FC 104/10

Finance Committee

Hundred and fourth Session

Rome, 15 - 19 September 2003

Liabilities for After Service Medical Costs

Table of Contents



1. The issue of liabilities for After Service Medical Care (ASMC) has been under continuous review by the Committee for some years. The Finance Committee at it last session considered the proposal of the Director-General to provide US$ 14.1 million in the SPWB 2004-05 as the first of 12 biennial contributions aimed at funding the accumulated liability for after service medical care. While being generally supportive of the proposal, it accepted the offer of the Secretariat to prepare an issue paper examining the history and current status of after service medical care liabilities1.


2. FAO staff have had medical insurance coverage since 1951. In 1968, the Council, after noting that FAO was the only major organization in the UN family which did not contribute to the cost of medical coverage for retired or disabled staff, approved the Director-General’s proposal to introduce such a scheme on a cost sharing basis2. Since that time a number of changes have been made including a period from 1971 to 1989 when the scheme was free to retirees and the disabled and was funded from a combination of the premiums of active staff and by the Organization.

3. In 1989, it was noted that the long-term viability of the scheme was of concern and therefore that this group of participants would have to pay premiums as for active staff except that retired staff members’ Basic Medical Insurance Plan (BMIP) premiums would not exceed the greater of 4% of the full periodic benefit from the UN Joint Staff Pension Fund (UNJPSF), including cost-of-living, or 4% of 32% of the Final Average Remuneration of the former staff members as long as they participate in the plans. There is a similar provision in the plan to protect staff members with low salaries.

4. In accounting terms, After Service benefits are the staff members’ entitlements which become payable at the end of service. In FAO, these comprise the following:

5. The Organization needs to account for the above liabilities as they are earned and to make adequate provision for their funding. The responsibility for accounting rests with the Director-General who is required under the Financial Regulations (FR XI) to maintain the Organization’s accounts including statements of assets and liabilities at the close of the financial period. The responsibility for provision of funds rests with the Governing Bodies and ultimately the Conference (FR IV) which votes the appropriations that constitute an authorisation to the Director-General to incur obligations and make payments for the purpose for which the appropriations were voted.

6. Where the earmarking of assets, from which liabilities will be paid, involves income-producing investments, the income produced reduces significantly the amount which has to be set aside from other sources. This has been the experience of the Organization with the Compensation Plan Reserve Fund and the Separation Payments. In fact, according to an actuarial valuation at 31 December 2001 both of these liabilities had reached the status of being fully funded.

7. Where costs of an After Service benefit have not been charged to the Organization’s income in the past, the amount undercharged is referred to as an unaccrued liability in respect of the past service of staff members. Where costs of an After Service benefit have not been funded in the past, the amount under-funded is referred to as an unfunded liability in respect of the past service of staff members. The Organization has a significant unaccrued and unfunded liability in respect of ASMC.

Description of the Current Medical Scheme

8. The Medical Insurance Coverage for FAO staff and retirees is extended through two schemes, a mandatory Basic Medical Insurance Plan (BMIP) and another complementary (optional) Major Medical Benefits Plan (MMBP).


9. All staff members participating in BMIP/MMBP may obtain premium paying after-service medical coverage subject to the following provisions:

      1. Staff members aged 55 or over and participating in BMIP at the time of separation, and who participated in BMIP and/or similar medical plans of the Organization for at least 10 years;
      2. Staff members aged 50 to 55 separating from the Organization on or after
        1 January 1992, participating in BMIP at the time of separation, who have been participating in BMIP and/or similar medical plans of the Organization for at least 20 years and who have elected for a deferred pension from UNJSPF;
      3. Staff members of any age participating in BMIP and who are separated for disability and awarded a disability benefit from UNJSPF; and their family members participating in the plan at the time of the disability; and
      4. Family members of staff members referred to in i, ii (and meeting the definition of MS 343.7.415) provided that they have been participating in BMIP at the time of the staff member’s separation and have been participants in BMIP or similar medical plans of the Organization for at least 10 years.

10. In addition, their family members, or survivor(s) may be covered provided the former staff member, or survivor(s), receives or will receive periodic retirement or disability benefit from the United Nations Joint Pension fund (UNJSPF). One exception concerns any staff member who is separated from the Organization for having submitted altered or fraudulent claims in any FAO medical plan.



11. BMIP benefits are similar to [the same as] those extended to active staff. The maximum amount reimbursable under BMIP/MMBP or both per participant in a year is US $1,000,000. Reimbursement is 80% of the following medical expenses: medical services; out-patient services; professional ambulance service; convalescence in sanatoria or institutional care; special nursing; injections as well as 100% of the costs of hospital service not including physician fees which are reimbursed at 80%. Various limits apply to hospital daily room and board charges, physical and psychological therapy, and to dental care.”


