When
the UN Pension Fund’s former Representative of the Secretary-General for
Investments (RSG), Sudhir Rajkumar, left suddenly at the end of March, the Note
to Correspondents from the Secretary-General’s Spokesperson on 29 March 2020,
said that he had resigned and that the Secretary-General thanked him for his
service.
At
a virtual meeting of the New York UN retiree association, held on 23 June 2020,
the Acting RSG, Pedro Guazo, in response to a question, repeated a quote attributed to the SG's spokesperson in a media article that the RSG had left because of “personal and family reasons”. Guazo also
confirmed that the expected internal governance audit of the Office of
Investment Management (OIM) had been received.
OIM
governance audit
While
up to now, the matter of the situation in the Office of Investment Management (OIM)
was mired in “he said/he and she said” (the former RSG’s responses to
allegations by Fund staff representatives and a group of senior investment
officers), the recently completed audit of governance mechanisms and related
processes in OIM presents a picture of serious shortcomings in governance.
Reading the audit also raises questions about the apparent failure of the Secretary-General’s advisers in taking mitigating action and a possible lack of transparency in reporting to stakeholders on the circumstances surrounding the RSG's sudden departure.
Reading the audit also raises questions about the apparent failure of the Secretary-General’s advisers in taking mitigating action and a possible lack of transparency in reporting to stakeholders on the circumstances surrounding the RSG's sudden departure.
Some
highlights of the audit (see attached Annex for detailed elements)
The
audit notes that the merging of management and oversight functions as a result
of misinterpreting a change in the Secretary-General’s delegation of authority
to his Representatives, meant that the former RSG acted as both “player and
referee” over investment proposals, with the ability to “stifle critical review
…and compromise due diligence, including
risk analysis…” An added paragraph stated that the delegation of
responsibility and authority was “personal” and “may not be further delegated.”
The
merging of the management and oversight functions also weakened checks and
balances and diminished the role of the Investment Committee. The RSG proposed
not to reappoint two long-serving Committee members and nominated four new
members.
According to information not included in the audit, one of the nominees is the subject of media controversy (see 6 July 2020 article in ‘Institutional Investor’ linked in the Annex).
According to information not included in the audit, one of the nominees is the subject of media controversy (see 6 July 2020 article in ‘Institutional Investor’ linked in the Annex).
The
audit observes that given that the Fund, unlike other funds, is not protected
by national laws or justice systems whereby officials with fiduciary
responsibilities may be held personally liable for the actions, an effective
governance structure with segregation of critical roles is essential to avoid
concentration of power and perceived or actual conflict of interests “to assure
the soundness of investment decisions and maintain the confidence and trust of
the Fund’s stakeholders, including the Secretary-General.”
The
Risk and Compliance teams were understaffed and weakened, and the RSG chaired three
key internal decision-making committees where he determined the level of
scrutiny of proposals, sometimes deemed to be inadequate or excessive.
There
are concerns about the legitimacy and appropriateness of a new Fixed Income
benchmark because of the manner in which it was adopted.
Changes
were made to the investment policy statement that deleted the section which
required the Fund to invest in only investment grade bonds.
There
was no clear accountability for investment performance and the audit noted
instances where performance evaluation of staff may not have been fair and
equitable.
Detailed
investment reporting that began in 2011 was removed from the website in 2018
and replaced with broad summary documents that were often outdated. This lack
of up-to-date information was an issue particularly when global markets were
impacted by Covid-19 and Fund participants and beneficiaries were concerned
about the financial health of the Fund and pension benefits.
Three
cases are described in which senior managers of the Fund did not properly
manage the disclosure or recusal process in situations of potential or
perceived conflict of interest.
Whereas
some staff unreservedly supported the senior management’s changes and
proposals, others strongly opposed them. This resulted in divisiveness and a
“toxic” culture among staff.
There
was a “lack of an appropriate tone at the top and the highest ethical standards
of behavior that are expected of officials entrusted with fiduciary
responsibilities”.
