The General Assembly resolution passed in December could not have been clearer: the United Nations pension fund has failed to deliver on both the investment side, led by Carol Boykin, and the secretariat side, led by Sergio Arvizú.
The resolution came on the heels of critical reports documenting massive foreign-exchange losses, low investment income and unprecedented delays in pension payments to new retirees and survivors, among other managerial deficiencies. The reports were produced by the UN Board of Auditors and the Advisory Committee and Administrative and Budgetary Questions, a subsidiary of the General Assembly.
This update on both the investment and secretariat sides of the fund follows an appeal to Secretary-General António Guterres to act to protect our fund and in the wake of an audit report by the UN Office of Internal Oversight Services’ Internal Audit Division made public two weeks ago.
What the audit reveals
The report refutes Arvizú’s claims that payment delays were caused by an increase in retirees and separations; lags in transmission of separation documents by member organizations; and teething pains from carrying out a new IT system by the fund in 2015, called IPAS.
Instead, the report documents Arvizú’s failure to assess and act to mitigate risks arising from blackouts and “missing or erroneous” functions in the IT system, such as not matching documents with participant files. The secretariat also failed to follow up on missing documentation, a task for which it receives $21 million every two years.
Arvizú also kept benefit-processing jobs vacant for prolonged periods, ranging from 13 to 60 months (averaging 28 months). As of Jan. 1, 2017, the fund’s operations section had 13 vacant jobs and 9 “under recruitment.”
Yet, Arvizú requested an additional $3.2 million funding from the pension board to establish a temporary task force ostensibly to address the backlog in pension payments. The General Assembly approved only $1.3 million of the request, after it determined that two senior posts were “not directly related to the mandate of this task force.” One of the unapproved senior posts was earmarked for Arvizú’s personal public-relations officer, who continues to perform this function.
Arvizú also failed to address a sharp drop in benefit-processing performance that occurred from 2013 to 2016 — plummeting from 72 percent of cases completed within 15 business days to 24 percent in the first half of 2016. Under his watch, the number of cases requiring more than 60 days to process (with full documents received) increased to 38 percent in the first half of 2016 from a low of 2 percent in 2013.
Most egregiously, when UN management set benchmarks for eliminating the backlog, Arvizú included in his reporting only a fraction of outstanding cases. The audit notes that he considered as “processed” almost 10,000 unprocessed initial separation and benefit revision cases, as well as more than 11,000 cases that he claimed lacked complete documentation. Of the latter, almost 75 percent were found by the audit to be complete and ready for processing.
In one notable case detailed by the audit, a staff member in a field mission died in 2006 and left a 16-year-old child, but “the child was a designated beneficiary and was yet to receive benefits as of 31 August 2016.”
The fund’s claims of responding promptly to “high priority” correspondence were found to be unsubstantiated, and the audit uncovered that only 3, 7 and 4 percent of phone calls were answered by the fund in February of 2014, 2015 and 2016, respectively.
Response to the audit
Arvizú responded to the report by saying the audit used flawed data to calculate outstanding cases. He requested closure of eight recommendations “on the grounds that the recommendations were ‘overtaken by events,’ the ‘risk has been eliminated,’ ‘there are no delays’ or ‘there is no backlog.’ ”
UN management, which all along accepted Arvizú’s data despite insistence by staff unions that they were seriously flawed, is quoted in the report as saying it “has no way of verifying accuracy of the data provide by the Fund. . . . ” But UN management has agreed to ask the fund to provide information on all outstanding cases and to establish new benchmarks for eliminating the backlog.
The auditors disagreed with Arvizú’s contention that some issues were moot, including the two critical problems of client servicing and benefit processing.
The “Trump bump”
On the investment side, after losses of $7.3 billion in investment income and $3.4 billion in foreign exchange in 2014-2015 and failure to achieve the target in 2016, the fund’s March 17, 2017 investment report shows assets at a record high of $57.175 billion, with a 4.89 percent nominal return rate.
Any urge to celebrate must be tempered with the reality that the surge has everything to do with the so-called “Trump bump” (a sudden rise in stock-market share value or revenue as a result of Trump’s presidential election) and nothing to do with new-found investment skills by the fund.
An industry analyst noted in general that if investments had been managed by a computer whose sole job was to maintain pace with the index, returns would most likely have been higher.
As to the fund’s investment performance, the 2016 pension board report says bluntly: “For the first quarter of 2016, the 85 basis points underperformance was attributed to 16 basis points from asset allocation and 69 basis points for manager value added (negative effect).”
The fund’s underperformance continues unabated. At the end of February, the nominal return rate was 3.94 percent, trailing the benchmark of 4.03 percent.
As of March 17, the largest portion of the investment portfolio — equities — was underperforming the benchmark by 23 points. And the bump may well be short-lived, causing current gains to disappear as suddenly as they appeared.
It’s appropriate to recall the news article in 2003 reporting that Boykin was ousted that year as chief investment officer of Maryland’s state employee pension system and “was criticized earlier by board members for failing to inform them that the system’s 2001 investment performance had been ranked last in a national survey.”
Not Out of the Woods
While uncounted numbers of new retirees and survivors still wait for their benefit payments to arrive, Arvizú is making his public-relations rounds of UN duty stations and agencies. He has managed to move the next pension board meeting from New York to Vienna, where he may perceive a less contentious political environment.
The fund is not out of the woods under Boykin’s leadership, either, despite whatever credit she may attribute to the recent market bump. The fact that the fund still underperforms in investments under favorable conditions is cause for alarm, particularly the possibilities that markets could turn turbulent.
Regarding the independent third-party review of investments requested by the pension board, the latest word is that Boykin has strictly limited contact with Deloitte Touche to herself and the fund’s director of investments, Herman Bril. This step could ensure Boykin’s tight control over any cooperation with the Deloitte team.
The recent oversight report uncovers the full extent of managerial deficiencies in the fund’s secretariat. The comprehensive audits, as called for by the General Assembly, are aimed at revealing the fault lines on both the investment and operation sides. The audits should include, along with the entire range of policies and systems, the fund’s IT system (reportedly underway); the selection, evaluation and payments to external managers; and expenditures on hospitality, or entertainment.
Now more than ever, Secretary-General António Guterres, we need you to install responsible leadership in the fund to protect our future.