UN ADMINISTRATION: PENSION BOARD APPROVES

UNCLAS USUN NEW YORK 001620

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: AORC KUNR UNGA ASIG
SUBJECT: UN ADMINISTRATION: PENSION BOARD APPROVES
INVESTMENTS PLAN AND APPOINTS AN AUDIT COMMITTEE


The following is a summary of the meeting of the Board of the
UN Joint Staff Pension Fund, recently held in Nairobi. It
was prepared by Thomas Repasch, USUN Minister-Counselor who
was appointed by the General Assembly to serve as an
alternate member of the Board.


1. Summary. At its meeting held in Nairobi July 13-21, the
33-member Board of the UN Joint Staff Pension Fund considered
several dozen reports on a range of topics, including: the
Fund's actuarial valuation; management of the Fund's $32
billion of investments; and the creation of an Audit
Committee to improve governance. The meeting, chaired ably by
Mr. Vladimir Yossifov, a Participant member of the ILO
Pension Committee, was held on the beautifully landscaped UN
Headquarters complex located in the hills overlooking the
Kenyan capital. In a departure from its usual practice of
consensus decision making, Board members decided by a vote of
17 to 11 (with one abstention) to approve the proposal made
by the Secretary-General to manage the Fund's $8 billion in
North American Equities in a passive way by outsourcing the
portfolio, eliminating the need for the UN to maintain a
staff of managers for these investments. The two groups
representing the UN Executive Heads and the Governing Bodies
voted for the investments plan, while the third group of the
tri-partite Board, representing the Participants, dismissed
the plan as premature and risky. Although the investment
plan had full backing from the prestigious Investments
Committee (chaired by William McDonough, former chairman of
the Federal Reserve Bank of New York),some members
criticized the presentations made by Under-Secretary-General
for Management Chris Burnham and his chief of investments,
Cheiko Okuda, as vague and not convincing.


2. In another move, the Board decided to use part of the
Fund's 1.29 percent actuarial surplus to restore some
benefits that were reduced several years ago when the Fund
experienced financial difficulties. It also rejected a
working group recommendation to reduce the Board's membership
to 21 but approved a measure to change the frequency of its
meetings from every two years to annually in order to improve
governance. The Board rejected a proposal from the ILO and
retirees to expand the use of the Emergency Fund but decided
to keep another benefit proposal alive by directing the
Fund's CEO to visit Ecuador to collect information about the
plight of UN pensioners who claim they were disadvantaged
when their country was "dollarized" several years ago. As
part of its consideration of the Fund's budget, the Board
approved supplemental appropriations to: bolster staff of
the Investments Management Service; strengthen internal and
external audit capabilities; provide for travel for members
of the new Audit Committee; and upgrade positions in the
Fund's information technology office. At the same time it
rejected requests for more office space and for consulting
services to help in pursuing socially responsible investments.


3. The Pension Board's report, which has been sent
electronically to the Department (IO/S; Podolsky and
Glockner) will be issued as a UN document in the coming weeks
in advance of its consideration by the Fifth Committee during
this autumn's session. The Board decided to meet on an
annual basis and will meet next year in New York; it accepted
an invitation from the International Fund for Agricultural
Development (IFAD) to meet in Rome in 2008. The following
paragraphs provide details of the Board's deliberations on
selected items. Suggestions for the U.S. to consider in
formulating its position on the Pension Board report are also
included where applicable. End summary.