Echoes
of the 2018 governance audit
Although
the specifics are different, aspects of the audit are reminiscent of the 2018 governance
audit that dealt with issues on the Pension Administration side of the Fund
(A/73/341), including in the concern expressed by the auditors about the “tone
at the top”.
Turning
to post-audit issues:
The
audit’s recommendations
The
Secretary-General has already accepted all recommendations of the audit and
initiated action to implement them in coordination with the OIM.
The
Fund is financially sound
The
Fund is weathering the Covid-19 storm and remains fully funded. Whereas December
2019 saw a record high in the value of the portfolio of $72 billion, the market
value of assets fell to $63.18 billion at the end of March. The market has
since bounced back, and the market value of assets as of 30 June 2020 is $70.18
billion.
The
Pension Board’s 2020 annual meeting
The
Pension Board will hold its annual meeting virtually because of Covid-19 this
week, from 16 to 24 July 2020, with buttressed confidentiality rules and its
usual non-transparent and cumbersome procedures whereby it takes decisions by
consensus of some 100 members and alternates.
Given
its record on General Assembly reforms, it is fortunate that the Pension Board
has limited oversight of the Fund’s investments and will not have the
opportunity to drag its feet on this audit’s proposed reforms as it has been
able to do on reforms contained in the 2018 governance audit of the Board and
Pension Administration management.
The
independent external governance review
At
the end of 2018, the General Assembly asked the Board to review recommendations
on proposed governance reforms contained in the 2018 internal governance audit.
Last year, the Assembly merely noted, but did not accept, the Board’s Governance
Working Group’s anemic report.
Instead,
the Assembly requested that an independent external entity be engaged to
conduct a comprehensive and objective analysis of issues including: size and
composition of the Pension Board, rotation of seats, terms of reference for the
Chair and all members; conflict of interest; and self-evaluation.
Mosaic
Governance Advisors was selected through the UN procurement process as
stipulated by the Assembly, and is expected to submit its report to the Board
shortly.
The
issue of direct election by retirees of their representatives to the Board has
been quashed by the Board, by an effort led by the purported retiree
representative body, FAFICS, (the Federation of Associations of Former
International Civil Servants), with a membership of one-quarter of UN retirees )
and which was cited by the 2018 governance audit for its lack of transparency
and democracy in its operations.
Attempt
to curtail survivor benefits
It
is reported that members of the Pension Administration’s aggrieved old guard are
trying to get the Chief Executive of Pension Administration (CEPA), Rosemarie
McClean, to propose changes to the Fund’s Regulations that would adversely
affect survivor benefits, including orphans and widows.
The
UN Participant Representatives to the Board (who represent 85,000 active staff)
are expected to request withdrawal of these proposals on the grounds that the
role of policymaking and oversight belongs to the Board, and not to the Pension
Administration.
FAFICS
– business as usual
Not
surprisingly, FAFICS has declined to hold its annual meeting with the heads of its
member associations worldwide before the Pension Board meeting next week,
opting instead to hold a physical meeting in the Fall, all the better for
backroom deal-making.
At the
23 June 2020 annual meeting of the New York retiree organization (AFICS),
Warren Sach, long-servingmember of the FAFICS delegation to the Pension Board, lamented
what he described as a “creeping gap” between the General Assembly and the
Pension Board.
He
described “one feature” as “Fifth Committee members who are designated to be
members of the Pension Board … and after [in some cases 20 years of
reappointments]…. they’ve more or less forgotten what they were doing in the
Fifth Committee …”.
There
is a much higher likelihood, given the Pension Board’s abysmal oversight
performance over the last several years, as documented in the 2018 internal
governance audit, its rejection of most of the audit’s recommendations, its
failed attempt to discredit the internal auditors, and its lackluster report of
the Governance Working Group, causing the Assembly to request a review of the
same governance issues by an independent external body, that Fifth Committee members have little
confidence in the Board’s positions and recommendations.
In
fact, Sach and his cohorts in the FAFICS leadership appear to have long forgotten
the meaning of “represent” in FAFICS’ purpose.
Where were the Secretary-General’s advisers?
