FC 109/19

Finance Committee

Table of Contents

Introduction

THE UNJSPF

KEY INDICATORS

Actuarial Valuation

Funded position in relation to obligations

Financial disclosure in the Audited Accounts

Introduction

1. The United Nations Joint Staff Pension Fund (UNJSPF) is a fund established by the General Assembly of the United Nations to provide retirement, death, disability and related benefits for the staff of the United Nations and the other organizations admitted to membership of the Fund.

2. Pursuant to resolutions passed by the FAO Conference at its fourth (1948) and fifth (1949) sessions, FAO was admitted to UNJSPF membership in 1950.

3. The participation of FAO staff members in the United Nations Joint Staff Pension Fund (UNJSPF) is provided for in Staff Regulation 301.6.1 reading as follows:

“Provision shall be made for the participation of staff members in the United Nations Joint Staff Pension Fund in accordance with the Regulations of that Fund”

4. and in Staff Rule 302.6.11 which reads:

“Staff members shall participate in the United Nations Joint staff Pension fund (UNJSPF) in accordance with its Regulations and Rules as they may be amended from time to time............provided that such participation is not excluded by the terms of their appointment”.

5. Staff members become participants in the UNJSPF upon receiving an appointment for six months or longer or upon completion of six months of service, provided that participation is not expressly excluded by their contract of employment, (e.g. as in the case of consultants and other service contract holders).

THE UNJSPF

6. The principles on which the Fund is based are essentially those of a civil service retirement scheme. It is classified as a “defined benefit” plan i.e. a plan in which the benefits are generally proportional to the period of contributory service which the participant has spent in one or more of the member organizations. The plan is funded by contributions paid by the participants and by the employer organizations at a rate considered adequate to ensure its continuing viability (“funded plan”).

7. The Fund is administered by the UN Joint Staff Pension Board (UNJSPB), by a ‘local’ Staff Pension Committee (SPC) for each member organization and by a Secretariat to the Board and to each of the ‘local’ SPCs.

8. The SPCs of the member organizations are tripartite bodies with one third of the members designated by the Governing Body, one third appointed by the executive head and one third elected by the participants in service. The SPCs appoint the members of the Pension Board which consists of 33 members and reflects the same tripartite composition of the SPCs of the member organizations. Given the different number of participants, organizations are entitled to a different number of seats in the Pension Board. The United Nations has twelve seats, FAO and WHO have three seats each while all other organizations are aggregated in groups in order to share the remaining number of seats and participate in the Pension Board on a rotation basis.

9. The present composition of the FAO Staff Pension Committee is shown in Annex I.

10. The Regulations of the UNJSPF are approved by the UN General Assembly. Amendments may be recommended by the Pension Board and are approved by the General Assembly after consultation with the Board.

KEY INDICATORS

Biennium 2002 - 2003 data

• Member organizations: 20
• Participants in active service : 85,245 ( FAO* 5,648 = 6.6% of total)
• Total contributions received from organizations: US$ 1.031 billion; of which the contribution of FAO* and its Staff participants amount to US$ 178.4 million
• Beneficiaries: 52,496 (of which former FAO* participants 7,509 = 14.3% of total beneficiaries)
• Total benefits paid: US$ 947.48 millions (of which US$ 140.93 million in favour of former FAO* participants = 14.9% of total)
• Ratio active participants to beneficiaries: 1.62
• Total Participants & Beneficiaries for which benefits is in payment: 137,741 (FAO* 13,167 = 9.6%)

* FAO and WFP combined

11. The assets of the Fund are held in the name of the United Nations – but separate from any other UN assets – on behalf of the participants and beneficiaries. The investments of the assets are decided upon by the Secretary General of the United Nations after consultation with an Investment Committee¹ in the light of observations and suggestions made from time to time by the Board on the investment policy.

12. According to the latest report on investment, the market value of assets of the Fund as at 31 December 2004 was US$29.42 billion. The assets allocation at that date was 62% in equities; 26% in bonds; 6% in real estate and 6% in cash and short-term holdings. About 61% of the portfolio was invested outside the USA.

ACTUARIAL VALUATION

13. One important element for the governance/administration of the UNJSPF is an actuarial valuation which is normally carried out every two years.

