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Further Outsourcing of $86 Billion UN Pension Fund Is Paused, and Questions Arise About Russian Investments

Secretary-General António Guterres waits for his next meeting, UN headquarters, March 1, 2022. He has paused further outsourcing of the UN $86 billion UN pension fund amid an outcry by its beneficiaries as problems persist in the fund’s management. MARK GARTEN/UN PHOTO

United Nations Secretary-General António Guterres has paused his plan to further outsource the management of the $86 billion UN pension fund’s assets to Wall Street. The plan to allow an additional 18 percent of the fund’s assets to investment companies would have doubled the amount already being privatized.

Questions also have arisen about the fund’s investments in Russia, given its most recent invasion of Ukraine.

The three-month pause, until Sept. 1, comes after weeks of fierce protest by UN staff unions and a petition signed by more than 13,000 active and retired UN staff members. They say they fear that further outsourcing the UN Joint Staff Pension Fund could lead to its full management by private investors eventually and pose more risks to its sustainability. More than 200,000 beneficiaries depend on the fund’s viability.

In his April 4 letter to Prisca Chaoui, president of the Coordinating Committee for International Staff Unions and Associations (CCISUA), announcing the pause, Guterres repeats assurances that were given by his representative for investments, Pedro Guazo, which have failed so far to mollify the unions’ concerns.

In letters of Feb. 18 and March 24, Chaoui said that investment underperformance, the ostensible reason for additional outsourcing “stems from managerial issues.”

“Circumventing the problem by outsourcing to high-fee, risk-driven private sector intermediaries is not the solution,” she added. She asked Guterres to continue to allow “internal management” of the fund to “reduce risk, eliminate duplicative expenditures and maintain control of our investments.”

Chaoui also noted that in 2021, in requesting a budget increase for 29 new staff members for the fund’s investment office, Guazo submitted the conclusions of a study finding that “managing each portfolio internally makes the Fund  more efficient than its peers that manage externally” and assured the pension board that more staff and “the new asset allocation and benchmarks would help correct the situation” of  “underperformance.”

In a virtual town hall meeting on Feb. 28, Guazo contended that the plan to outsource “up to 65 per cent” (about $16 billion) of the fund’s fixed-income portfolio was temporary but necessary to fill a performance gap. He also said that “the potential asset external managers [are] not  even in Wall Street . . . even if they were on Wall Street . . . the resources are always in our accounts and under our control.”

Moreover, he said, the 2019 “investment policy, clearly stated or states still, that the office of investment management can use external managers for the purpose that the team is doing it.”

In response, Ian Richards, an alternate UN representative to the pension board, said he thought there were “perhaps different interpretations of what the board has authorized in the past.”

In his view, authorizing the use of outside managers had been based on the need to invest in “areas where the fund didn’t have expertise, new areas of investment, particularly as we go into private investments. . . . ” He didn’t think, he said, that the need for expertise was there for “broad fixed income investments.”

The UN staff unions said that a presentation that Guazo made to them on Feb. 22 was ambiguous about how much of the fund would be outsourced (it said up to 75 percent or as low as 25 percent) and “showed that there is no plan to return all our funds to the internal management.”

While Guazo insisted that the plan was based on a “bottom-up” decision, he reportedly hired a consultant to work on the plan in December, while he was also requesting that the General Assembly provide a bigger budget for him to hire more staff. He argued that internal investment management was safer and cheaper.

Guazo, a UN official who succeeded Sudhir Rajkumar in 2020, after an internal governance audit found nontransparency, a toxic work culture and conflicts of interest in the investment office, promised to put things right in the fund.

At a town hall meeting on April 29, 2020, shortly after he started his new job, Guazo said that “the proportion of external investment is very small and there are no plans to expand it.” Yet in October 2021, he was promising to outsource $5 to $7 billion of the private-markets portfolio, which would raise the percentage of externally managed assets to 45 percent.

Michelle Rockcliffe, a former fund staff representative and member of the pension board, said in an interview for this essay that the pace of reforms in the UN investment office has been slow. She noted that Guazo has failed to implement several recommendations from the fixed-income team in April 2020, aimed at correcting underperformance in the portfolio.

One recommendation was to eliminate junk bonds and investments in countries heavily reliant on fossil fuels, such as Russia and Mexico.

As to investments in Russia, Guazo reportedly answered a written question after the February 2022 town hall meeting by repeating a statement in his March 11 announcement, posted on the fund’s website, that he had reduced exposure in emerging markets and “more specifically in the Russian Federation to below 0.3 per cent of the overall portfolio.”

Those  investments — in private equity, fixed income and real estate — were valued at around $783 million at the end of 2019, representing 1.09 percent of total investments, according to the secretary-general’s report on investments.

Since Guazo said that he has reduced investments in Russia to around $250 million (0.3 percent), it is unclear how more than $530 million was decreased and when as well as the current market value of the Russian portfolio. Recent information on this matter is unavailable because the secretary-general’s reports on the fund’s investments are published biennially for the previous year.

Another recommendation from the fund’s fixed-income team was to reconstitute it “to eliminate the risks inherent in ‘teams of 1’ managing billions of dollars.”

Indeed, Toru Shindo, the fund’s chief investment officer, observed at the February 2022 town hall meeting: “One of the most critical issues I observed as CIO is that the portfolio is currently managed by one person team.”

Rockcliffe said that the fixed-income team was created in 2009, after a 2006 report of the General Assembly’s Fifth Committee (which handles UN budgets) described single-portfolio managers as a “huge key-man risk.” The team operated until 2019, she noted, when it was disbanded by Guazo’s predecessor.

The fund’s website indicates that Guazo has also fallen short on promises he made at the April 2020 town hall “to go to the maximum level of transparency on the web page.”

When asked at the February 2022 meeting about the dearth of comparative and historical financial data on the website, Guazo said: “When you’re investing [and] people know what you’re gonna do, you always lose. . . . We have to balance between having a list of investments that probably will not be useful for any[body] of our stakeholders . . . vis-à-vis sacrificing returns.”

The unions’ current unease about outsourcing more of the fund’s assets stems partly from past attempts to do so. In 2007, a similar plan ­to outsource almost 30 percent of its $33 billion assets at the time prompted a UN staff union resolution’s opposing the move. The plan was scuttled by effects of the global economic crisis in 2008.

Another attempt to privatize the fund, in 2014, establishing separate financial and human resources rules and regulations, was abandoned when it met strong resistance from staff unions.

The unions now welcome Guterres’s decision to temporarily stop further outsourcing the fund, and they consider it a ripe time for listening and responding to their concerns.

On April 13, Chaoui wrote to Guterres noting that Guazo had informed her that “under new leadership the fund’s fixed-income portfolio has outperformed the benchmark this year to date,” adding that this “shows the wisdom of properly empowering and trusting the investment officers of our pension fund’s Office of Investment Manager Over Wall Street.”

The three-month reprieve must go beyond bland assurances by Guterres that he will do his utmost to safeguard the fund’s sustainability, in keeping with his fiduciary obligations.

Loraine Rickard-Martin is a co-founder and chief executive of Compliance and Capacity Skills International, a nonprofit firm specializing in global 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).

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Further Outsourcing of $86 Billion UN Pension Fund Is Paused, and Questions Arise About Russian Investments
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Dorothy Hoffmann
Dorothy Hoffmann
3 months ago

Keep Loraine and avoid investments in Russia !! Thank you for all your work on our behalf cordial greetings Dorothy Hoffmann

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