One
of the questions raised by the OIM governance audit relates to the what
mitigating action, if any, the Secretary-General’s advisers were taking while
the events in OIM were unfolding. While the UN Participant Representatives to
the Board were raising the alarm in letters to the Secretary-General, the RSG’s
contract was renewed last October for a second two-year term.
The audit notes that “concerns relating to the actions or decisions of the Representative were often escalated to the Secretary-General, thereby undermining confidence in the Representative’s ability to effectively manage the Fund’s investments.”
Many stakeholders have been wondering about a possible lack of transparency in the actual circumstances surrounding the sudden departure of the RSG, and the audit's findings will exacerbate those concerns.
Debt
of gratitude
The
Fund Staff Representatives, who are also UN Participant Representatives, were
instrumental in bringing forward issues of mismanagement in the Pension
Administration. They suffered retaliation from the Board as a result, including
physical threats and intimidation that escalated at last year’s annual meeting
in Nairobi.
They
were also instrumental in bringing issues in OIM to the forefront. For obvious
reasons, Staff Union representatives and UN Participant Representatives to the
Board, to whom stakeholders owe a debt of gratitude, cannot continue to bear
the brunt of ensuring our Fund’s continued health.
The Secretary-General must do a clean sweep
In
the past five years, the OIM has had three heads (including interim heads) and the
Pension Administration has had four.
Perhaps
the frequency of changes at the top has to do with the reality that such
changes are often insufficient to ensure a transformation in culture. The UN
doesn’t do a good job of cleaning house and often the key players are left in
place who continue to perpetrate dysfunctional attitudes and approaches.
It
was heartening to hear McClean (CEPA) acknowledge at the recent virtual meeting
of the NY retiree organization on 23 June, that transparency is important for
trust and that that was not always the case in the past.
Still,
if she doesn’t have support from an effectively functioning Board, and a clean sweep
of the aggrieved old-guard in the Fund Secretariat, does not occur, her job
will be that much harder.
Similarly,
unless the Secretary-General makes a clean sweep of those responsible for the
dysfunctional culture in the OIM, implementation of the audit’s recommendations
may remain on paper as entrenched attitudes and approaches are difficult to dislodge.
Otherwise,
it’s only a matter of time before the Fund can no longer withstand what seems
to be a regular onslaught of threats and actual shocks to its health and
sustainability.
Annex
– Elements of the OIM Governance Audit
Change
in the delegation of authority, paras. 1-2
Weakening
of checks and balances, paras. 3-5
Diminished
role of the Investment Committee, paras. 6-7
Changes
in the membership of the Investment Committee, para. 8
Weakening
risk and compliance, paras. 9-11
Reconstituting
the Executive Office – still pending, para. 12
Stacking
internal committees, paras. 13-16
Strategy
setting and implementation, paras. 17-20
Changes
to the investment policy statement, paras. 21-22
Business
continuity is working, para.23
Performance
management and accountability, paras. 24-26
Transparency
in investment reporting, paras. 27-28
Managing
conflict of interest situations, para. 29
Culture
and ethical values, paras. 30-31
The
audit’s recommendations, para. 32
Change
in the delegation of authority
1. At the core of the issue, is a change made
in 2013, while the RSG function was still part-time, to the delegation of
authority from the Secretary-General to his then part-time RSG. The change
stated that the delegation of responsibility and authority was “personal” and
“may not be further delegated.”
2. The audit makes clear that the change was
meant to apply only to broad and strategic decision-making. However, subsequent
full-time Representatives interpreted it as granting them sole authority in
decision-making on investment transactions. The former RSG took it further than
did his predecessor, in effect, becoming both “player and referee” on
investments.
Weakening
of checks and balances
3. The audit notes that the resulting merger
of investment oversight with investment management had “profound implications”
for investment governance, weakened checks and balances and opened the door to
actual or perceived conflict of interest.
4. It also states that while other pension
funds “are governed by national laws and justice systems, whereby the officials
who have fiduciary responsibilities may be held personally liable for their
actions”, no such legal safeguards exist “to protect the interests of the Fund’s
stakeholders.”
