FC 108/11a ii)

Finance Committee

Table of Contents

Introduction

Current Financial Situation

Projections for 2004/05 Biennium

Separation Payments Scheme

Termination Payments Fund

Unfunded After-service Medical Care

Introduction

1. In the last several years, the Committee has examined and proposed various actions in connection with staff-related liabilities. The main documents considered were FC 104/10, FC 97/9, FC 96/12, FC 90/9 and FC 89/14. At its 107^th Session in May 2004 the Committee considered document FC 107/13 and asked to be kept up to date. The Secretariat presents below the updated information on all 4 schemes of the staff-related liabilities as reported in the FAO Audited Accounts 2002/03 (C 2005/5 A) and as based on the latest actuarial valuations at 31 December 2003.

2. After Service benefits are the staff members’ entitlements which become payable at the end of service. In FAO, these are comprised of the following (please also see FC 108/11 (b)):

1. Separation Payments Scheme (SPS) – Within the UN common system, the terms and conditions of staff in the general service category are established to reflect the best prevailing local employment conditions (the Flemming principle). In conformity with this principle, FAO has for many years reflected the separation payment scheme that Italian labour legislation requires local employers to provide.
   
   Prior to 1975, the value of such schemes was quantified and included as an element in the determination of the base salary. Effective 1 January 1975 FAO decided to replicate the local practice within the Organization and established the separation payments scheme. At that time a non-pensionable amount corresponding to one month’s salary (8.33%) was separated from base salary and set aside under the Separation Payment Scheme. In January 1991, the monthly percentage was revised to 7.41% to reflect a change in local conditions.
   
   As the scheme reflects the practice in Italy, it applies only to staff members in the general service category whose salaries are based on the Headquarters salary scale. Such staff members receive a payment on separation from the Organization for any reason, or on promotion to the professional category. This payment is calculated as net base annual salary in force at the time of separation divided by 13.5 and multiplied by the number of completed years of service rendered between 1 January 1991 and the date of separation. Where applicable, an additional amount is calculated as the net base annual salary in force at the time of separation divided by 12 and multiplied by the number of completed years of service rendered between 1 January 1975 and 31 December 1990.
    
2. Compensation Plan Reserve Fund (CPRF) - The Compensation Plan provides benefits subject to certain limitations to staff members (including, inter alia, consultants and persons holding Personal Service Agreements) in the event of injury, illnesses, or death attributable to the performance of official duties. The benefits include annuities (supplementing the UN Pension benefits, if applicable) in the event of death or disablement, lump sum payment in the event of permanent disfigurement or loss of member or function, and reimbursement of reasonable medical, hospital and directly-related expenses.
    
3. Termination Payments Fund (TPF) – The Termination Payment Fund consists of five types of benefits payable to staff upon separation from service. These programs are referred to as the Repatriation Grant, Repatriation Travel and Removal, Commutation of Accrued Leave, Termination Indemnity, and Death Grant. Following is a brief description of each:
• The Repatriation Grant is payable to eligible staff members whom the Organization is obliged to repatriate, and who take up residence in a country other than that of the last duty station. The amount of the grant is dependent on the length of service with the Organization;
• Repatriation Travel and Removal, is payable to eligible staff for travel on separation, as well as the associated baggage costs. Additional provision is made for staff members with spouses and with children;
• With respect to Commutation of Accrued Leave, on separation, a staff member who has an accrued annual leave credit will be paid compensation for such accrued leave, up to a maximum of 60 working days;
• Termination indemnities are payable in certain circumstances on the termination of an appointment by the Director General according to the standard schedule of indemnities;
• A death grant is paid to a staff member’s designated beneficiary in case of death in service of an eligible member; a death benefit of one month’s net base pay for each year of completed service (subject to a minimum of three months’ net base pay and a maximum of nine months’ net base pay) is payable in the form of a lump sum.
   
