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The $75 Billion UN Pension Fund: Kicking Reforms Down the Road

Flags of United Nations Member States outside of the UN in New York
The flags of United Nations member states at New York headquarters, September 2020. Despite efforts to reform the organization’s pension fund operations, much more professionalism is needed to optimize its work, the author writes. JOHN PENNEY

A new governance study has confirmed what many United Nations Joint Staff Pension Fund observers have long surmised: there are significant variances between the fund’s own operations and best practices and those of pension funds elsewhere.

The areas reviewed by Mosaic Governance Advisors, who prepared the study, include standards of professional and ethical conduct, conflicts of interest and oversight of culture.

There were certainly clues as to problems: two internal audits conducted by the UN Office of Internal Oversight Services, one a comprehensive governance audit in 2018 (A/73/341) and the other an investment office governance audit in July 2020 (A/75/215), found that the fund’s culture needed to change to address conflicts of interest and other threats to the fund’s health and sustainability.

The standard response to turmoil in the 71-year old, 212,000-member fund, currently worth $75.2 billion, has been to make serial changes in its top leadership while an entrenched old guard in the fund and on the board ensures that improvements are slow to arrive and are largely cosmetic.

Tone at the top

The 2018 internal governance audit, mandated by the UN General Assembly, called for the pension board to ensure that the pension administration “sets the appropriate tone at the top with regard to integrity and ethical values.”

The 2020 internal investment governance audit found that the fund’s Office of Investment Management under Sudhir Rajkumar, Secretary-General António Guterres’s former representative for investments (a position known as the RSG), lacked “an appropriate tone at the top with regard to the highest ethical standards of behaviour that are expected of officials entrusted with fiduciary responsibilities.”

Player and referee

The 2020 investment audit substantiated the allegations of the four UN participant representatives to the board and their alternates, who represent 85,000 UN staff members, that the investment office suffered from a toxic work culture that included retaliation against personnel. It also found a lack of safeguards on decision-making and conflicts of interest in the investment office.

In addition, the audit found that the “merging of management and oversight functions in a single post has enabled the Representative to set the rules and to act as ‘player’ and ‘referee’ at the same time,” which may “stifle critical review of proposals and compromise the due diligence, including risk analysis, that is performed by subordinates of the Representative. . . .”

Rinse and repeat

While the pension board warmly endorsed policies put in place by Rajkumar over his two-year tenure, which lasted from January 2018 to March 2020, the participant representatives tried to alert Guterres to practices that they said exposed the fund to more risk and decreased liquidity. But it was to no avail.

These actions followed an earlier pattern. Beginning in 2014, the participant representatives raised allegations about conflicts of interest in the fund’s administration arm and faced vigorous pushback by the board. In 2018, when the comprehensive governance audit was published, the board, except for the UN participant representatives, rejected most of the findings and recommendations and tried to discredit the auditors.

The General Assembly responded by making sweeping reforms and requested the board to review and report on many of the same important governance recommendations that it had rejected (74/263).

A client-averse culture

For too many years, the fund administration’s practices have reflected a client-averse culture. A UN internal audit published in 2017 confirmed the UN participant representatives’ allegations that over a two-year period beginning in 2016, the administration severely underreported the scope and extent of an unprecedented backlog in pension payments.

This year’s report by the Board of Auditors substantiates their concerns that the fund administration’s claim of a “more than 90 per cent” compliance rate to process initial separations within 15 days is based on stopping and restarting the clock when documents are discovered to be missing.

The same report also confirms concerns that the deployment of the head of the fund’s Geneva office (a financial expert) and another chief of finance to nonfinance posts in New York City headquarters was based on false assumptions of underperformance. The auditors discovered the real reason the Geneva office processed fewer cases — it had fewer staff for a similar number of clients. The staff transfers resulted in underservicing beneficiaries from Europe, the Middle East and Africa as well as a loss of institutional financial knowledge and leadership. The former head of the Geneva office has since been involuntarily placed in another UN office while still being on the fund’s payroll.

Participant representatives view this situation and the longstanding matter of the dismantled fund executive office — where two senior personnel were relocated in 2016 to another UN office where both remained on the fund’s payroll until one was transferred recently — as a breach of the fiduciary duty to use pension funds solely for the administration and payment of benefits.

The curious case of the former head of investments

On March 29, as Covid-19 rocked financial markets and investments in the fund took a nosedive (from $71.9 billion on Dec. 31, 2019 to $63 billion on March 31, 2020, a drop of about 10 percent), Guterres’s spokesperson announced Rajkumar’s departure without explanation, saying that the secretary-general was naming Pedro Guazo as his acting representative.

Only three months earlier, Guterres had renewed Rajkumar’s contract for two years, despite allegations by the UN participant representatives of a hostile work culture and risks to the system of checks and balances, a situation that the internal audit largely confirmed.

That the value of market assets has rebounded to $75.2 billion as of Oct. 23 doesn’t belie concerns that Guterres’s apparent inaction in response to anxieties about the investment office and his renewing Rajkumar’s contract could have exposed the fund to further risk in the volatile Covid-19 economic environment.

‘If it ain’t broke. . . .’

Returning to the 2020 external governance study (Mosaic) that revealed variances in standards of professional and ethical conduct, the consultants also found significant differences between that of the UN fund and other pension funds’ best practices in board size; composition and allocation of seats; and the terms, roles, purpose and responsibilities of the board.

The board’s decision to have its governance working group further examine Mosaic’s study and submit a report to its next session are cause for wonder about the prospects for implementing the proposed reforms, given that the working group had earlier produced an anemic report to the General Assembly on many of the same topics and that triggered its request for an external review initially.

