countries and China, said that improvements in the United Nations Pension System should be implemented in such a way that they provided retirement, death, disability and related benefits for participants and retirees of the United Nations on the basis of full respect for the principles of transparency and accountability.  The Group joined the ACABQ recommendations included in its report.  He further welcomed the actuarial surplus of 0.49 per cent of pensionable remuneration as at 31 December 2007, noting that that was the sixth consecutive positive actuarial result over the past decade.

On the investments of the Fund, he also noted with appreciation that the market value of the Fund’s assets had increased by $3 billion, or 7.9 per cent, and had a real rate of return of 4 per cent, which exceeded the Fund’s long-term objective or 3.5 per cent for the biennium.  However, he noted the drop of 29.6 per cent in market value of the assets since the beginning of 2008.  He asked what effect that might have on the Fund, given the large number of expected retirements over the next four years.

While he appreciated the Fund’s efforts to engage in wide geographic diversification in investments, he noted that Latin America and, to a lesser degree, the African region, lagged behind.  He urged the Fund to target sound developing economies for investment, so that those economies could serve as engines of growth.

Regarding the study on the addition of alternative asset classes that recommended an overall allocation of 18 per cent to private equity, hedge fund and hybrid assets, to be considered by the Board at its fifty-sixth session in 2009, the Group stressed the need for regular coordination and consultation among all competent actors and with the full respect of the four paramount investment guidelines of the Fund:  safety, liquidity, convertibility and profitability.  He further aligned the Group with the recommendation that every effort should be made to ensure that future investments took into account potential risks and that the Investments Committee should play a key role in providing guidance to the Investment Management Service.

On administrative and other matters, he expressed appreciation for developments in recruiting staff for posts approved by the General Assembly for the biennium 2008-2009, but remained concerned by the need for more specialized personnel.  Noting the Pension Board’s plan to implement an integrated pension administration system, he said that the Fund should consult with the Chief Information Technology Officer on the technical requirements for such a system.  Further, he said that any amendment to the Fund’s regulations should be adopted in full respect of the principle of income replacement.

Regarding the role of the representative of the Secretary-General, the Group reiterated the need for intensive cooperation with the Board and the Investments Committee within their respective delegations of authority and accountability mechanisms, taking into account that their decisions affected returns on billions of dollars.

He welcomed the Board and ACABQ recommendation to admit the Special Tribunal for Lebanon to membership in the Fund and reiterated the need for equitable representation of constituent organizations at all Fund meetings.  In closing, he expressed concern at the lack of information on adoption of the ad hoc measure recommended by the Board and approved by the General Assembly to address the adverse consequences of the dollarization process on retirees and beneficiaries living in Ecuador.

ANDREY V. KOVALENKO ( Russian Federation) said that, against the background of a high level of instability in securities markets, according to the latest actuarial evaluation of the Fund at 31 December 2007, the actuarial surplus had declined from 1.29 per cent, in 2005, to 0.49 per cent for pensionable remuneration.  In that context, he welcomed the balanced and cautious approach taken by the Board not to recommend liberalization of pension benefits, and trusted that it would continue to monitor actuarial evaluations and take decisions on the basis of those evaluations.

He also welcomed the Board’s caution towards investing in alternative asset classes and with regard to changes in how the Investment Management Service would function and the redistribution of areas of responsibility between internal investment managers and external consultants.

He also asked for information regarding what steps the Investment Management Service was taking to protect the Fund’s assets, in light of the collapse of securities markets and the global financial crisis.  He further noted ACABQ’s recommendations, which he would discuss during informal consultations, as well as the recommendation to admit the Special Tribunal for Lebanon to the Fund at 1 January 2009.  A final decision on that item lay with the General Assembly, he said.

MICHAEL SCANLON ( United States) noted that, as of March 2008, the Fund’s assets had increased to $40.6 billion, reflecting an increase of 7.9 per cent from two years earlier and producing a small surplus resulting from actuarial evaluation.  He was pleased that the Board had chosen to retain the surplus, in light of recent developments in the world economy, and expected that policy to continue in force and that the Board would not seriously consider the sorts of benefit proposals that had been made, including one “to mitigate the impact of currency fluctuations”.

Continuing on benefit proposals, he expressed disappointment that the Board recommended a change to allow for the purchase of additional years of contributory service by part-time staff, as it violated the long-standing, accepted principle of income replacement, embodied in the Fund, and which had been upheld by the General Assembly.  He, therefore, endorsed ACABQ’s recommendation against approval of that change.

Turning to longer-term possibilities, he commended the Board for establishing a working group to look at the Fund’s future.  He hoped that, among other things, that group would analyse ways to modernize the pension benefit scheme, including such proposals as ways to make it more attractive to staff members who were not interested in spending their entire careers with the Organization.

He further commended the Pension Fund’s Audit Committee for assisting the Board with issues concerning internal and external audit, the Fund’s financial statements, and risk management and the internal control framework.  Noting that the Board of Auditors’ recommendation for monthly reconciliation of contributions had not been implemented, he enquired on the current status of that recommendation.  He also commended the Board for approving the change in the Audit Committee’s terms of reference to achieve independence for the internal audit function and to certify compliance with generally accepted audit principles.

The Fund’s two major components –- investing and payment of benefits -- must coordinate their operations and cooperate to the maximum extent, he continued.  To that end, he endorsed the Advisory Committee’s recommendation that a revised memorandum of understanding be presented to the Board at its meeting next year.  Further, he endorsed the Board’s recommendation to approve the application of the Special Tribunal for Lebanon to join the Fund.

He said that a change in the United Nations Pension Fund, taking into account recent discussions and proposals already made, could make a significant contribution to promoting accountability in a transparent manner.  In cases where staff members were convicted of stealing from the Organization, he said, the United Nations should be able to attach their pension benefits to recover the amounts stolen.  Noting that the Secretary-General did not currently have such recourse, he requested advice on ways to begin that process.

WALTER SCHULDT ( Ecuador) supported the position of the Group of 77 and China and said that his delegation took note of the increase in the market value of the Fund and results of the actuarial valuations.  It also agreed with the need to strengthen the Fund’s structure and staffing, while taking a cautious approach to investing, in particular in alternative asset classes.  It was important to take into account the current financial crisis and market volatility, observing the principles of safety, profitability, liquidity and convertibility.

Noting the Fund’s commitment to seek diversification in developing countries, he also drew attention to the low growth of investments in Latin American countries, despite the fact that the region had a favourable financial atmosphere for long-term investments.  He also recalled the Assembly’s decision on addressing the adverse consequences of dollarization in his country, thanking all those who had supported those measures.  However, he was concerned that this year’s report did not contain information on the implementation of those measures.  On the contrary, Ecuador’s retirees were asked to retake bureaucratic steps, despite the measures approved.  He asked for the implementation of the payment in full, and if there were any problems, information should be provided on when payments would be completed.

* *** *

For information media • not an official record