Twenty months after the staff union accused management of the United Nations’ $54.5 billion pension fund of “massive fraud,” controversy over its structure and performance remains on a low boil.
While the UN’s Office of Internal Oversight Services dismissed fraud allegations, a near perfect storm of management restructuring, a software fiasco and a weak global economy has compromised the credibility of the UN Joint Staff Pension Fund (UNJSPF) in the eyes of some staff representatives and retirees.
Recently, the fund’s performance has flattened. Key investment jobs in the fund have sat empty for too long, and a new software program delayed payments to thousands of retirees. At the same time, the fund’s attempts to adapt its operations and investments have led skeptics to fear that the once rock-solid pension is endangered and nest eggs are being “outsourced” to greedy speculators on Wall Street.
At its annual meeting held this year in Vienna in July, the 33-member UN pension fund board — citing its actuaries — declared the fund solid and able to pay its 200,000 current and prospective beneficiaries from 23 organizations well into the future.
In their biennial report to the board, actuaries “confirmed the fund is in good health with a small surplus,” the board president, Vladimir Sobolev, told a town hall gathering. After outlining a difficult period of 15 years during which the fund wore down a large surplus, its chief executive officer, Sergio Arvizú, described to the town hall meeting how management strengthened solvency and governance.
“The fund is in a very strong financial situation and a very strong operational situation,” he said, adding that it would not need to dip into principal to pay the difference between income and payouts for 50 years, if it can maintain a 3.5 percent annual return over time.
“We can do it [pay beneficiaries] with only dividends and interest,” Arvizú said. “The fund is maturing, large and complex, and atypically, it’s still growing.”
In fact, the assets and payees of the fund have hit an all-time high, as participation has nearly doubled from 15 years ago. But the fund failed to meet its 3.5 percent benchmark beginning in 2014, and returns cited in its most recent quarterly report fell below that level as of July 2016.
Two years of low returns may not be game-changing, and 3.5 percent is considered a conservative target. Yet the fund’s strategic framework for 2016-7 predicts that the recent adverse investment climate — low bond interest, flat securities income and fluctuating currencies — will not go away soon.
Among strategies to sustain performance, the fund — traditionally managed internally — will pursue more alternative assets that may require additional outside expertise, the document points out. This prospect makes some staff representatives nervous, as does their faith in the senior management on both sides of the fund’s house, assets and liabilities.
As to the assets, in 2014 UN Secretary-General Ban Ki-moon elevated the position of head of the fund’s Investment Management Division (IMD) to a full-time representative of the secretary-general, or an RSG. The new senior position, held by Carolyn Boykin, was needed, the head of human resources management explained at the time, “given the growth in assets, the complexity of the fund’s investment and financial markets” and to “address the severe operational risks the IMD is facing.”
While the IMD’s staff of 85 portfolio managers, analysts, traders and other roles of a typical brokerage house invest the fund’s assets, a chief operating officer oversees the administration of benefits. The bifurcated structure of investments on one side and payments on the other was set up as a form of checks and balances. While Boykin answers to the secretary-general, the chief executive reports to the pension board, which reports to the UN General Assembly.
Unusual for the UN, the board itself is a tripartite body with an equal number of members from governing bodies (General Assembly diplomats), the UN administration and beneficiaries. An assets and liabilities monitoring committee is supposed to coordinate the fund’s two arms. Recently, that committee has grown concerned.
In July, it warned the board that the fund was “exposed to significant governance, investment, operational and compliance risks,” and that the fund’s biggest portfolios — North American Equity and Global Fixed Income, representing some $30.5 billion — underperformed in the first half of 2016. It was the committee’s second warning on risk controls this year.
Boykin, the investments chief, has cautioned retirees to take a long view, noting that the UN pension system is “fully funded” and set to meet its 3.5 percent return target over time. Averaged over the past 10 years, the fund has returned 5.1 percent, not bad for a large pension fund, according to a recent Bloomberg news report. However, over the past two years the annual rate of return has fallen below 2 percent, and this year it is not looking much better.