5. Therefore, an effective governance
structure with segregation of critical roles is essential to avoid
concentration of power and perceived or actual conflict of interest “to assure
the soundness of investment decisions and maintain the confidence and trust of
the Fund’s stakeholders, including the Secretary-General.”
Diminished
role of the Investment Committee
6. The merging of investment oversight with
investment management also served to diminish the role of the Investment
Committee, with which the Representative maintained an appearance of
consultation while controlling its agenda and records of meetings and access of
investment officers to its meetings.
7. Considering that there’s no fiduciary
board or committee overseeing the Representative and the OIM, the audit states,
advice from the “highly respected experts in the investment industry” on the
Investment Committee ”should not only strengthen the Fund’s investment policy
and strategy and align them with industry best practices, but also provide an
additional layer of assurance to the Fund’s stakeholders.”
Changes
in the membership of the Investment Committee
8. In 2019, in a move that had not happened in
15 years, the RSG proposed not to reappoint two long-serving Committee members,
and nominated four new members to the Committee.
According to information not included in the audit, one of the nominees is the subject of media controversy as per this 6 July 2020 ‘Institutional Investor’ article :
According to information not included in the audit, one of the nominees is the subject of media controversy as per this 6 July 2020 ‘Institutional Investor’ article :
Weakening
risk and compliance
9. The audit notes that In an environment where
“staff in general were reluctant to express dissenting views to the
Representative”, and where the independence and effectiveness of the Risk team
was already inadequate, the team, which had 10 authorized posts, was operating
with three temporary staff at the P4 and P3 levels, who “cannot reasonably be
expected to challenge the instructions or views of senior management.”
10. Similarly, several posts remained unfilled
on the Compliance team, and its functions were performed by two G-7 staff
members for a year after the P5 Compliance officer separated in April 2017, and
until the post of P3 Compliance officer was filled a year later.
11. The RSG cancelled the recruitment of the P4
Compliance officer in June 2018 and redeployed the post to his office for a
temporary Special Assistant, “without disclosing this redeployment in the
subsequent budgets.”
Reconstitution
of the Executive Office – still pending
12. The Assembly has requested in its two
latest resolutions A/73/274 and A/74/263) that the Executive Office, abolished
by the former CEO, be reconstituted for providing administrative services to
both entities of the Fund, including resolving the situation of the P4 and P5
posts which had been loaned to the UN Secretariat. At the time of the audit, it had not
happened. Instead, the OIM set up its own HR functions with a temporary P4
Administrative Officer and a G-6 Administrative Assistant.
Stacking
internal committees
13. In 2017 and 2018, the RSG established seven
internal committees to coordinate and formalize decision-making. He chaired
three key committees, invited up to 25 non-members to attend meetings and
sought a majority view in making decisions, allowing the presence of the larger
group to counterweigh the views of the core committee members.
14. The audit notes that given the RSG’s role as
the sole individual exercising the delegated authority on investments, the
limiting of the committees’ role is a “unique arrangement as compared to the
industry standard where decision-making is vested in a committee or board,
instead of a single individual.”
15. In addition, the RSG as chair of the
committees, determined the level of scrutiny of proposals “which [was] sometimes
viewed by some members as either inadequate or excessive.”
16. The audit states that staff who dissented
on investment proposals initiated by the RSG would find their own proposals
rejected, on the basis that the measuring tool was inappropriate, while the
same tool had been used to measure proposals by the RSG.
Strategy
setting and implementation
17. The audit states that the Fund’s 2019 Asset-Liability
Management (ALM) study, conducted every four years to project the long-term
solvency of the Fund and recommend the long-term strategic asset allocation,
contained certain improvements over past ALM studies and had areas that could
be further improved.
18. While the OIM had done a rigorous job in
setting the capital market assumptions for the main asset classes, the review process
was less broad and rigorous for some sub-asset classes.
19. The OIM lacked a strategy to fill capacity
gaps in order to implement the investment strategy in a cost-effective manner.