12. MMBP basically provides top-up coverage for medical services not otherwise reimbursed under BMIP. These include out-patient services; professional ambulance service; convalescence in sanatoria or institutional care; special nursing; injections; and hospital/ clinic expenses when they charge an all-inclusive rate comprehensive of doctor fees, for the purposes of calculating reimbursements. Participants in MMBP are reimbursed 80% of out-of-pocket reasonable and customary expenses, beyond those reimbursed by BMIP for any amount which cumulatively exceeds the threshold set in the terms of coverage (Euro 170 for Euro premium scheme or US$ 200 for US Dollar premium scheme).

Premiums and cost sharing


13. The total monthly contributions in respect of former staff members and recognised family members meeting the eligibility requirements are shared equally between the participating former staff member (or their survivor) and the Organization. However, the contribution of the former staff member shall not exceed the cap of 4% of the full periodic benefit from the UN Joint Staff Pension Fund (UNJSPF), including cost-of-living; or 4% of 32% of the Final Average Remuneration of the former staff member as long as they participate in the plans.

14. The difference, if any, would be paid by the Organization. The Organization bears the entire cost of the premiums (BMIP and MMBP) of the former staff member or survivors whose full periodic benefit from the UNJSPF is US $ 193.33 per month or less as well as of handicapped children.


15. The total monthly contribution is paid entirely by the former staff members or their survivors.

Comparison to other UN agencies


16. All UN agencies offer eligible staff and retirees medical insurance that covers a broad range of medical services at reimbursement rates that vary by plan and type of expense, but generally range from 75% to 100%. FAO & ILO are the only organizations with a maximum annual benefit. All plans except BMIP have some provision for a higher rate of reimbursement for expenses above a certain threshold. FAO staff must elect MMBP to obtain such a benefit. If they do so, the higher reimbursement (96%) starts at a lower threshold than other plans. All plans allow treatment anywhere in the world, subject to “reasonable and customary” provisions. Overall the benefits provided by the BMIP and MMBP are broadly comparable to those of other agencies.


17. All plans are based on staff and organization making contributions towards the costs of the premium. The staff’s share of contributions is 50% for ILO, UNESCO and UNIDO, and 33.3% for WHO. For UN Geneva the staff share is 50% for active staff with dependents, 42.6% for active staff without dependents, and 33.3% for pensioners. For FAO the staff (and retirees) share is 50% of BMIP (subject to a maximum percentage of compensation) and 100% of MMBP. At current levels of ceilings on staff & retirees’ premiums the Organization’s share is equivalent to 61% of the total BMIP premiums. The WHO plan which offers the highest contribution by any UN Organization to its staff medical insurance premiums (66.6%) includes two features of interest. A specific portion of the active staff premium (25%) is allocated to pre-funding the costs of after-service coverage that exceed the premiums of pensioners.

Financial Provisions for ASMC

Progress to Date

18. Attachment 1 provides a detailed chronological account of the steps taken since 1997 to address unaccrued and unfunded After Service Medical Coverage by reference to the recent reports of the Governing Bodies. There are two parts to the accounting and funding problem for After Service benefits in FAO:

Accruing for the After-Service Medical Care Liability

19. In preparing its financial statements the Organization follows the UN Accounting Standards (UNAS) and generally accepted accounting standards in the form of the International Accounting Standards (IAS). UN Accounting Standards are still at the embryonic stage and less complete than IAS. With respect to expenditures, UNAS generally require the accrual of expenditures. With respect to After Service benefits they require that organizations either accrue fully for the related expenditures or if not, they disclose the unaccrued amounts in the notes to the financial statements. IAS requires the accrual of all expenditures including After Service benefits. However, the relevant standard applicable for financial statements starting with 1999, recognises a transitional measure where an organization can record the unaccrued liability over a period of 5 years.

20. The ASMC liability in respect of the past service of staff members which amounted to US$ 201.7 million at 31 December 2001 is presently being accrued from 1 January 1998 over an amortisation period of 30 years. In addition, all of the current service costs of staff members are being accounted for and funded from the regular budget.

21. Although a thirty-year period was originally chosen for recording this unaccrued liability in the accounts, the subsequent decision of the Governing Bodies to transfer the excess of income over the requirements of the Separation Payments Scheme and Compensation Plan to the ASMC Liability has made possible a shorter amortisation period. In fact, this decision has already resulted in the recording of 48% of the liability in the first two biennia. Accordingly, no further change in accounting action is proposed.