4. Management of investments - This issue was by far the
most contentious item, producing a rare vote by a body that
works hard to produce consensus agreements. The main issue
was the Secretary-General's proposal to "outsource" the
Fund's investments in North American Equities. Although the
Fund had experienced significant asset increases in recent
years and had achieved actuarial surpluses, the
Representative of the Secretary-General (Mr. Burnham) had
stated in several briefings over the last several months that
the Fund was "under-performing". He also suggested that the
UN should give its investment management business to
consultants and advisors. These remarks created concerns
particularly among the Participants' Group, causing the
Secretary-General to write to UN staff on July 11, telling

SIPDIS
them that there was "absolutely no plan or proposal for
'privatizing' the Pension Fund or changing the system of
benefits." The controversy carried over to Nairobi, where
the Fund's Investments Committee met just before Board's
meeting and discussed the proposals. The word circulating
among some Board members was that the Investments Committee,
headed by former NY Federal Reserve Chairman William
McDonough, had a very heated exchange with Burnham about the
performance of investments. Rather than conclude that the
Fund had been "under-performing", the Committee pronounced


that the North American Equities portfolio had not kept pace
with market indexes.

Determining that it would be impossible for the UN's
investment managers to try to beat the indexes of the world's
"most efficient investment marketplace," the Investments
Committee endorsed the plan to manage this portion of the
Fund's investments in a passive way, hiring a firm to produce
returns equal to the indexes. While Burnham claimed that
this approach would eventually save the Fund money, the
proposal carried immediate financial implications of $2.9
million to pay for transition services and the costs of
indexed management.

Despite efforts to allay the concerns of the Participants,
the Group opposed the proposals from the very beginning of
the meeting. At one point they went so far as to propose
that the responsibility for investments be taken away from
the Secretary-General and given to the Chief Executive
Officer of the Pension Fund. One leader of the Participants
Group said repeatedly that the outsourcing plan was risky and
premature since the Board had not yet received the results of
the Asset/Liability Management Study that it had approved
previously. Many members of the Board (including me) found
it difficult to distinguish between among proposals to
improve the management of the beleaguered Investment
Management Service and those aimed at improving investment
returns. Although they have no formal role in the Board's
decision-making, representatives of the retirees joined with
the Participants in opposing most proposals.

The drama heightened as the Board plowed through its hefty
stack of reports and narrowed its focus to the investment
management issues. With no compromise in sight, the Board
suspended its meeting and awaited the outcome of a "working
group" commissioned to produce an agreement. The working
group met for several hours, producing a tentative agreement
that would express concerns but would also approve the
investments plan and most of the requested budget increases.
(Comment: I was a member of this Group, representing the
Governing Bodies group). When the Participants'
representatives took the compromise back to their Group, the
proposal was rejected, setting the stage for a vote that the
Participants knew they would lose. The Participants remained
defiant in their loss, as other Board members (including me)
saw the vote as a referendum on the performance of
Under-Secretary-General Burnham. Some Board members who
voted for the plan (including me) privately expressed
disappointment at the style and approach used by Burnham;
many also agreed that Burnham's Director of Investments, Ms.
Cheiko Okuda, while hard-working, was not up to the task of
managing the Fund's $30 billion-plus in investments.

Comment: When the report is considered by the Fifth Committee
this autumn, the U.S. might want to express concern about the
Board's use of voting for this decision and seek information
on progress made by the Secretariat in implementing the
investments plan.


5. Actuarial Valuation - The Board was told by its actuaries
that the Pension Fund had completed 2005 showing a surplus of
1.29 percent. This means that the value of the Fund was 1.29
percent more than the amount needed to pay all of its
promised benefits, based on the standard assumptions and
actuarial models. The Board was informed that the surplus was
primarily the result of gains from the continuing moderate
levels of inflation and changes in the participant growth
assumptions. The surplus was slightly higher than the 1.14
percent shown during the last valuation in 2003 and
represented the fifth consecutive valuation that had resulted
in a surplus.