14. The actuarial valuation determines whether the present and estimated future assets of the UNJSPF will be sufficient to meet its liabilities. Technically it is a “funding valuation” since its primary purpose is to determine the adequacy of the contribution rate² to meet the Fund’s liabilities in the years to come. From a methodological point of view it consists of a “discounted cash flow” exercise on the basis of which the present value of current and future assets is compared with the estimated present value of current and future liabilities. Both future assets and future liabilities take into consideration those pertaining to present participants and beneficiaries (i.e. the value of their future contributions prior to retirement and the total estimated value of the benefit to be paid thereafter) as well those which relate to the future generations of participants who will join the Fund in the future (the so called “open group” methodology).

15. The valuation is prepared on the basis of parameters and actuarial assumptions adopted by the Pension Board upon recommendations by the Committee of Actuaries³ which take into account both demographic as well as economic assumptions.

16. The demographic assumptions are periodically reviewed to reflect the most recent trends in the composition of the enrolled population (participants in active service and beneficiaries), actuarial rates for life expectancy, age at entry and at separation dates, incidence of disability, the estimated number of new entrants (i.e. future participants), etc.

17. The economic assumptions are also reviewed to take into account the movements expected in the level of the Pensionable remuneration of participants in active service, due to salary increases for both service seniority as well as inflation, the adjustment in pension benefits payable to retirees and other beneficiaries, the expected rate of return from investment, etc. A factor of high relevance for the valuation is the “real” (i.e. inflation adjusted) rate of return from investments, which is obtained by discounting the “nominal” rate of return by the expected level of inflation.

18. Another important assumption is the future growth of the participant population since, as indicated above, the valuation takes into account also the assets and the liabilities related to the future generations of participants.

19. The twenty seventh actuarial valuation of the Fund as of 31 December 2003 was based on the following factors:

1. increase in Pensionable remuneration: 4.5%
2. nominal rate of interest (investment return): 7.5%
3. price increases (reflected in increases of pensions to beneficiaries): 4%
4. real rate of interest or investment returns after inflation, calculated as (b)-(c): 3.5%

Additionally,

5. future growth of participants’ population for the next 20 years was assumed at 0%.

20. The combination of the above factors, designated as 4.5/7.5/4, or “regular valuation basis” permits the calculation of the contribution rate which is required in order to attain a balance – over the foreseeable future of the Fund – between its assets and its liabilities. In order to test the sensitivity of the formula, calculations are also made using formulas which imply slightly different rates, e.g. 3% and 4% real rate of return from investments, rendering alternative actuarial designations of 4.5/7/4 and 4.5/8/4, respectively.

21. The starting point for the actuarial valuation exercise is the value to be attributed to the assets of the Fund. In order to reduce the effect of short term fluctuations (market dives and surges) on the considered value of the assets, the valuation is based on the five year moving market average method, with a limiting range of 15 percent above and below the market value at the valuation date. For the valuation as at 31 December 2003 such actuarial value was equal to US$25.237 billion, approximately 96 percent of the market value (US$26.368 billion).

22. The results of the actuarial valuations are normally presented in the form of percentages of Pensionable remuneration required to keep the Fund in balance. Results are also presented in dollar terms.

23. The results of the twenty-seventh valuation indicated that the contribution rate required to achieve the actuarial balance was 22.56 per cent of Pensionable remuneration. As the current contribution rate is 23.70 per cent, such results reflected an actuarial surplus equivalent to 1.14 per cent of Pensionable remuneration, or US$1.949 billion in dollar terms. (It should be noted that the magnitude of the surplus/(deficit) when expressed in dollar terms must be considered in relation to the magnitude of the liabilities and not in absolute terms).

24. The following table shows the results of the actuarial valuations carried out since the adoption of the current contribution rate of 23.70 per cent of Pensionable remuneration:

25. Actuarial balances (positive or negative) are normally taken into account either to provide for necessary changes to the pension benefits, or, when deemed necessary by the Pension Board, to invoke the revision of the contribution rate. (During the period 1978-1989 such rate was increased from 21.0 per cent to 23.70 per cent of Pensionable remuneration while economy measures where introduced to the benefits in order to reduce progressively the actuarial imbalance that existed at that time).

26. The Committee of Actuaries, noted that the valuation as at 31 December 2003 was the fourth in a series of consecutive positive actuarial surpluses. Although the surplus calculated at the end of 2003 (1.14%) was lower than the corresponding result of the valuation as at 31 December 2001 (2.92%), the Committee of Actuaries also noted that the financial position of the Fund was significantly improved since 1990. From an actuarial point of view, as well as from a business perspective, the “funded ratio”, i.e. the ratio of the actuarial value of the assets to the actuarial value of accrued benefits (or, in other words, the extent to which the assets of the Fund cover the liabilities in respect of the benefits already earned by the present participants) continue to be considered adequate for the Fund according to the Fund Actuaries.