A former sanctions expert at the UN, Loraine Rickard-Martin, keeps a wary eye on the fund with her blog unpension.blogspot.com. In a recent post, she questioned the “yawning discrepancy” between the narratives of the actuaries and monitoring committees on the fund’s performance. The Coordinating Committee for International Staff Unions and Associations of the United Nations System (or CCISUA), based in Geneva, has also noted that “the fund is now underperforming in the three-to-five year horizon.” (The IMD did not respond to requests by PassBlue for comment.)
But performance was not what initially concerned the UN staff union and others, who had been focused on governance and human resources issues related to the fund, though the two strains of discontent have become increasingly mentioned in the same breath.
The monitoring committee was so alarmed at the number of vacant senior posts in the fund’s investment division earlier this year that they wrote to Ban twice, asking for his intervention and warning that the vacancies “pose a grave operational risk” that threatened pensions. The position of director of the IMD was vacant for more than a year, after the retirement of a UN veteran, Suzanne Bishopric, in March 2015. It was filled in July 2016 by Herman Bril of Britain, who had been providing investment advice to pension funds as a managing director at Cardano.
Still to be hired nearly a year after the incumbent left to work for the Houston firefighters’ pension fund is the deputy director of risk management and compliance. These critical vacancies during a difficult time for global investments may have contributed to poor performance, says Ian Richards, an economist and president of the CCISUA. The fact that hiring delays are nothing extraordinary in the UN Secretariat may have further motivated fund management to push for more independence from UN bureaucracy.
Or the UN may just be too complicated and not competitive enough to attract talented people in the investment industry: the gross annual salary for an assistant secretary-general post (both Boykin and Arvizú are such) is about $190,000. Comparatively, in the United States the executive director of the Massachusetts’ state pension fund ($60 billion in assets; 149,000 members) is $395,000.
The UN fund’s management has long argued that rules and procedures meant for general UN programs have hindered the fund’s operations, which services 72,000 retirees in 190 countries and uses 15 languages. Two years ago, the UN General Assembly asked the fund to write its own financial rules, which the board approved in July and the General Assembly is expected to endorse. The rules encode practices the fund has used since inception, the UN controller, Bettina Bartsiotas, told the town hall in Vienna.
“They are designed to safeguard your assets,” Bartsiotas said. “Nothing opens the door to anything new. All the checks and balances that were in place are in this document.”
But by having rules independent of the UN, the fund is exposing pensioners to greater risk, critics argue: “The new rules treat the fund as a quasi-independent entity at a time that it is outsourcing the investment of our assets to banks and hedge funds,” the CCISUA posted in July. Last year, a petition signed by 13,000 staff members and retirees caused UN management to withdraw a proposed revision to a 2000 memorandum of understanding with the UN’s human resources department. That would have given Arvizú, the chief executive, more leeway over staff rules and contracts.
The petition’s authors, however, fear that a recent authority granted the fund will not only allow it to hire more consultants, retirees and “cronies” — relying less on UN civil servants — but it will also remove procurement from UN oversight and could be exploited by “Wall Street” outsiders.
“The more you move out of the UN, the more it costs money and brings risks,” said Richards of the CCISUA in an interview. The delegation of authority is less far-reaching than that overseeing peacekeeping operations, says Lee Woodyear, the fund’s communications officer, and is partly intended to allow the fund to hire temporary and emergency staff such as the team being assembled to handle the lag in benefits payments.
Meanwhile, other developments stoked the anxieties of fund skeptics. In 2014, Ban hired Boykin as the first full-time representative for investments. Staff unions immediately raised alarms, and as recently as the Vienna meeting in July were still questioning her appointment.
Boykin is easily Google-able, as she had had been chief investment officer of the Maryland state pension fund during a difficult time (from 1999-2003). In 2001, the fund finished last among its peers ranked by Wilshire Associates, losing one-fifth of its value over 15 months. Boykin was also rapped by the media in Baltimore after the Maryland pension board kept on a money manager, Alan Bond, who had been indicted for defrauding pension systems. Three years later, that manager’s supervisor, Nathan Chapman, was imprisoned for diverting millions in retirement funds into his own businesses, including $6 million from Maryland’s fund.
