Monday, September 25, 2017

UN Pension Fund: Selection of the RSG for Investments: Open letter to the USG for Management, 25 September 2017

Open letter to Ms. Jan Beagle, United Nations Under-Secretary-General for Management

25 September 2017

Dear Ms. Beagle,

Subject: Selection for the post of Representative of the Secretary-General for Investments

In view of the current selection process for the Fund’s Representative of the Secretary-General for Investments (RSG), it is imperative that you ensure that the selection committee bears the following pertinent information in mind.

As you are aware, investment underperformance – failure to meet the policy benchmark – puts the long-term sustainability of the Fund at risk and is a matter of ongoing concern.  

The issues are documented in the reports of UN governing bodies and include General Assembly resolution 71/625, reports of the Advisory Committee on Administrative and Budgetary Questions (A/72/621), the Board of Auditors for the past two years (A/71/5.Add.16 and A/72/5.Add.16) and the report of the 63rd Pension Board meeting (A/71/9).  In fact, this matter has been of such concern that the Pension Board this year engaged Deloitte Touche to perform an independent third-party review of investments.


Fundamental to the RSG’s performance is that he or she must “Achieve an annualized rate of return which meets or exceeds the policy benchmark and/or a return target equal to a 3.5 per cent real rate of return over a 3 to 5 year period of time.”

From 2014 to June 2017 the real rate of return according to published reports of the Investment Management Division is 2.7 per cent , i.e, failing to  achieve the 3.5 per cent policy benchmark target. The opportunity cost (lost investment income) measured by the gap against the policy benchmark is roughly US$ 965,000,000 or about $1 billion. 

The Board of Auditors report dated December 2016, A/72/5.Add.16 notes that “the Fund had improved its performance in 2016 compared with 2015, although the nominal return was still less than the policy benchmark of 6.9 per cent by 1.71 per cent; the real rate of return was also below the expected long-term real rate of return of 3.5 per cent by 0.4 per cent.”

It is important to consider that the Fund pays benefits in a year of about $2.2 billion. So the level of lost income is about 40 per cent of a year’s benefit payment. It is also important to note that this underperformance is taking place in a favorable market

The investment picture receives a boost if the review is conducted over a five-year period, which apparently has been done for evaluation of the RSG’s performance. The Fund’s real rate of return for the five year period was 5.5 per cent, exceeding the actuarial return goal of 3.5 per cent.  However, five years of data producing a satisfactory result for a performance that preceded the arrival of the RSG in 2014 presents an unrealistic picture. The reality is that investment performance in the past three years – the current RSG’s tenure - has not achieved the required “high-quality results.”

An account of the actual status of underperformance on investments is detailed in the report of the Assets and Liabilities Monitoring to the Pension Board in July 2017:

“5. The Fund achieved a nominal investment return of 5.06% in 2016, underperforming the policy benchmark by 166 basis points, which achieved a return of 6.72%. The ALM Committee recalled that the Fund had underperformed the policy benchmark by 53 basis points in 2014 and obtained an excess return of 10 basis points in 2015. The Committee observed that the underperformance of the Fund’s investments against the investment policy benchmark was greater in 2016 than in previous years, representing an opportunity cost to the Fund in the form of lost investment returns of approximately $1 billion.”

In addition, according to a FAFICS report (Federation of Associations of Former International Civil Servants) dated 9 August 2017, on the 64rd meeting of the Pension Fund, the Assets and Liabilities Monitoring Committee reported to the Pension Board that the independent third-party review of investments conducted by Deloitte Touche this year had observed that the Investment Management Division lacks a) a fully defined and documented long-term investment strategy; b) a functional risk management process: c) formalized portfolio rebalancing policy and procedures; d) a vigorous interaction with the Investment Committee; e) a completed Investment Policy Statement.

In making this important determination for the post of RSG, account must also be taken of information contained in the reports of the UN governing bodies listed above, and letters to the Secretary-General from the Assets and Liabilities Monitoring Committee, indicating that recruitment for senior and other posts in IMD have not been completed in a timely manner. Paragraph 38 of the Board of Auditors report dated 31 December 2016 (a/72/5. Add.6) notes that “that the post of Deputy Director had been vacant since October 2015. Additionally, both posts of Compliance Officer were vacant as at April 2017. . . The vacancies for the post of Deputy Director (Risk and Compliance) and both posts of Compliance Officer would limit risk monitoring and active risk management.”

For much of its 68-year history, the Fund has thrived by dint of judicious management of its assets and capable administration of its liabilities. The past several years of chronic investment performance and unprecedented payment delays have caused great unease among participants and beneficiaries.

A recent public pronouncement by the Chief Executive Officer of the Fund concerning a change by major companies and international organizations such as the World Bank, from the defined benefit model (where the employer bears all risks, as in the case of our Fund) to the defined contribution model (where the employee bears all risks) and persisting reports of ongoing discussions of such a change among the Fund management and some senior members of the Secretariat are further issues of concern.

Now, more than at any other moment in its history, the Fund needs and deserves the highest levels of competence and accountability in its management.

Thank your for your consideration.

Yours sincerely,

Loraine Rickard-Martin
Beneficiary, UNJSPF

c.c. Ms. Maria Luiza Ribeiro Viotti, Chef de Cabinet



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