Because the Fund showed a surplus, there immediately ensued
discussions on what to do with it. Representatives of the
Participants proposed to restore all the benefit reductions
imposed in the 1990's when the Fund fell on hard times.
Another proposal made by the ILO Pension Committee was to
spend some of the money to expand the use of the Emergency
Fund to help former UN staff members from the Soviet Union
who were cheated out of benefits promised them by their
former Communist governments. Still another idea was to help
retirees in Ecuador who were "economically disadvantaged"
when their country dollarized its economy several years ago.
The Board decided to spend about .32 percent of the surplus
for partial restoration of reduction in the first consumer
price index adjustment and elimination of the limitation on
the right to restoration for existing and future contributing
participants based on length of prior service. With this
decision, there will remain a small portion (.5 percent) of
the consumer price index reduction still in place. The
General Assembly, in its resolution from 2004, pronounced
that it would not consider approving any other benefit


improvements until the reductions were fully restored.

Comment: Even though the Board's decision on the surplus was
a generally conservative one, the U.S. may still want to ask
why the Board allowed the Fund to dip below the one percent
surplus level (to .97 percent) considered prudent by most
actuarial experts. The U.S. might also want to oppose the
Board's decision to send the Fund's Chief Executive Officer
to Quito to find out more about the plight of the UN retirees
in Ecuador. Such a trip would clearly be a waste of the
Fund's resources since the General Assembly has already
decided that it would not approve any benefit improvements
until benefit reductions were fully restored.


6. Audit Committee - The Board decided to create an Audit
Committee and approved Terms of Reference that provides for
up to nine members, including two "outside experts", one
member to represent retirees, and two members from each of
the three groups that comprise the Board. Using the criteria
aimed at obtaining experts in audit, financial management, or
compliance, the groups proposed and the Board appointed the
following members for 4-year terms. They Committee is
expected to meet twice each year, once in New York and once
in Geneva.

Executive Heads: K. Matsuura (UN-Geneva); G. Engida
(UNESCO-Paris)
Participants: J.B. McGhie (IFAD-Rome); C. Santos Tejada
(UNGeneva)
Governing Bodies: J. LaRiviere (WHO-Geneva); T. Repasch
(UN-New York)

Comment: The U.S. may want to commend the Board for creating
the Audit Committee and express hope that the Committee will
be able to help the Board grapple with oversight,
accountability, and governance questions. At the same time,
the U.S. might want to ask how the Board has assured itself
that the Audit Committee members are indeed "experts" in the
appropriate fields and find out, in particular, whether all
Committee members have circulated their resumes among Board
members.


7. Size and composition of the Pension Board - The Board
rejected the preferred recommendation of its longstanding
Working Group to reduce the size of the Board from 33 members
to 21. In doing so, the Board recognized that its decision
did not respond to requests from the General Assembly to
reallocate the seats on the Board in order to provide more
equitable representation of the participating organizations.
In particular, the General Assembly and the UN Secretariat
have had long-term concerns that the UN, with up to 70
percent of the participants and/or beneficiaries in the Fund,
has only 36 percent of the members of the Board. The
21-member proposal would have increased the UN's
representation to more than 40 percent. The Board did,
however, adopt a number of other measures to improve its
efficiency and (hopefully) improve the overall quality of
governance. Perhaps most importantly, the Board decided to
meet annually beginning in 2007, thus reducing the role of
the Board's 15-member Standing Committee, which had met in
odd-numbered years to consider the Fund's proposed budget.
Henceforth the Standing Committee will deal primarily with
appeals cases. While deciding to retain its tri-partite
structure (Governing Bodies; Participants; Executive Heads),
the Board agreed to pay the costs for two retiree
representatives to attend the annual meetings. It also
approved a variety of measures aimed at making the Board's
deliberations more efficient.

Comment: The U.S. may want to ask why the Board was
nonresponsive to the General Assembly's request for proposals
that would result in more equitable distribution of the seats
on the Board. It could ask why the Board has spent several
years and several hundred thousand dollars studying the
issue, only to decide to maintain the status quo. The U.S.
might want to propose, during the Fifth Committee's
deliberations, that the General Assembly approve the
21-member option that was recommended by the Working Group
but rejected by the Board.


