Pension by hcj


									                                 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
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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