Q: What is the United Nations Joint Staff Pension Fund and how does it function?
The United Nations Pension Fund is an inter-agency organization whose mission is to manage pensions for all participants from its 22 member organizations, such as UNESCO, WHO, FAO, ITU, ILO, etc. The United Nations Organization, with all its funds and programmes , such as UNHCR, UNICEF and UNDP, is by far the largest of the member organizations. Currently, the Pension Fund covers participants and beneficiaries who work and live in more than 190 countries worldwide. So this is a huge operation. I’m talking about some 95,000 contributing participants and 55,000 retirees and beneficiaries.
This pension fund is similar to other defined benefit pension schemes. The difference is that this pension fund is a truly international one, both because of its membership and its constituencies. It also has interesting features, such as automatic adjustment of pensions paid to retirees and beneficiaries; that is, regular adjustment by the applicable consumer price index. Pensions are adjusted to inflation in order to maintain the purchasing power for the beneficiaries. Another interesting feature is that retirees may opt for what we call « a double track-system » of adjustment, which basically provides a way of hedging the level of the benefits paid in local currencies against exchange rate fluctuations.
This is a unique feature which is a bit complex to manage, but I think the beneficiaries gain a lot from it, especially when you think that their expenditures are often denominated in currencies other than the US dollar which is the Fund’s base currency. That is an interesting and unique feature.
Q: You have a huge responsibility on your shoulders investing all these funds — US$36 billion. Do you sleep well at night?
You are right when it comes to the amount of assets, slightly over US$37 billion. Management of the assets of the Pension Fund is a responsibility entrusted to the UN Secretary-General. Investment decisions by the Secretary-General, or his representative, are taken after consultation with an Investments Committee and in light of observations and suggestions made by the Board of the Pension Fund. It is true that this is a huge responsibility and a very challenging job.
In light of this, managers and the Board put special emphasis on having strong internal control mechanisms and clear policies in terms of risk management.
Q: What do you do in order to make money for the Pension Fund?
What is critical for a pension fund is to make sure that the assets are managed in order to return a performance which is in line with assumptions on the liability side. In other words, the assets are not managed like mutual funds, because this is a Pension Fund whose ultimate objective is to make sure that it will be able to pay benefits to retirees and beneficiaries. We have to make sure that the performance achieved by the assets matches our long-term liabilities. So far, so good! In other words, this Pension Fund enjoys a surplus, which means that if our demographic and economic assumptions are correct (and we check them every two years through an actuarial valuation which is carried out by an external third party), then we can safely say that we will be able to meet our promises and cover our long-term commitments. So far, the UN Pension Fund is in a strongly funded position.
Q: So you have beaten the market several times?
The Fund’s asset managers have an excellent track record and have consistently beaten their aggregate market benchmark. In fact, for the Pension Fund the key objective is to achieve a performance which meets its return objectives. Basically, the objectives in nominal terms are to achieve a 7.5% rate of return on an annual basis, and in real terms 3.5%. Over the last forty-six years, the fund has — on an average annual basis —performed above this objective.
Q: There have been quite a lot of worries among the UN staff about their pensions. Is the Pension Fund going to be outsourced or is it going to stay the way it is? Could you clarify what is going on? Is there something to worry about?
What is clear is that managing a Pension Fund is a complex activity requiring a lot of professional knowledge — not only in terms of administra-tive skills, managing contributions, calculating and paying pensions, but also an in-depth knowledge of actuarial matters, investment matters, IT processes and things like that. For us, the key question is to make sure that all this knowledge is available when we need it. From time to time, we need external resources to improve the way we manage the Pension Fund. Outsourcing is one of the many possible options. It has been implemented in several areas of the Fund. We have been working for many years with outside companies for actuarial valuations, IT operations as well as for the investment of the assets of the Fund. For example,the management of the small CAPS (investment in small companies) category of assets is already outsourced, simply because it would be very difficult for the Pension Fund to rely solely on its own information or staff to invest in small companies around the world.
Your question refers to discussions that happened in the Pension Board a year ago. At that time, outsourcing of the North American Equity portfolio was presented to our governing body composed of representatives of all our Member Organizations, including staff and retirees.
The Pension Board eventually decided to outsource this particular portfolio and to have it managed in the passive mode. In other words, it decided not to try « to beat the market » through active management, but basically to replicate the market indexes in this US and Canadian equity portfolio. Many people had no problem with the passive or indexing approach. Indexation is a tool; and it is a fact that in those transparent and efficient markets, when managers actively manage a portfolio — and studies illustrate this point very well —it is difficult for them to consistently achieve a better performance than the market index.
The discussion basically focused on the question of strategy. Is the strategy only to replicate an index or is there more to it? Many people believe a more comprehensive assessment of the pros and cons should be presented. Managing a portfolio obviously requires a clear understanding of the risks involved, and also the costs involved in changing the investment policy. Basically, the discussions were on these issues. Many people were uncomfortable because they felt that the discussions focused mainly on the tool and not enough on the risk profile, risk appetite, or on the asset-liability management, for which a study is currently being carried out. These documents and reports will be presented to the Pension Board in July 2007.
