FC 109/17

Finance Committee

Hundred and Ninth session

Rome, 9 – 13 May 2005

Funding of the After Service Medical Costs Liability

Table of Contents

I. Introduction

II. Background

III. Financial Situation of ASMC

IV. ASMC Amortisation Funding Options

I. Introduction

1. At its last session in September 2004, the Finance Committee discussed the financial implications arising from the 2003 actuarial valuation of staff related liabilities and requested the Secretariat to investigate further funding options for the After Service Medical Coverage liability (ASMC).1 This document is prepared for the Committee to review funding options available to the ASMC scheme and recommend to Council the amount of funding from Member Nation assessments to be included in 2006/07.

II. Background

2. ASMC is the largest of the four after service schemes in FAO, as follows:

3. The Organization needs to account for the above liabilities as they accrue 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 end 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.

4. FAO introduced the accounting and funding of ASMC liabilities in 1998/99 to recognise and address the liability. However, the accounting and funding treatment of ASMC liabilities in the UN system can vary significantly from one agency to another as illustrated in Table 1 below which shows a comparison of the total ASMC liabilites (recorded and unrecorded) and funding of other major UN agencies and the UN itself at the end of 2003.

Table 1

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5. In this regard, it is noted that the Organization’s accounting policy is more prudent than the policy adopted by several other agencies including the United Nations. For example, the United Nations currently recognises ASMC liabilities only to the extent payments are made to eligible staff. It is also noted, however, that this policy is currently under review with the assistance of a recognised firm of actuaries with a view to following best practice.

Accruing and Funding for ASMC Liabilities

6. In 1997 the Governing Bodies approved the Organization’s treatment of the ASMC liability in respect of the past service of staff members. This involved an annual accrual in the accounts from 1 January 1998 over an amortisation period of 30 years. In addition, the current service costs of active staff members are being accounted for and funded from the regular budget. In the current biennium, 2004/05, this amounts to $12 million.

7. The Conference in its 2003 session approved an additional assessment to begin funding the amortisation of ASMC liabilities. The initial funding for the 2004/05 biennium was $14.1 million which the Council decided should be revised by subsequent actuarial valuation.2 The latest actuarial valuation as at 31 December 2003 resulted in an increased ASMC amortisation amounting to $30 million for 2006/07.

III. Financial Situation of ASMC

8. Table 2 below shows the funded and unfunded liabilities for each staff related scheme as well as the total recorded liabilities for all schemes at 31 December 2003 compared with the 1998/99 and 2000/01 biennia. It should be noted that there was no actuarial valuation in 2004 and the next actuarial valuation of the staff related schemes will take place at the end of 2005.

Table 2

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9. As can be seen from Table 2, the total staff related liabilites increased significantly from the 2000/01 to the 2002/03 biennium due primarily to the ASMC increase arising from a “one-time” change of basis of apportionment of liability between Rome-based agencies of the ASMC scheme from the pensionable renumeration to “active staff and retiree” headcount methodology in the actuarial valuation (see also paragraphs 57 to 60 in CL 127/15 Report of the 108th session of the Finance Committee).

10. Although the increase of the FAO ASMC liability between the two biennia was significant, Table 3 below shows that the increase of total ASMC liabilities for all participating agencies in Rome in the ASMC scheme between 2000/01 and 2002/03 was contained since the variations were mainly due to a shift of the size of ASMC liabilities between the participating agencies.

Table 3

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11. A factor contributing to the increase in ASMC liabilities has been the growth in the FAO retiree population which has led to higher retiree ASMC premiums paid by FAO. Table 4 shows the evolution of the actual retiree premiums paid out of the ASMC scheme by FAO for the last 3 years from 2002 to 2004 compared to the average number of FAO retirees. It clearly shows that as the retiree population has increased there has been an increase in the ASMC premiums paid for retirees of 50% over the period from 2002 to 2004.

Table 4

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12. The Conference decided in 2003 to begin funding the ASMC amortisation as failure to act would cause costs to rise as the ratio of retirees to active staff in the total population of participants rises.

13. The decisions of the Governing Bodies have enabled some significant progress to be made in reducing the unaccrued and unfunded liabilities of the ASMC since 1997. However, a significant portion of the ASMC liability still remains unfunded. In addition, the investments earmarked for the staff related schemes are not treated as planned assets for purposes of the actuarial valuation since the investments are not held in a separate trust. The long-term investments earmarked for the ASMC liability at the latest actuarial valuation of 31 December 2003 compared to the total ASMC liability are as follows:



US$ millions

 US$ millions

Investments at cost




Market value increment




Investments at market value



Unfunded ASMC liability




Total ASMC liability at 31.12.03



14. As indicated above, the unfunded ASMC liability at 31 December 2003 considering investments at cost was $246.7 million and $221.2 million considering investments at market value. Under current arrangements, the unfunded liability can be addressed through (i) investment income of assets earmarked for ASMC (ii) from transfers of excess of investments (income) to fund SPS and CPRF and (iii) by Conference Resolution providing additional assessments from Member Nations to provide funding of ASMC amortisation.

