How is the Pension Fund doing?

Interview of Mr. Bernard Cochemé, CEO of the Pension fund.

By Jean Michel Jakobowicz.

How is the Pension Fund doing ? Bernard Cochemé: The Pension Fund, your Fund, is doing well! For those hoping for a brief, general overview, this is how I would summarize the situation. For those of you who would like more detailed information, I would ask you to turn your attention to the graphs below, which illustrate the three core areas of the Fund: operations, investments and actuarial situation. With regard to operations, the number of participants over the last year has gone up 3% to 85,245. Periodic benefits paid out by the Fund, which are currently at 52,496, have also increased 3% during the last year. Altogether, the Fund offers social coverage to 137,741 participants and beneficiaries who live and work throughout the world. Particularly notable is the increase in participants over the last few years; in four years their number has increased by 24%.

With regard to investments, the market value of the Fund’s assets reached $25.7 billion as of 31 December 2003, an increase of 23% compared to $20.9 billion at the end of 2002. In June 2004, the market value surpassed $26 billion. In terms of cash flow, the annual revenue (i.e. contributions and investment income) surpassed total payments (i.e. benefits and administrative costs) by some 1.1 billion dollars.

What are the latest results of the actuarial valuation ? The Fund is showing, once again, an actuarial surplus, and this is for the fourth consecutive time. The latest valuation revealed a surplus of 1.14% of pensionable remuneration. The valuation was carried out by the Fund’s Consulting Actuary, based on figures through the end of December 2003. The results of the valuation were then reviewed by the Committee of Actuaries during their last meeting in June 2004, and will be presented to the Fund’s Pension Board in July. This positive result is a good indicator of the Pension Fund’s ability to successfully honor its commitments not only in the short-term but over the long-term as well. The decrease in the surplus level with respect to the last valuation carried out in 2001 shows the sensitivity of the actuarial results to fluctuations in the financial markets, as well as to the weakening of the dollar with respect to certain currencies, the Euro in particular. It should also be noted that the asset value used in the valuations was determined on the basis of a five-year moving average methodology. This method yielded an actuarial asset value that after cash flow adjustment was about 4 per cent less than the market value at the end of 2003. Stated otherwise, this smoothing technique underestimates the Fund’s real surplus.

Have we suffered a lot from the financial crisis ? The value of the Fund’s assets were slightly shaken during the crisis that the financial markets experienced in 2000, however, during the years that followed, the Fund began to benefit from the recovery of these same markets, and has been for more than a year. The market value even surpassed, in February 2004, the highest amount ever reached before the crisis. This performance is largely due to the structure of the Fund’s portfolio, that is to say the different choices made between stocks, bonds, real estate and short-term investments, as well as the geographically diverse nature of the portfolio; the Fund was therefore able to benefit from an excellent performance in the areas where it was most heavily invested. If we take a step back, we can see that that the Fund’s performance, calculated over a 44-year period ending in March 2004, grew at an average rate of 8.6%. The real rate, obtained after taking into account inflation was 4.1% over the same period, higher than the real long term assumption (3.5%) used in the actuarial valuation. Overall, the Fund withstood the stormy weather. These results also confirm the theory that a strategic allocation of assets, which allocates a sizeable portion to equities, proves to be more efficient, on average, than other types of investments, which are tactically reallocated for the short-term.

There were supposed to be reforms designed to help retirees, when will they take place ? The recommendations made in 2002, on the basis of a comprehensive review carried out by a Working Group of the Pension Board in 2000, were not approved by the General Assembly of the UN for immediate implementation. These recommendations will, once again, be on the agenda of the Pension Board meeting in July 2004 at ICAO headquarters in Montreal.

What are the most important subjects being considered at the meeting in Montreal ? The meeting’s programme will be particularly busy. The Pension Board will have more than 40 reports to examine, concerning, for example, the actuarial situation of the Fund, the performance of its investments, the reforms already mentioned above, the accounting and financial situation of the Fund, the reports of internal and external auditors and the report of the medical consultant. I would like to indicate as well, some of the more notable projects, which include a report to ameliorate a specific problem with the pension adjustment system in countries that have seen a significant devaluation in their local currency, a report to change the size and composition of the Pension Board and Standing Committee, a report concerning the possibility of purchasing additional years of contributory service, as well as studies on the calculation of final aver- age remuneration, on partial disability, on sustainable development, etc. The Pension Board will also decide on a method of work with the International Civil Service Com- mission for its upcoming review of pensionable remuneration. This list, although incomplete, shows that few subjects are really secondary, even if each one of the members of the Pension Board has different priorities.

What are the dangers and implications of a review by the ICSC on pensionable remuneration ? Among other things, this necessary review will take into consideration the changes, the increases and decreases, which have taken place since the last review concerning taxation rates at Headquarters’ duty stations. It is clear that any revision in the level or components of pensionable remuneration will have an effect on future pensions. Which is why an agreement on the method of work and a review jointly carried out by the Pension Board and the ICSC is so important. The review should start at the beginning of Fall 2004.