4. After-service Medical Care (ASMC) - is a medical insurance plan for retired staff and their families meeting certain eligibility criteria. The Basic Medical Insurance Plan provides partial reimbursements for certain hospital, physician, dental, psychiatric, physical therapy, hospice and eyeglass charges subject to various limits and exclusions. The cost of the Basic insurance is shared between the retired staff member and the Organization. Under the Major Medical insurance provision, partial reimbursement is made for certain prescription drugs and medicines, and for physician fees, in excess of the Basic insurance. The cost of the Major Medical is borne entirely by the retired staff member.

Current Financial Situation

3. Table 1 shows the funded and unfunded liabilities for each Staff Related Scheme, according to the financial statements and actuarial valuations, as well as the total recorded liabilities for all schemes at 31 December 2003 compared with the same date in 2001 and 1999.

4. As shown in Table 1, the ASMC liability increased significantly from 31 December 2001 to 31 December 2003. The Committee discussed this increase at its 107^th Session in May 2004 (please also see the Finance Committee’s report in CL 127/14, paragraphs 14 to 16) and noted that a change in methodology for the 2002/03 actuarial valuation had been necessary because prior biennia calculations, based on a single valuation for all the Rome-based UN agencies, carried a notional apportionment of retirees amongst the agencies which did not reflect actual populations. The Committee had also recognized that future calculations should not fluctuate so significantly.

5. Table 2 shows the total annual current service cost (i.e. accrued cost of active staff liability charged to the regular budget) from the latest 2003 actuarial valuation which is now being charged in the 2004/05 biennium, compared with the charges for the 2000/01 and 2002/03 biennia.

Projections for 2004/05 Biennium

6. Table 3 shows the estimated liabilities for each staff related scheme at the end of the 2004/05 biennium compared to the liabilities for the previous three biennia. The table is based on the ASMC assumptions used the latest 2003 actuarial valuation, with ASMC liabilities of 1998/99 and 2000/01 restated based on actual numbers of active staff and retirees.

Separation Payments Scheme

7. The SPS liability is completely denominated in Euro, the currency applicable to the HQ General Service staff salaries. Table 4 compares the SPS liability of the accounting currency, US$, and the underlying currency, Euro. As can be seen from the table, the liability in the base currency, Euro, is actually on the decline whereas the liability when stated in US$ fluctuates based on the applicable exchange rates at the end of each valuation period.

Termination Payments Fund

8. TPF liabilities in respect of the past service of staff members are being accrued from 1 January 1998 over an amortisation period of 15 years. In addition to the current service cost, the TPF amortisation is also being charged to the regular budget. In recent years however, the actual cash disbursements of TPF liabilities have exceeded the total of current service cost and amortisation charges. The basis of the actuarial assumptions is under review by the Actuaries.

Unfunded After-service Medical Care

9. As its 107^th Session in May 2004, the Committee noted that the partial funding of US$14.1 million approved by the Conference in 2003 towards the ASMC liability in 2004/05 would need to increase to US$30 million for 2006/07 to offset the increased biennial amortisation for ASMC. The need to adjust the amount of biennial funding in accordance with the latest actuarial valuation was recognized by the Council when it endorsed the Finance Committee’s recommendation in 2003 to include $14.1 million in the 2004-05 Budget Resolution towards the ASMC liability. Paragraph 37 of the Report of the Council’s 125^th Session is reproduced below:

Liabilities for After-Service Medical Costs

37. The Council noted that the Finance Committee considered that the current arrangements for funding After-Service Medical Costs (ASMC) liabilities were clearly insufficient and that the issue needed to be addressed as a matter of urgency. The Council endorsed the Finance Committee’s recommendation that the 2004-05 Budget Resolution include an amount of US$14.1 million to offset the amount of the liability to be amortized during the biennium, according to the biennial actuarial valuation, and that this amount should be reviewed in each subsequent biennium and adjusted accordingly to reflect the current valuation.

10. Table 5 shows the effect on the unfunded ASMC liability (which amounted to US$247 million at 31 December 2003) with the latest calculation of annual and cumulative amortisation payments, when funding matches amortisation for each biennium.

11. An illustration of the effect of insufficient funding is shown in Table 6 which shows current biennium funding of $14.1 million, rising only with pensionable remuneration, over a period of 24 years.