IV. ASMC Amortisation Funding Options

15. In accordance with Conference Resolution 7/2003 the approved funding mechanism of the ASMC amortisation is the funding of $14.1 million for the 2004/05 biennium. In 2003 the Council at its 125th Session endorsed the Finance Committee’s recommendation to review the ASMC amortisation funding each subsequent biennium and adjust it accordingly to reflect the latest biennial actuarial valuation.

16. This method of funding assures full funding of the ASMC liability in 24 years as can be seen from the schedule for the funded and unfunded ASMC liabilities with the annual and cumulative amortisation payments in Table 5 below. The Committee will note in Table 5 that the funding of $14.1 million this biennium is increased to $30 million in 2006/07 as calculated in the latest 2003 actuarial valuation.

Table 5 - Fund amortisation in accordance with latest 2003 actuarial valuation

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17. Another significant factor affecting the ASMC is the multi-currency nature of the ASMC liability. The recent Asset and Liability Study on staff related liabilities highlighted the need to allocate investments in proportion to the currencies in which the liabilities are incurred. Similarly, the ASMC amortisation funding by Member Nations should be made in both US Dollars and Euro in the proportions recommended in the Asset and Liability Study, starting in 2006/07.

18. Three funding options are presented below as alternatives to the current approved method of funding the ASMC amortisation. The alternatives presented are not exhaustive and are aimed at lessening the cash burden of funding the ASMC amortisation.

a) Maintain amortisation funding in accordance with 2001 actuarial valuation level of $14.1 million

19. The Council at its 125th Session recommended that the ASMC amortisation funding be reviewed each biennium and adjusted accordingly to reflect the latest biennial actuarial valuation to ensure full funding of ASMC liability in 24 years. If future ASMC funding remains at the current 2004/05 level of $14.1 million, rising only with the level of estimated pensionable remuneration, Table 6 shows that the unfunded ASMC liabilities will escalate.

Table 6

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b) Fund amortisation over a new 30 year cycle

20. The ASMC amortisation period of 30 years, introduced from 1998, was initially recommended by the Actuaries and External Auditors and endorsed by the Finance Committee/Conference. An option to reduce the amortisation funding is to reset the 30 year amortisation period to commence from the current biennium. It should be noted that the accounting treatment for recording ASMC amortisation will not be changed but will continue with reference to the 30 year amortisation period that commenced in 1998. The amortisation funding for the next biennium is estimated at $25.9 million with this method. Table 7 shows the full funding of ASMC liability over the next 30 year period with this option.

Table 7

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c) Fund amortisation over a new 30 year cycle using investment market values

21. The ASMC amortisation funding recommended by the Actuaries assume that investments are valued at cost since investments earmarked for staff related liabilites are not placed in a special trust fund but are comingled with other investments of the Organization.

22. While FAO will continue the existing accounting policy by reference to investment cost values for accounting for ASMC, for funding purposes there is the option to use investment market value instead of cost. As the market value of investments earmarked for ASMC exceeded the cost value at 31 December 2003, the method of using investment market value is estimated to result in an ASMC amortisation funding for the next biennium of $23.3 million using a 30 year amortisation cycle (as described in option (b) above). It should be noted that the market value of investments is subject to fluctuations over time.

23. Table 8 shows the ASMC amortisation funding over a 30 year amortisation cycle, based on investments market value, required to achieve full funding of the ASMC liability.

Table 8

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24. The current approved funding method remains the most suitable for the Organization – with recurring ASMC amortisation funding each biennium at the level prescribed by the latest actuarial valuation as described above in paragraphs 15 and 16. This would solve the funding problem in that the requisite level of funds would be made available over a period of 24 years. Each of the alternative funding options described above would make it more difficult to achieve full funding of the ASMC liability over time

25. It is recommended that the annual ASMC amortisation funding decided by Member Nations should be made in both US Dollars and Euro in the proportions recommended in the Asset and Liability Study, i.e. 60% in Euro and 40% in US Dollars, at the agreed budget rate for the 2006/07 biennium.


1 FC 108/11 a(ii) - Summary History on Staff-Related Liabilities and CL 127/15 para 61

2 CL 125/REP para 37