Funding for the After Service Medical Care Liability

22. As regards the unfunded ASMC liability in respect of the past service of staff members which stood at US$ 124.1 million at 31 December 2001, the Finance Committee endorsed an Action Plan which was forwarded in its report to the Council and approved at its 115th Session and subsequently by the Conference at its 30th Session. The Action Plan requires, inter alia, that any excess in a) the investment income of the Separation Payments Scheme and Staff Compensation Plan over the related requirements, and b) the investments in the Separation Payments Scheme and the Staff Compensation Plan over the related liabilities, is earmarked for the ASMC liability for past services.

The Current Situation

23. As a result of giving effect to the above Action Plan, according to the accounts of the 2000/01 biennium and the latest actuarial review at 31 December 2001, the unaccrued and unfunded liability and the cumulative current service cost and cumulative amortisation charge for After Service Medical Coverage at that date, as compared with the prior biennia end, are as follows:




Unaccrued liability




Unfunded liability




Cumulative Current Service Cost




Cumulative Amortisation




24. In accordance with the decision of the Governing Bodies to earmark for ASMC the investments in the Separation Payments Scheme and the Staff Compensation Plan which exceed the related liabilities, the earmarking of investments at 31 December 2001 was as follows:


Estimated Actuarial Liability


Estimated Unfunded Liability







Separation Payments





Compensation Plan










Terminal Payments










25. It can be seen from the above that the decisions of the Governing Bodies have enabled some real progress to be made in reducing the unaccrued and unfunded liabilities of the ASMC since 1997.

26. The Organization is now correctly accounting and budgeting fully for the current service costs of all staff for all After Service benefits. The question therefore is what is being done, and what more can be done, to regularise the situation in order to complete the accounting and funding for unaccrued and unfunded liabilities in respect of past service.

Funding Options

27. As indicated above, the unfunded liability for After Service Medical Care, taking investments at cost, is US$ 124.1 million. Under current arrangements the only way in which the unfunded liability can be covered is through investment gains. Even ignoring the current investment environment, where such gains, if any, are unlikely to be significant, it is not possible to envisage that current investment with a market value of US$ 82.3 million will increase by US$ 124.1 million or by 151% in the foreseeable future.

28. Failure to act will cause claims, and hence costs, to rise exponentially as the ratio of retirees to active staff in the total population of participants rises. Eventually, the Organization’s share of costs will rise to a level which will inevitably impinge on the Programme of Work.

29. There are a number of funding options open to the Organization:


30. From a funding viewpoint this is the ideal solution as it eliminates the under-funding in one step. Its disadvantage is that the resulting special assessments in 2004 would not be insignificant particularly for countries in financial difficulties.


31. From the funding viewpoint, this approach still solves the problem in that the requisite level of funds would be made available albeit over a period of 24 years. It also has the advantage that the currently approved accounting practice for amortization of the outstanding balance of the unaccrued liability will result in a biennial accrual equal to the amount of additional funding provided. This means that the impact on the General Fund of the Organization will be unaffected by this aspect.


32. Clearly in the case of a single lump sum, the correct choice would be to have a separate resolution with a separate assessment. However, with a periodic payment over 24 years, there are several reasons why a separate resolution is less appropriate:

    1. there is a traditional principle that the budget should be a single consolidated one and consequently that there should be a single resolution;
    2. separate resolutions would need to be presented and approved at the next 12 Conferences requiring a lengthy and time-consuming re-education process as delegates familiar with the historical rationale are replaced by new delegates – in effect, this approach passes the decision on an already existing problem to future generations; and
    3. separate resolutions will also add to the administrative burden for the Secretariat and the Membership; in the former case as a result of the need to send out a separate call for funds in each of the 24 years, reconcile receipts and manage a separate set of arrears; and for the latter, in identifying a separate funding source and approval.

33. It is concluded that a separate resolution is appropriate for a single lump sum assessment. However, this is not the case for a periodic payment over 24 years where use of the budget resolution is more in line with accepted practice as well as being more reliable and cost effective.


34. Given that a lump sum approach, while desirable for its effectiveness in resolving this long-standing problem, is unlikely to be acceptable to many Members, the Director-General recommends that the Budget Resolution include a provision equal to the amount to be amortized in the subsequent biennium as determined by the biennial actuarial valuation. The amount would be explicitly reviewed each biennium and be adjusted to reflect the latest valuation.

Attachment 1


87th Session of the Finance Committee

1. At its 87th Session in April 1997, the Finance Committee considered the report of the Consulting Actuary on end of service and post retirement benefits at 1 January 1996 and the related unaccrued liability. As regards its funding, the Committee noted that urgent action should be taken and that this would have important related budget implications for 1998-99 and thereafter. As regards accrual, upon request of the Committee, the External Auditor confirmed that a 30-year amortisation period to record the liability in the accounts would be acceptable for audit purposes.

