In the middle of the coronavirus epidemic, the United Nations spokesperson announced that Sudhir Rajkumar resigned from his job as representative of the secretary-general for investment of the assets of the UN Joint Staff Pension Fund, effective March 31, 2020. The abruptness and lack of explanation in the March 29th announcement came as a surprise and indicated a serious problem.
In fact, this was just the last in a series of warning signs that had emerged recently regarding the fund. These signs have suggested a long-term threat to the fund, despite the reassurance by Secretary-General António Guterres in April of his commitment that pensions will continue to be paid in full.
In the last three years, the top four positions in the fund — the chief executive officer of pension entitlements (or, CEPA, now split into two positions), the head of Office of Investment Management and the secretary of the board — have been held by eight people: four regular and four interim appointments. The turnover reflects concerns noted in two reports, one in 2018 and another in 2019 by the internal auditors, including lack of proper governance and effective oversight, as well as cautions from the judges of the UN Appeals Tribunal that the fund needs to adhere more scrupulously to its regulations.
Indeed, there has been increasing criticism that the fund is violating its fiduciary responsibilities to the stakeholders by choosing secrecy over transparency.
No one wants to be the messenger of bad news by warning that the fund is at risk due to investment decisions made during the pandemic. However, the resignation of Rajkumar suggests the most serious development in the history of the 70-plus years of the fund. As of March 31, 2020, it was worth $63.41 billion.
While any organization may survive a lack of proper management and accountability for a short period, it is unlikely that the fund can fully rebalance its assets in the medium or long term to meet its obligations, even with a 3.5 percent real return on net assets, because of the expected impact of a prolonged recession. The departure of Rajkumar was a result of failed policies put in place over the last two years. Although the pension board was informed of the new policies, it endorsed them with little to no oversight, as did the fund’s investment committee and assets-and-liabilities monitoring committee.
A major issue emerged when the two top officials in the Pension Investment Office, Rajkumar and the director, Herman Bril, imposed changes in investments that for the first time since the fund’s inception departed from the principles adopted by the General Assembly that investments would be guided according to safety-profitability-liquidity-convertibility and instead would be tied to profitability-safety-(nonliquidity)-convertibility.
That change exposed the fund to more risk and reduced liquidity, making it more difficult to rebalance investments during marked downturns. The exposure to high risk and the discussions that ensued internally, including alleged retaliation against those who disagreed with Rajkumar, led staff representatives to voice their concerns with Guterres last year.
The World Health Organization, a participant organization of the fund, released a Strategic Preparedness and Response Plan in February to help protect countries with weaker health systems deal with the coronavirus, and the situation was viewed with concern by investment officers, who had experienced downturns in the market in the past and understood it was essential to maintain liquidity to intervene and rebalance the fund’s assets. The virus hit the market with full force in March. The warnings about risk had become a reality. The assets of the fund sank (initially by some 20 percent) and the resignation of Rajkumar was quickly suggested and accepted. Since then, some of the losses, but not all, have been recouped.
Economic and financial reports have been suggesting that the Covid-19 epidemic could lead to a prolonged volatile market and possibly a deep recession for an extended period. Like the veritable emperor, the fund would be caught with no clothes on if it lacked the flexibility to respond to a continuing downturn.
The technical reasons include: insufficient liquidity or reserves to rebalance the fund’s investment portfolio; the total contribution of participants received is lower than the benefits paid; administrative expenses continue to increase (0.32 to .40 in 5 years) between 2015 and 2019; the number of those using the costly two-track system, a noncontributory portion of the adjustment system, fluctuates between 34.5 percent to 27 percent of beneficiaries, costing 1.67 percent of contributions; the number of retirees and beneficiaries continues to increase (from 51,893 in 2009 to 67,582 in 2017), while the growth of participants is slowing, from 117,580 in 2009 to 116,985 in 2017; and the inaction of the pension board and its committees reflects a continuing tendency to ignore danger signs and failure to provide direction and oversight.
Finally, one should expect UN member states to be reluctant to provide increased contributions to the fund, given the financial circumstances affecting their own countries from the pandemic.
The consequences are grave for the fund because it may not have the resources to survive in the long term, in which case the solution would be to follow what other pension funds have been adopting, a two-tier system in which the retirees have their basic benefits provided under the regulations protected pursuant to Article 26, but supplementary adjustment systems that are not part of the fund’s regulations would not be provided. Since the two-track system is not contributory, it may require a different funding mechanism to be imposed or eliminated.
It is a truism that Covid-19 would not have claimed so many victims had action been taken earlier. It would be wiser if the relevant parties to the fund act as soon as possible to avoid dire problems, sticking to running the fund as it was designed originally by the pension review group in the early 1950s.
These challenges may present an opportunity to enact serious reforms to safeguard pensioners into the future. It will mean ensuring the appointment of qualified people to leadership positions, reforming the board, adopting economies and curtailing expensive subsidies (such as the two-track system) and, above all, reaffirming the core international civil service that has made the fund so successful until now.
Given the decisive action of Guterres in prompting the resignation of Rajkumar, the participants in the fund, most of whom are UN staff, need to address the fact that the fund was created by the General Assembly in 1949 to serve its staff. While specialized agencies were allowed to join the fund and receive the same treatment under its regulations, the large majority of participants, over 65 percent, are UN staff under the secretary-general, who plays a critical role in the fund’s survival.