Pensions: Danger ahead
Jean Michel Jakobowicz, ONUG
In a few days time the biannual meeting of the Pension Board will take place in Nairobi. Why in Nairobi? Because it is hot, far away and the UN has so decided. Among topics which will be discussed one of them is of great concern to you and me: the management of our investments.
Good news!
Let us begin with the good news. Our Pension Fund is going very
well. On 31 May 2006 we had more than $33.2 billion in our portfolio.
The big depression of the early 2000s is far behind us. Of course, for
most of us such a figure doesn’t mean anything, and that is why the
actuaries periodically look at the long-term viability of our Pension
Fund. And there again the news is reassuring since for the tenth year
running we have a surplus. Which means that taking into account
our life expectancy, the possible evolution of inflation, the possible evolution
of the size of our organizations and of our wages … our Pension
Fund will be able to pay the pensions of all international civil servants
until the last one is dead. This figure is even more positive if you take
into account the fact that this evaluation is not based on what we really
have in our kitty but on a much lower value based on a five-year
moving average (for those who don’t understand just give me a buzz).
These results are even more surprising because we had been
told on many occasions that our Fund had reached its maturity,
namely that contributions would no longer cover the expenses
linked to pensions and we would be obliged to draw on our capital
or at least on the revenues of our capital, which for a pension
fund at a certain stage is normal. But this is not the case. What we
see today is that in view of the large number of new staff members,
contributions still cover expenses linked to pensions, which
means that we are not obliged to draw on our $33 billion. So, if the
picture is so positive why not increase our pensions, or decrease
contributions? Well, it’s not as simple as that. We have been trying
to do that for a number of years but Member States are still reluctant
and say let’s wait until we have a long-term trend of surpluses.
Don’t ask me what that means, nobody knows, including the General Assembly. Anyway, this will also be discussed in Nairobi.
Now let’s talk about the dangers.
Beware – danger!
The dangers that are threatening our Fund are both external and
internal. Despite the fact that we lost $5-$6 million in the early 2000s,
our Pension Fund is still highly exposed to the stock market. We still
have 60% of our portfolio invested in stocks, which is lower than in the
late 1990s – which was 68% – but is still very high by European standards.
Now let us turn to the internal threat.
A year ago the Secretary-General nominated as Chief of Administration
of the United Nations a former US investment banker. In an
interview for UN Special in September 2005 the Chief of Administration, who is in charge of the Fund’s investments, said that he was
going to modernise the management of our Fund. That’s where the
trouble started. What our new Chief of Administration originally proposed
was quite simply to entrust the management of our $33 billion
to private bankers outside the UN. What was amazing is that depending
on the audience, he would change the percentage; he told the
Investments Committee that he wanted to fully privatise management of the Fund’s investments, a few days later in Vienna he said
that only 70% would be privatised, and a few hours later in Geneva
the figure was down to 40%.
Why do we need to change something that works? The argument
put forward by our Chief of Administration was that we
could earn much more money than we actually do by giving the
management of our Fund to specialists as well as by investing in
more risky areas such as emergent countries and other edge
funds. He always carries in his pocket a graph prepared by an
external consultant which shows that our Pension Fund has not
performed satisfactorily in recent years.
Currently our Fund is managed in the following way: the fiduciary of our money is the Secretary-General; he delegates his authority to the Chief of Administration of the United Nations. The Chief of Administration has what is called an Investment Management Service to do the job. At the head of the service is a person who has a whole team in charge of managing 98% of the funds. Each manager is advised by external advisers. Taking into account the size of the Fund and its long-term perspective, sales of assets do not occur on a daily basis – far from it. Furthermore the broad orientation of the Fund’s investments is given by a group of bankers who work for free for the United Nations under the title of Investments Committee. This Committee meets three or four times a year.
The problem with this graph is that it mixes everything together:
funds with one billion-dollar assets with funds of $200 billion. Some of
these funds may have earned a lot of money one year and completely
disappeared the next year because they had taken too many risks.
Anyway, taking into account solely funds with 30 billion dollar assets
and more, the United Nations Pension Fund is the third best in the
United States. Furthermore, when he came to Geneva our Chief of
Administration stressed that he had the support of the Investments
Committee, which was not true. When you read the report of this Committee
it says that further study would be needed before a decision
could be taken. In addition, he complained that there are not enough
people in the investment management section, whereas we have
learned since that for the past several months a number of empty posts
have not been filled. The question which immediately arises is: can we
trust such a management?
Why change? You have to figure out that the management of
our Fund by external bankers will give them a revenue of $130
million a year. If you add up all the other expenses, this amount
will reach annually almost $200 million, which you and I will
have to pay to these bankers. This enormous amount represents
15% of the contribution which you and I pay every year. This with
the hope that investment bankers will be in a position to outperform
what is currently done.
Following the presentation by the Chief of Administration, participants’
representatives immediately wrote to the Secretary-General voicing our concerns in the face of what we consider
to be an adventurous attitude. Of course the Pension Board
will not be able to make a decision, its role being only consultative,
but we hope that its unanimity will draw the Secretary-General’s attention to something that we consider to be
worrying. In any case, you will be kept informed of what is
happening.
Let’s just put the record straight. I joined the Pension Board 10 years ago and at that time we had $15 billion. Currently we have more than double that amount. If we compare the evolution of our Fund with the market, we find that in most cases our Pension Fund has performed much better than the benchmark funds. Furthermore, taking the actuarial hypothesis, we need a real rate of return in the long term of 3.5%. Over the last 46 years the Fund’s rate of return has been 4.3% – much higher than what is needed. If you take only the three last years, this rate of return has reached 14.1%. If that is considered to be a poor performance, what is a good one?
© 2006 UN Special |