2. The Committee therefore recommended certain courses of action in this connection which may be summarised as follows:

112th Session of the Council

3. At its 112th Session in June 1997 the Council reviewed the report of the 87th Session of the Finance Committee and noted the results of the actuarial study on the cost of After Service Medical Coverage. Its conclusions were as follows:

4. While the Council recognised that full service costs for current employees should be included in the budget, it also recognised that certain questions remained outstanding, in particular, regarding the responsibility for that part of the accumulated liability that related to staff funded by other institutions. The Council requested the Director-General to continue to explore solutions to covering the accumulated liability so as to minimise the negative effects on the substantive output of the Organisation, taking into account other approaches being adopted in the UN system. The Council, therefore, concluded that the Finance Committee should again consider the matter at its September session where it should address the proposals of the Director-General in the context of the full Programme of Work and Budget 1998-99.

5. The Council agreed on the need to correctly account for such costs.

88th Session of the Finance Committee

6. At its 88th Session in September 1997, the Finance Committee was updated on developments which had taken place since its 87th Session in April 1997 in order to obtain its advice on the various funding alternatives proposed by the Secretariat following the 112th Session of the Council in June 1997.

a)    Service Costs of Current Employees

7. In line with the Council’s guidance that the full cost of medical benefits for current employees be funded from the budget, it was proposed to adjust the standard costs in the 1998/99 budget to include the full ASMC costs of current employees which in turn would be charged to the Programme of Work and Budget. It was explained that this action would reduce the programme outputs over the 1998/99 period by about US$ 2.2 million. Moreover, while this approach responded to the guidance given by the Council, the Director-General was of the view that the reduction in the programmes of the Organisation to fund this expense was in contradiction to the Council’s directive concerning the need to protect, to the maximum extent possible, the technical and economic programmes of the Organisation, and therefore, respectfully requested that the US$ 2.2 million be added to the budget.

b)    Accumulated liability in respect of retirees and current employees

8. As regards the Council’s request that the Director-General continues to explore solutions to the accumulated liability which, for FAO, was then estimated to be US$ 154.2 million, the Finance Committee was informed that FAO had:

9. With respect to funding the ASMC unaccrued liability for past services of US$ 154.2 million, it was explained to the Finance Committee that the proposal was to move forward on funding taking into account:

10. The Committee noted the significant developments that had been made and also endorsed the ASMC funding proposals noted below:

113th Session of the Council and 29th Session of the Conference

11. The Council reviewed the report of the Finance Committee at its 113th Session. On this basis the Secretariat prepared the Programme of Work and Budget for 1998-99 incorporating the Council’s requirement that provision should be made for the full cost of medical benefits, including after service medical coverage, for current staff, as endorsed by the Finance Committee (paragraph 167 to 169, 1998-99 PWB C97/3). The Conference approved the Programme of Work and Budget at its 29th Session.

90th Session of the Finance Committee

12. At its 90th Session in September 1998, the Finance Committee, now that the funding for the cost of medical benefits for current staff had been provided for, discussed the actions to be taken to fund the liability for After Service Medical Cost in respect of past services.

13. Following consideration of the Director-General’s proposal for funding of the liability the Finance Committee agreed to forward to the Council a Resolution embodying the following:

  1. Any income generated from the investments held in respect of the Separation Payments Scheme and Staff Compensation Plan be applied as originally foreseen to ensure the adequacy of those funds to extinguish the respective liabilities.
  2. Should there be an excess in the investment income of the Separation Payments Scheme and Staff Compensation Plan over the requirements for these funds then this should in principle be earmarked for the After Service Medical Coverage liability for past services.
  3. Following the past practice to establish separate funds for after service benefits, the investments in the Separation Payments Scheme and the Staff Compensation Plan exceeding the liabilities be earmarked for an After Service Medical Coverage Fund.
  4. Not withstanding the provisions of Financial Regulation 6.1 (b), any cash surplus on the General Fund will be allocated as a priority.

115th Session of the Council and 30th Session of the Conference

14. The Council reviewed the report of the Finance Committee at its 115th Session. The Conference approved the Action Plan at its 30th Session.

96th Session of the Finance Committee

15. At its 96th Session in May 2001, the Finance Committee was provided the progress report of the After Service Medical Coverage.

16. The Committee considered three options on the proposed way forward for ASMC funding:

17. The Committee recommended continuing with the present arrangements.


1 CL 124/16 paragraph 66

2 CL 51/REP paragraphe 317