The participants’ representatives, and the retirees, expressed concern about changes in the investment policy. Of course, this is important for many of them, as their current and future pensions are or will be their only source of revenue.
I am very pleased when our constituents give their pension fund this level of attention. They are usually very supportive of proposed changes in favour of modernization, and they feel that they own the Pension Fund. This feeling of ownership is great and they are proud of the performances achieved up to now. I mentioned earlier that this is a strongly funded pension fund; this is due to good and prudent management and good governance. This is a rarity in this world where many pension funds struggle to stay afloat. Participants want the UN Pension Fund to be able to continue to meet its pension obligations of the future. There are, therefore, lots of reasons for our constituency to keep an eye on what is happening to the Pension Fund.
Q: You said earlier that you had a Governing Board and 160 people working here in New York. How do you select your people — are they all investment bankers?
The Fund has a limited number of asset managers, but our governing bodies — the Pension Board and the United Nations General Assembly, our legislative body — have agreed to strengthen this small team of highly skilled professionals who have the responsibility of managing the equity portfolio, the bond portfolio and the real-estate portfolio. The bulk of our investments is outside the US. Investment advisers have been appointed to assist the Fund’s asset managers in their investment decisions in the various regions of the world, in equities, bonds, real estate, emerging markets, currencies etc.
The Fund’s asset managers are selected through the competitive UN recruitment process; all posts are advertised on the UN website. Providers and investment advisors are selected through a similar competitive process managed by the UN procurement service.
Q: Do the people working on the Asian market, for instance, follow the working hours of the Tokyo Stock Exchange?
The Fund’s managers are all here in New York. Of course, they travel, but a lot can be done from New York. Second, this is a pension fund, so daily trading is not a core activity. Most of the assets are long term.
Q: What do you think about your job of managing the Pension Fund?
When I was selected for the job, and appointed as CEO, it was because this was already my area of specialization — managing pension funds in France. What is new about it is the international nature of this activity. The techniques, when it comes to actuarial matters, investments, IT, are all the same.
Q: Where do you want to see the Pension Fund ten years from now?
Obviously, the Pension Fund will be larger, not only in terms of assets but also in terms of membership. Basically, the UN is expanding. There is a great demand addressed to the United Nations, for more peace-keeping missions, for instance, and the UN family of organizations is responding. So the number of employees is increasing. Also, as of 1 January 2007, we have a new member, IOM — the International Organization for Migration.
It is a growing business. As a fully-funded pension fund (contrary to other pension schemes which are managed in a different manner, such as pay-as-you-go — the contributions pay for the pensions), we have reserves. Even if there were a decrease in the number of participants in the years to come, the Pension Fund would not be at risk.
Q: So people should not be worried at all?
When it comes to that, certainly not! However, I think it is very healthy for the member- ship to ask questions and to express concern when they believe that the discussions have not been as far reaching as they would like them to have been. I believe that most people are quite comfortable with the present situation: the Pension Fund is well funded; the governance functions are in place and work well; management is committed to quality, timely delivery of services and on-going improvement of the way it works. Internal control mechanisms are efficient and with a newly established audit committee, an additional layer of supervision and control has just been added. This audit committee is a new organ established by the Pension Board; it comes on top of the normal internal control mechanisms carried out by management, the internal audit and the external auditors. I believe that this is reassuring for people.
Q: Do the new IOM members have the same rights as the others, even their retirees?
All members have the same rights. It is amazing when we go to some countries where the social security system is weak or where pension schemes do not exist, people look at us in disbelief because they do not believe that we will be able to pay them a pension. This is so unusual because they do not understand the mechanism — contributions, the investment of the contributions, the payments, etc. It is a reflection sometimes of the little faith they have in collective arrangements. I think that when these collective arrangements are properly managed and supervised, this is a wonderful tool in addition to other human resource policies and entitlements.
Q: You have an excellent reputation all over the world and people are satisfied with the services you provide. What more can you ask for?
My dream would be for more people to benefit from this kind of coverage, because it’s clear that life expectancy is rising and, without proper coverage of old age, a lot of people outside the UN are going to experience problems down the road. I tend to believe that a pension scheme is not a luxury. It is a way for individuals and groups to plan for the future, especially for a time when they would no longer be able to work or rely on the family to provide for their needs. Pension funds with all their skills, and mechanisms and long term reserves, are an excellent answer to these issues.
Q: So if a country needed some advice, would you give it to them?
Of course! We do that from time to time. Lots of people are interested in knowing how these tools can be made available to others. It is a complex operation and it requires a lot of discipline. I would also say that it requires strong ethics.
Interview with Mr Bernard Cochem?, Chief Executive Officer of the United Nations Joint Staff Pension Fund
Q: What is the United Nations Joint Staff Pension Fund and how does it function?