At the Vienna meeting, Boykin went public, she said for the first time, to clear up “falsehoods.”
“There was indeed fraud in the Maryland plan, and I was very involved in working with the US attorney’s office. . . . Mr. Chapman went to jail for six years, in part due to my testimony,” Boykin said. As for Bond, she had alerted the board about him, but temporarily lost the documentation confirming her communication. Months later, the media had evidence of her communication but never retracted their reporting, she said.
Boykin also defended the performance of the Maryland pension system, which remained “fully funded” during her tenure, which is no longer the case.
Another hot-button issue for staff and retirees has been the UN pension fund’s recent investment in hedge funds at a time when the media indicated other pension funds were dumping them. About 3 percent of the fund’s investments are listed as “alternative assets.” Boykin said in July that the hedge fund has been sold.
Her revelation in Vienna, however, that 14.75 percent of the fund is “externally managed,” in private equity and real estate, surprised some observers and appeared to contradict Arvizú, the chief executive, who had just said that he had heard “no mention, no plans of outsourcing anything to Wall Street.”
Boykin, however, said the fund would soon return to more internal management, as “good business sense.” (Asked to comment on the strategy, a New York investment adviser said: “14.75 percent externally managed does not seem like very much. Maybe this is the reason that they are having a hard time reaching their 3.5 percent goal.”)
There are investments that might need to be outsourced in sectors where the UN lacks expertise, Richards said. “But there has not been an open discussion on the investments of the fund.”
The fund’s allocation of 58 percent in global equities, about 25 percent in bonds and the rest in real assets (such as precious metals) and cash is considered a safe track. But even achieving the conservative 3.5 percent may be difficult: the Economist magazine predicted that large pension fund returns will stall at 2-2.5 percent for the foreseeable future.
“There is market uncertainty, more than we’ve seen in a while,” Boykin said in Vienna. “But this asset class mix is the most likely in order to meet the 3.5 percent over time,” she added, citing a recent study by Buck Consultants.
At the same time, an administrative snafu unfolded on the chief executive’s side of the fund. Last year, to streamline its operations, the fund moved to a new software program called the Integrated Pension Administration System. Like other recent attempts by the UN to adapt management-planning systems to its complex ecosystem, it failed. Or at least it could not handle timely payments of current beneficiaries plus a “surge” of recent separations — particularly national staff from downsizing peacekeeping missions.
Thousands of new retirees waited as long as 12 months for their first payment. Shouting matches ensued at meetings where stories of evictions and other traumas were hurled at fund managers. The fund hustled to pay its 72,000 previous retirees, and the newly separated felt the pinch, to put it mildly.
To help allay concerns about the fund, the Association of Former International Civil Servants (AFCIS), a retirees’ group, invited Secretary-General Ban to its annual meeting in New York in May, his first appearance there in several years. He assured retirees that the fund was solvent, conservatively invested and well shepherded. He expressed sympathy for those not yet paid but said the backlog would be “eliminated by the end of the month.”
New cases keep pouring in, though, with nearly 1,500 pending at the end of July. And while the pension fund staff are processing nearly twice their normal caseload each month, the surge is expected to persist into 2017.
The fund is hiring an 18-member crisis team to help, while the board authorized advance payments to those newly separated in the meantime. But the retirees’ associations are not buying all the current charges of mismanagement at the fund. During the Vienna meeting, the Federation of AFICS (FAFICS) emailed its members, warning them of a second petition from staff representatives, saying it contained misrepresentations, distorted facts and rehashed allegations of fraud and risky rule changes.
“The proposed amendments to the financial rules as well as the HR policy and other issues, are being discussed by the Board and continuously addressed at all appropriate levels,” the email said. Some retirees who feel too much noise about the pension fund could alienate General Assembly diplomats, who may only dream about such a stable retirement at home.
As the pension fund presents its annual report to the new session of the General Assembly this month, it remains to be seen if policy changes emerge. But the assembly has already endorsed one move that may improve pension fund finances: the mandatory retirement age for all staff members will change from 62 to 65 by January 2018.
UN staff members will be working longer, contributing more and hoping that their once-solid nest egg will not crack any time soon.