8. Study of Personal Status for Pension Entitlements - What
started out as a seemingly innocuous proposal by the Pension
Fund Secretariat to collect information about the evolving
issue of personal status in participating organizations grew
into a lively and heated debate about same-sex marriages and
domestic partnerships. The Board was informed by the Fund's
Chief Executive Officer (Bernard Cocheme) that there had been
significant changes in national legislation in several
countries and that some member organizations had been
reviewing the personal status of staff members for the
determination of entitlements under their staff rules and
regulations. Because such decisions had potential


consequences for the Pension Fund, the Secretariat proposed
that it collect data and study the issue. Some Board Members
expressed strong concerns about the Fund's engagement in such
a sensitive and controversial issue, stating that the Fund
had no business getting out in front of topics such as
same-sex marriages. After substantial discussion, the Board
decided that employees' personal status for the purpose of
entitlements was entirely up to the member organizations.
The Board called on all member organizations to make sure
that their staff members' personal status records "are
maintained and verified on a fully current basis."

Comment: The U.S. may want to remain silent on this item,
thereby accepting without question the Board's decision,
which is consistent with decisions of the UN Secretariat and
the UN General Assembly.


9. Internal audit arrangements - The controversy over access
to the Fund's internal audit reports provided a lively few
hours of heated discussion, including a threat by the CEO to
resign his post if the audit issue was not resolved
satisfactorily. Following a report from the OIOS auditors
(via video from New York) who serve as the internal auditors
for the Pension Fund, the CEO of the Fund expressed his
concerns about the possible impact on the Fund of the General
Assembly's decision in 2004 to allow member states' access to
OIOS audit reports. Specifically, the CEO said he was opposed
to this access provision because the Fund's internal auditors
report to him and not to the General Assembly. The
temperature in the meeting room rose several degrees when I
asked about the status of the recommendations contained in a
recent OIOS investigation of allegations of conflict of
interest related to Pension Fund procurement. The CEO said
he was "stunned" that a member state (in this case, the
United States) had obtained access to a confidential
investigation that was not yet completed. He added that he
would quit as CEO if such a practice continued. While I
responded that the report in question was not a draft and
that the U.S. saw the access as critical for improved
transparency, the CEO was successful in stirring up support
for his alarmist position. Some Board members (primarily
those representing Participants) agreed with the CEO and
recommended that the Fund replace OIOS with its own internal
auditors. After things calmed down a bit, the Board agreed
that the Audit Committee should monitor the internal audit
arrangements for the Fund as a matter of priority.

Comment: The U.S. may want to emphasize the importance of
effective oversight of the large and growing UN Pension Fund
and reiterate that the General Assembly has primary authority
over budget and other issues related to the Fund. In the
interest of transparency, it was therefore appropriate that
Member States have full and adequate access to audit and
oversight information.


10. Possible new member organizations - The Board considered
the applications of the International Organization for
Migration (IOM) and the International Commission for the
Conversation of Atlantic Tunas (ICCAT) to become members of
the Pension Fund. It decided to recommend to the General
Assembly that IOM be admitted but concluded that ICCAT did
not meet the terms of membership because, among other things,
the Commission's governing body had not authorized the
Executive Secretary submit an application or to make the
required changes to its own staff regulations and salary
scales.

Comment: The U.S. may want to express satisfaction with the
Board's decision on IOM and signal its readiness to approve
IOM membership in the Pension Board. It may also want to
highlight the importance for other potential members to
strictly follow the rules that apply to those considering
membership.


11. Note: As a member of the UN Local Pension Committee in
New York elected by the General Assembly, I attended the
meeting and participated fully in the discussions. I took a
strong interest in the issue of the size and composition of
the Board, having served on the Working Group that
recommended a reduction in the Board's membership (to 21). I
also intervened frequently in discussions of the Fund's audit
arrangements and the decision to create an Audit Committee.
I was subsequently appointed to a three-year term as a member
of the new Committee. Being less senior than other
representatives of the General Assembly on the Board,
however, I was designated an "alternate" member and therefore
was not authorized to vote.
BOLTON