20. The manner in which the Fund had adopted a
new Fixed Income benchmark raises concerns about its legitimacy and
appropriateness, specifically the use of an entity (Entity A) which manages the
$1.9 billion exchange trade fund and that had done the project pro bono at the
same time that it had submitted a proposal for a procurement exercise, for
which it was selected.
Changes
to the investment policy statement
21. Although the holding of non-investment
grade bonds was a violation of the Fund’s investment policy, the Fund had held
about $9 million in such bonds -- B and BB ratings, through the Emerging Market
Debt fund, from 2001 to March 2019. After reviewing the risks and benefits and
deciding to maintain the bonds, the RSG deleted the relevant section from the
investment policy statement which required the Fund to invest in only
investment grade bonds, thus “expos[ing]
the Fund to the risk that non-investment grade bonds may be considered to be
acceptable as a matter of policy.”
22. While the investment policy statement
included the allocations for the top-level asset classes, some sub-asset
classes such as Private Debt and Hedge Funds that tend to be more controversial
and lack transparency were not included, making it more important that
stakeholders be made fully aware of the allocations for such sub-asset classes.
Business
continuity is working
23. The audit notes that OIM successfully
conducted two business continuity planning tests in early 2020 and the existing
information and communications technology network and infrastructure were found
to be adequate to support the Office’s operations.
Performance
management and accountability
24. The audit noted inconsistencies in the
periods selected to measure the Representatives’ individual performance (a “3-5
year period” in 2016, and “the 15 year period ending 2019” in 2019), and noted
that for ensuring accountability, the period selected for measurement should
remain consistent, including both short and long terms in relative and real
terms, and for periods corresponding to the tenure of the Representative.
25. There was no clear accountability for
investment performance and the OIM could explore an incentive scheme for its
staff, although previous attempts had not been unsuccessful. In order to be
fair and balanced, the performance evaluation process should clearly link staff
members’ investment performance and their performance goals.
Transparency
in investment reporting
27. The audit observes that whereas
transparency is a key feature of good governance and accountability, detailed
investment reporting that began in 2011 was removed from the website in 2018
and replaced with broad summary documents that were often several months old.
28. While global markets were severely impacted
by Covid-19 in 2020, and there was widespread concern among the Fund’s
stakeholders about the impact on the financial health of the Fund and pension benefits,
OIM did not provide an update on the Fund’s investments. Since April 2020, OIM
has included more detailed investment information on its website.
Managing
conflict of interest situations
29. The audit describes three cases in which
senior managers of the Fund did not properly manage the disclosure or recusal
process in situations of potential or perceived conflict of interest and notes that
such actions had the potential to “undermine the Fund’s ability to make sound
investment decisions [and] potentially damage the Organization’s reputation.”
Culture
and ethical values
30. The auditors observed and received feedback
from staff that indicated “divisiveness among staff and a culture that many
staff described as ‘toxic’”. Some staff unreservedly supported the senior
management’s changes and investment proposals, others did not. There was
perceived micro-management of certain senior managers and a perceived
intolerant and retaliatory attitude and approach to dissenting views and criticism.
31. The audit noted instances where performance
evaluation of staff may not have been fair and equitable, such as the use of
audit findings from a period prior to the staff member’s appointment date; use
of a staff member’s dissenting views as a negative factor; sidelining reporting
officers; and using alleging underperformance from previous years as an issue
in a later performance cycle.
The
audit’s recommendations
32. The remedial actions that will be taken
include a new organizational structure and revised delegation of authority to
reflect the new segregation of duties;
strengthening the independence of the Investment Committee;
strengthening the operational independence and effectiveness of the Risk and Compliance
group; enhancing the effectiveness of internal committees including their professionalism
and transparency; developing an improved ALM study and a strategy to fill
capacity gaps; reassessing the appropriateness of the new Fixed Income
benchmark and clarifying steps for changing policy benchmarks; enhancing
transparency in the investment policy statement; ensuring consistency in the
periods selected for performance assessment of the RSG; developing and implementing
detailed disclosure and recusal procedures; and developing and implementing a
culture transformation programme to cultivate a harmonious, high-performing and
ethical culture in the OIM.
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