Pension Versus Plummeting Dollar Shuibao LIU UN Participants’ Representative The United Nations Joint Staff Pension Board (UNJSPB) which is comprised of 33 members divided equally among the Governing Bodies, Executive Heads and participants, held its 55th session from 9 to 18 July 2008 in Rome, Italy. This year, one of the hot topics was the impact of currency fluctuations on pension benefits. It was one of the major concerns of the participants’ representatives. Actually, this subject has become a recurrent agenda item of the Board meetings in recent years. At the request of IAEA Staff Pension Committee last year, the UNJSPF secretariat conducted a study on the impact of currency fluctuations on UNJSPF pension benefits. Since the pay scale for professional staff is different from that of General Service, the Study addressed the impact of currency fluctuations on both categories of staff separately. As far as the General Service staff is concerned, the Study finds that a depreciating dollar gives rise to an increase in the pensionable remuneration in United States dollar terms and consequently in the United States dollar pension. In the determination of the initial local currency pension, the decreasing 36 month average exchange rates are applied to increasing United States dollar pensions. Given the balancing effect of the relationship between pensionable remuneration rates, the ensuing final average remuneration rates and the applicable exchange rates, local currency track amounts for this category of staff are evolving in a normal and consistent manner. The Study therefore suggests that the current methodology for determining the final average remuneration in respect to General Service staff be maintained. The issue was not opened for discussion at this session, although its evolution will continue to be monitored. For the professional staff, the Study has used an example to illustrate its findings. The example used is a P-4 at top step with 25 years of contributory service at 2% accumulation rate per year. The findings are based on the local currency track amounts of full periodic benefits, expressed as income replacement (I/R) ratios: I N C O M E R E P L A C E M E N T (I/R) Separation dates: Dec 2001 Dec 2004 Dec 2007 United States (NY) [Considered the base] 60.4 % 60.4% 60.4% Switzerland 65.8% 62.0% 58.8% France 75.0% 68.7% 62.4% Italy 81.8% 71.9% 63.8% Austria 75.1% 69.1% 64.6% United Kingdom 64.9% 63.8% 58.8% Some people may find the above paragraphs confusing and complicated. It is true that UNJSPF is a very complex pension scheme and the two-track system is its unique feature. In other words upon your retirement, you have a choice that your pension benefits can be paid either in US dollar or local currency of the country where you reside, the latter option being referred to as the “local-track”. To put it simply, when the US dollar appreciates at the time of retirement, your “local track” pension goes up and vice versa. Therefore, the weakening dollar in recent years has led to the shrinking of “local track” pension amounts. While many people who are going to retire in the coming months or years are very much concerned that their pension benefits would be much less than that of their colleagues who took retirement 3 or 4 years ago, if they choose local track, this Study has found that in terms of I/R ratio, it is still higher in most European duty stations than at the base in New York. However, because of the plummeting dollar, many people feel that they are being treated in an inequitable way. Is that the case? It depends on how you look at the matter. In terms of equity, there are two problems here: equity vis-à-vis the base on the one hand and among different duty stations and separation dates on the other hand. The above table shows that the I/R ratio at the base is constant, i.e. 60.4%, but varies among different duty-stations and at different separation dates. Currently it is only in Switzerland and the UK where the IR ratio has descended below the base. According to the data from the Fund’s Secretariat, some 30% of retirees choose local track. This means that 70% of retirees on the dollar track get less than those on local track in terms of I/R ratio. Yet those who get higher ratio still complain because they compare their own pension amounts with that of their colleagues who retired a few years ago when the exchange rate was more favorable. In sum, there is a problem of equity in two aspects. The Study discussed at the recent Rome meeting identified a couple of solutions to address this disparity. One of them is the possibility of using 120-month average exchange rates (instead of last 36- month average rates) to determine the local currency track amounts for Professional staff. The aim of such a measure is to spread the currency risk, as well as the potential for gain, over a longer horizon thereby reducing the steep variations that have been experienced in the past as a result of different dates of separations. Although this is not an ideal solution to the problem, the participants’ representatives after consultations with different stake holders, were in favor of this option. They went to Rome with a hope that the UNJSPB would agree to recommend this solution to the United Nations General Assembly for adoption. Regrettably, the Board failed to reach a consensus on the immediate implementation of this solution despite of the heated debate and convincing arguments being put forward. As indicated in the first paragraph, the UNJSPB is a tri-partite organ in which the participants’ representatives account for only one third of the members. Board decisions are normally reached through consensus. Votes are avoided as they undermine and weaken the decisions of the Board that, at a later stage, must be adopted by the UN General Assembly in order to become truly effective. While there was a general recognition that there was a problem, only the participants’ representatives advocated that immediate action be taken. The main obstacle to this position was the limited actuarial surplus of 0.49% of pensionable remuneration by 31 December 2007. This is less than the estimated cost of 0.67% of pensionable remuneration required to implement the 120-month average currency exchange proposal. Implementation of the 120-month average currency exchange would push the fund into a deficit, something that the Board was not willing to do. Recognizing the importance of the issue, the Board agreed to continue monitoring the problem and to send quarterly reports to the Staff Pension Committees of the Member Organizations of the Fund. Furthermore, the Fund Secretariat was requested to submit before next April 2009 a further report on concrete, workable and sustainable solutions to mitigate the impact of currency fluctuations at a cost compatible with actuarial results for consideration by the Board at its 56th session in 2009. If the need for immediate action is revealed, the Board at its next session will consider recommending such solution or combination of solutions to be implemented as soon as it can be effected after 1 January 2010. That is what the participants’ representatives managed to achieve at the Rome session. We must bear in mind that whatever solution or recommendation agreed upon at the Board will have to be presented to the UN General Assembly for adoption and can be implemented only in the following year. In other words, any immediate solution is always, at the earliest in a year or two away from its adoption.. As far as Switzerland is concerned, pending the long term solution being found, the Cost of Living Differential factor (COLD factor) will be soon (most likely in August 2008) introduced to determine the local track benefits amount. This COLD factor in simplified language means that if the post adjustment in Switzerland has been on average 5% higher than that of the base in New York over the last 36 months consecutively, final average remuneration will be increased roughly by 3% to determine the local track amounts. For P-5 and above the increase will be a little bit less than 3%; this is the first time that we hear there is a unfavorable element for P-5 and above categories. In the UK, the COLD factor has already kicked in. For other Euro areas, the COLD factor is warming up in the horizon and will come in soon. Nevertheless, the COLD factor may cool down this hot issue for the moment, but won’t freeze it. The subject will become very much alive and heated again at the next Board session in 2009 in either Geneva or Vienna. Let’s just stay vigilant and alert.
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