27. Strictly speaking the liabilities of the Fund, considered for comparison with the assets’ valuation, are those defined under the Regulations. While such Regulations do not provide for periodic adjustments of pensions in payment, periodic adjustments for cost-of-living increases have become a regular feature of the pension and the adjustment system has been approved by the UN General Assembly. For this reason, funded ratios are calculated both without pension adjustments, as per the Regulations, as well as with pension adjustments.

28. As at 31 December 2003 the ratios have been as shown below:

29. Funding ratios are also used to compare the evolution of the actuarial position of the Fund over successive valuations. Since the comparison is possible only if the actuarial valuations have been based on the same demographic and economic assumptions, the results of the valuation as at 31 December 2003 have been re-calculated on the basis of the assumptions adopted for the valuation as at 31 December 2001: the results of the comparison are shown in the following table:

30. The decreases in the funding ratios (minus 6.2 percentage points and minus 10.1 percentage points respectively) were largely attributable to the lower than anticipated growth in the value of assets and to the fact that liabilities increased due to the weakening of the US dollar against certain currencies. However, both in terms of absolute amounts as well as in terms of percentages, the funding ratios were deemed satisfactory for a mature pension fund as the UNJSPF which has a robust assets basis and a mechanism for the adjustment of the benefits and contribution rate. In his 2003 report, it was the opinion of the Consulting Actuary that “the Fund continues to be in a strongly funded position”⁴

31. The opinions of the Committee of Actuaries and of the Consulting Actuary were formally reflected in the “Statement of actuarial position of the United Nations Joint Staff Pension Fund as at 31 December 2003” which indicated that “the present contribution rate of 23.70 per cent of Pensionable remuneration is sufficient to meet the benefits requirements under the Plan, and would be reviewed at the time of the next actuarial valuation as of December 2005”⁵.

FUNDED POSITION IN RELATION TO OBLIGATIONS

32. The assessment of the actuarial position of the Pension Fund, made through the comparison of the actuarial value of accrued benefits on the valuation date (i.e. the liabilities of the Fund for benefits already earned by present participants and current beneficiaries), with the value of assets needed to meet such liabilities (i.e. continuation of payments to existing pensioners and beneficiaries and establishment of a reserve to meet the benefits owing to present participants were they to become eligible to such benefit on the valuation date) is also important to determine whether member organizations have any financial obligations in the case of an actuarial deficit.

33. The applicable provisions of the Regulations of the UNJSPF read as follows:

Article 26 – Deficiency payments

(a) In the event that an actuarial valuation of the Fund shows that its assets may not be sufficient to meet its liabilities under these Regulations, there shall be paid into the Fund by each member organization the sum necessary to make good the deficiency.

(b) Each member organization shall, subject to (c) below, contribute to this sum an amount proportionate to the total contributions which each paid under article 25 during the three years preceding the valuation date.

(c) The contribution of an organization admitted to membership less than three years prior to the valuation date shall be determined by the Board.

34. It is important to note that an “actuarial” deficit does not necessarily imply an actual “financial” deficit. Whilst the second indicates a shortfall of resources to meet accrued liabilities, the first forecasts that, if the future evolves as anticipated in the actuarial assumptions adopted, at a certain point in the future, projected assets may not be sufficient to meet projected liabilities. The valuation basically provides indication on a trend, which should be monitored to prevent the emergence of a problem but whether and when this deficiency situation might materialize cannot be predicted.

35. Furthermore deviations from the actuarial balance, with surplus or deficits of limited entity, do not necessarily require immediate corrective actions since they could well be within the margin of error intrinsic in any actuarial exercise. At the same time, when corrective adjustments are adopted, they are introduced gradually, with their full effect materializing over a period.

36. Whilst the provisions of Article 26 appear of simple implementation, the fact that there is no indication as to the level of actuarial imbalance under which its provisions should apply, presents a series of considerations. First of all, excluding the situation which applies in the case of plan termination, when all assets and liabilities are clearly established as of the termination date, during the normal life of a pension fund its liabilities mature over a number of future years. Also the value of the fund’s assets is changing over the years, and it is conceivable that future valuations may reveal a trend leading to an improvement of the actuarial situation.