Despite the study’s findings of significant variances between the pension fund’s governance and best practices in all the areas it reviewed, a UN retiree representative voiced repeatedly to the board that “if it ain’t broke, don’t fix it.” Chief among his criticisms was that the study exceeded its mandate and that the fund simply had no peer because of its “unique global nature,” both well-worn responses of his group to calls for change.

Representatives of UN retirees are influential members of the board and its committees, and they punch well above their weight as a retiree organization with nonvoting status on the board and that counts a mere one-third of UN retirees among its membership. They led the board’s rejection of the Assembly’s request to consider modalities for UN retirees to directly elect their representatives.

It is the same retiree representative organization that the 2018 comprehensive governance audit cited for conflicts of interest and “the appearance of collusion . . . [with] the Fund secretariat to challenge the authority of the Secretary-General and the General Assembly in governance matters of the Fund. . . .”

Swimming against the tide

On the 33-member tripartite board, composed of elected participant representatives, UN executive heads and governing bodies, the UN participant representatives are often isolated in their positions. They have been targets of intimidation and efforts to prevent some of them from taking their seat on the board. In addition, one person in the group was unlawfully suspended last year.

The representatives have nevertheless consistently pushed for timely benefit payments and a system to alert members that their benefits are about to be forfeited. At the annual (virtual) board meeting in July, they worked with other board members to stop amendments to regulations proposed by the chief executive of pension administration, Rosemarie McClean. The amendments would have curtailed benefit eligibility for widows and children not declared to the UN while the staff member was working.

As noted in the board’s 2020 report, the representatives continue to push back against attempts to increase the fund’s operating costs, to enable the board to remove itself from the jurisdiction of the UN Appeals Tribunal and to prevent fund staff members from running for board seats.

Ominously slow to change

The participant representatives noted in a communiqué to their constituents after the July board meeting that the fund is in a good financial position, “due in part to the unprecedented level of intervention of governments and central banks to maintain the high value of financial markets.”

Although Guazo, the new acting head of investments, said he was committed to addressing the investment audit’s recommendations, the participant representatives remain concerned about the slow rate of implementation.

Symptomatic of the fund’s inability to change its culture and similar to the situation in the pension administration after the departure of the previous head, Sergio Arvizù, the participant representatives note that some senior personnel who had roles in constructing the failed policies — as revealed in the recent investment governance audit — still have their jobs.

Restoring trust

McClean took up her functions as chief executive of pension administration in January. She noted in her presentation to the board meeting in July that “the Fund needed a clear strategic direction and improved trust among its stakeholders.”

Indeed, among the findings of the Mosaic study, it noted “insufficient clarity, transparency and communication at all levels within the governance structure and with stakeholders” and said that “rebuilding trust should be a priority.”

The cumulative message from internal audits and the Mosaic study is that while cosmetic changes are possible, meaningful reform cannot be realized without a radical change in the fund’s culture. But breaking that grip is challenging, particularly when the old guard remains firmly in place and a lack of term limits keeps some board members installed for decades.

As one example of superficial change, Michelle Rockcliffe, a participant representative, cites the fund’s response to the General Assembly’s directive to split the role of chief executive officer into two separate functions. In her view, “the manner in which the separation has been carried out has diminished the role of the secretary of the board, and ensured that the General Assembly’s goal of eliminating inherent conflicts of interest and making that role fully independent of the chief executive of pension administration has been undermined.”

Cutting to the heart of fund culture, the UN participant representatives emphasize that while the General Assembly has asked the board to develop a code of conduct, a number of members appear keen to use it to reduce transparency while leaving conflicts of interest unresolved.

 The General Assembly: more action needed

Audits, studies and Assembly reforms can go only so far when the people responsible for the fund’s oversight and management have neither the ethical culture nor the political will to carry them out.

Ian Richards, a UN participant representative and former president of the Coordinating Committee for International Staff Unions and Associations (CCISUA), told PassBlue: “Staff are really worried about how their pension fund is being administered and have asked us to fix it. They also want it kept within the jurisdiction of the UN tribunal. We’ve done all we can. Now the General Assembly needs to act on the evidence before it. It can’t kick the can down the road.”

The Assembly must decide on which recommendations it will follow from the Mosaic report. That includes acting on its own 30-year-old request for reform and fair and equitable representation on the pension board.

Only then can the fund begin to improve its culture and become the ethical and efficient organization it was always meant to be.

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Loraine Rickard-Martin is a co-founder and chief executive of Compliance and Capacity Skills International, a consulting partnership specializing in international sanctions. She is a former senior political affairs officer in the Security Council Affairs Division of the UN Department of Political Affairs. She was also secretary of the UN Secretary-General’s high-level panel on threats, challenges and change in 2003-2004; a lecturer on UN sanctions at Columbia University’s School of International and Public Affairs; and a member of the UN Board of Inquiry into the death of two members of the UN Group of Experts in the Democratic Republic of the Congo. She is a co-author of “The Evolution of UN Sanctions: From a Tool of Warfare to a Tool of Peace, Security and Human Rights” (Springer, 2017).

2 thoughts on “The $75 Billion UN Pension Fund: Kicking Reforms Down the Road”

  1. + This poor management of th Pension Fund has been going on for too long and I fail to understand why it is impossible to hire competent and honest staff to take charge of the investments !! The situation is totally unacceptable !!! What on earth are the problems which cannot be sorted out. Bad management means those in charge are incapable and should be fired immediately !!! Let the UN staff handle everything and hire some competent staff. This is becomng a never-ending story and we participants are more than just fed-up with these pitiful explanations. I await a sensible reply by return .. cordialement Dorothy Hoffmann Get rid of Antonio Guterres for a start !!!

    Reply

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