First article of a series on our pensions

How are our pensions?

Jean Michel Jakobowicz, UN

Every day there is at least one colleague who asks me the same questions: « What about our investments? How is the pension fund? Will you be able to pay my pension? » Following the recent meeting of the Pension Board last July I can now answer that in the long run prospects are not too bad, while in the short run the outlook is not brilliant.

The 26 ^th actuarial valuation which compares the expected long term spendings (liabilities) of the fund to long term income prospects tells us that we are on the right track. In fact for the third valuation in a row – these valuations are done every two years – our expected incomes are higher than our expected expenses. These valuations take into account that we will live longer’, inflation; that there will be more and more retirees as compared to active staff members; and thousands of other things which are totally unpredictable. Anyhow, the actuaries are happy, therefore, we should be happy in the long run we are ok. However, in the short run our results are far from being as positive.

As early as 1996 and every year since then, one of your representatives was complaining during the Pension Board meetings as well as in the columns of UN Special, that the fund was investing too much in the stock market. 69% seemed to your representative far too much to be safe. At that time, in 1996 the assets of the fund were valued at 16 billion dollars. In front of this poor layman the « experts » were claiming that in the long run only equities’ returns were significant. That is why the representative’s voice, even though recorded in all reports of the Board, was never heard. The famous experts were smiling with indulgence in front of this representative who was trying to play in the senior’s playground. The results are the following; after five years the funds assets reached 26 billion dollars and two years later in 2002 the value of the funds assets are between 19 and 20 billion dollars.

In other words, thanks to the experts’ policy of buying on the stock market, over a period of 7 years our investments have had the wonderful rate of return of … 2 to 3%, which is even less than a family savings account would have earned. Furthermore, following computation done by the pension fund last March, over the last 20 years the rate of return of bonds has been equal to the one of equities. I am sure that five months later the rate is surely better for bonds than for equities. In other words we could have invested in state bonds 20 years ago with a much greater security and a better return than on the equity market.

The major issue with the fund is that it has been dominated in recent years by a single strategy. While in Europe most pension funds are not allowed to invest more than 45% of their assets in equities (20% for the Swiss AVS) in the United States it is common for a pension fund to invest 95% in the stock market. In 2000 in the midst of the stock market euphoria a UNECE seminar was warning pension funds against the risks of explosion of the “speculative bubble” of the stock market. This warning was brought to the attention of the experts who did not care. The only leitmotiv of the experts was that « in the long run you always win with equities ». I am sure that those who invested in Swissair and Enron who went bankrupt will be happy to know this.

We international civil servants come from a variety of cultures and a variety of horizons. It is a shame that only one culture would dominate when it comes to our pensions assets. As I was writing it in UN Speciala few years ago, the question is not to forbid any investment in equities, but just to follow the advice of my mother whose only expertise was in common sense: « Never put all your eggs in one basket ». That is what we did and we are continuing to do. If today we have less than 55% invested on the stock market, it not because our experts have changed their policies, it is just because we have lost more than 45% of our equity assets (from 18 billion dollars in 2000 to 10 billion in 2002).

The pension board has sent a strong message asking that experts in the investment committee should come from different types of asset management sectors, such as bonds and real estate. But that might not be enough, What is needed is a change in mentality and that is surely not easy.

The author is a participant representative to the pension fund.