37. For all these reasons the Pension Board – and, more importantly, the UN General Assembly - considered that a “dynamic” balancing of assets with liabilities, such as that obtained through the adjustments of contribution rates and pension benefits, rather than the payment of a lump sum at a pre-established date – or of a series of payments at pre-established dates – represents the most appropriate method for restoring the balance over a reasonable period.

38. It is for this reason that, rather than invoking the provisions of Article 26 (which has never been invoked since its introduction in the Regulations in 1953) to redress a potentially future deficiency, on the occasions of past actuarial deficits the Pension Board had recommended a phased approach consisting of a balanced mix of measures implying reduction in benefits (equivalent to over 10% of Pensionable remuneration) and increase in contribution rates (2.7% of Pensionable remuneration). This has permitted restoring a positive balance after the peak actuarial deficit equivalent to 8.41% of Pensionable remuneration revealed by the valuation as at 31 December 1983.

39. Whilst Article 26 of the Pension Fund Regulations represents a safeguard in the case of the emergence of a rapid and consistent actuarial deficit, the governance organs of the Fund consider that its real application would present a series of complications and technical problems which discourage its adoption during the course of events, limiting its application only in the event of plan-termination. ( a letter from the Chief Executive Officer of the Fund on the “Possible liabilities of UNJSPF member organizations under article 26 of the UNJSPF Regulations” is attached in Annex II).

FINANCIAL DISCLOSURE IN THE AUDITED ACCOUNTS

40. Considering the above, FAO’s financial disclosure in the Audited Accounts is based on International Accounting Standards (IAS). The applicable IAS is number 19 which defines and prescribes the treatment and disclosure of Pension Fund financial operations.

41. IAS 19 recognises that in the case of a multi-employer plan such as the UNJSPF, a contingent liability may arise from, for example:

• actuarial losses relating to other participating enterprises because each enterprise that participates in a multi-employer plan shares in the actuarial risks of every other participating enterprise; or
• any responsibility under the terms of a plan to finance any shortfall in the plan if other enterprises cease to participate.

42. These conditions clearly do not exist for UNJSPF, therefore the provisions of IAS 37 regarding definition and treatment of contingent liabilities are observed in FAO’s current note disclosure which, over the years, the External Auditor has considered adequate:

“The Organization is a member of the United Nations Joint Staff Pension Fund (UNJSPF) established by the General Assembly of the United Nations to provide retirement, death disability and related benefits to staff of member organizations. The scheme is of the defined benefit type and the Organization's obligation is limited to specified contributions to the Fund.”

Annex I

Proposed

FAO/WFP STAFF PENSION COMMITTEE

as at 1 January 2005

Secretary: Mr Nabil Gangi

Annex II

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¹ The Investment Committee consists of the following Members: Mr Jürgen Reimnitz, Member of the Central Advisory Board Commerzbank, A.G., Germany; Ms Hélène Ploix, Chairman and CEO Pechel Industries, France; Mr William J. McDonough, Chairman and CEO of the Public Company Accounting Oversight Board, United States of America; Mr Ahmed Abdullatif, Member of Majlis ash Shura, Saudi Arabia; Ms Francine Bovich, Managing Director, Morgan Stanley Investment Management, United States of America; Mr Fernando Chico Pardo, President, Promecap, S.C., Mexico D.F., Mexico; Mr Takeshi Ohta, Special Adviser to the President, Daiwa Research Institute Inc., Japan; J.Y. Pillay, Chairman, Singapore Exchange Limited, Singapore; Mr Peter Stormonth Darling, Chairman, Atlas Investment Counsellors Limited, United Kingdom.

Ad hoc Members: Mr Emilio Cárdenas, Executive Director HSBC Argentina Holdings S.A., Argentina and Mr Ivan Pictet, Managing Partner, Pictet & Cie, Switzerland.

Members Emeritus: Mr Emmanuel N. Omaboe, Chairman, E.N. Omaboe Associated Ltd., Ghana and Mr Jean Guyot, Partner (Former), Lazard Freres et Cie, France.

² Presently equal to 23.70 per cent of Pensionable remuneration payable by the employing member organization and by the participant in the proportion of 2/3 and 1/3 respectively.

³ A committee consisting of five independent actuaries appointed by the Secretary General of the United Nations upon recommendation of the Pension Board

⁴ JSPB/52/R.4/Add 1

⁵ JSPB/CA/41/R.12 – Report of the forty-third session of the Committee of Actuaries