by Lowell Flanders*
The Mosaic Report – Comprehensive Review of UNJSPF Governance
The Mosaic review of the governance structures of the UN Joint Staff Pension Fund was commissioned pursuant to General Assembly resolution 74/263 (2019). Mosaic Governance Advisors, LLC (“Mosaic”) an independent external entity with expertise in pension fund governance matters, conducted a comprehensive and objective analysis of the governance of the United Nations Joint Pension Staff Fund (“UNJSPF” or the "Pension Fund") from June 19, 2020 to July 13,2020.
Review objectives
The objective of the analysis was to compare UNJSPF to best practices applied in international public pension organizations, and make recommendations regarding:
–Governance Structure of the United Nations Joint Pension Staff Board (“UNJSPB” or “Pension Board”) and its Committees.
–Pension Board role, responsibilities, and practices that are relevant for the proper governance of the Fund.
–A strategy to transition UNJSPF governance to align with best practices.
Not measuring up
The most shocking conclusion of the report is the significant “variance between UNJSPF governance practices and pension fund governance best practices in all the areas we reviewed.” To put it in plain language: our Pension Board just doesn’t measure up to what is considered best practice among other Pension Boards.
Unwieldy Board sessions
Another surprising revelation has to do with the size of the Board with “attendance at UNJSPF Board sessions in excess of 100 people.” This included: (a) Board members with voting rights (33); (b) Alternates (29); (c) Representatives of the member organization's Staff Pension Committees (25); (d) Non-voting representatives (4) and alternates (2) of the Federation of Associations of Former International Civil Servants ("FAFICS"). This makes Board sessions not only unwieldy but also distorting because “the Board rarely votes and instead relies on a consensus-based approach which takes into consideration the views of non-voting Board members, alternates, and others in attendance.” It’s a kind of helter-skelter approach to decision-making because whoever happens to be there gets included in the consensus. In most best practice jurisdictions, only those Board members with voting rights get to make the decisions.
Mosaic concluded: “The Board should: (a) seek changes to the Regulation to create a smaller, more nimble Board; (b) strive for consensus, but adhere to the Rules which specify that a vote be taken by a majority of the Board members present; and (c) limit the use of alternates and non-voting members to strengthen Board accountability and align fiduciary decision-making to those with a Board seat.”
Fair and equitable vs rotational representation
Until now, the composition of the Pension Board has been based on the principle of “fair and equitable representation” of the different constituent groups, such as Governing bodies, member organizations and staff participant representatives from different member organizations. As the Fund grew with new participants and more member organizations, including retirees, it became more difficult to maintain a strict formula to satisfy the principle of "fair and equitable," and the concept of rotational representation between different groups was introduced to address the situation. How to best organize this rotation in a fair way became an ongoing issue for the Board.
What is a fiduciary framework?
Mosaic suggested a different approach. “The principle of 'fair and equitable' is achieved by other pension fund organizations through the application of a modern fiduciary framework, which requires all board members to act in the best interests of all participants, retirees, and beneficiaries, even though they may be servicing hundreds of employers.”
Mahatma Gandhi was once asked what he thought of Western Civilization. He replied, “I think it would be a good idea.” The Mosaic Report’s emphasis on “fiduciary responsibility,” falls in the same category. It seems like a good idea.
But what does “fiduciary responsibility” really mean and how is it achieved?
Mosaic found “divergent and conflicting views about the Pension Fund's legal/organizing status,” and this lack of clarity led to confusion about the Board’s fiduciary responsibilities. The regulations of the Pension Fund do not “expressly state that the Pension Board and its members are fiduciaries and do not explicitly use the term "trust.”
We do know however that the term “fiduciary” is specifically attached to the Secretary-General’s responsibility for investing Fund assets. Staff have, in fact, appealed to the SG’s fiduciary responsibility in the past when issues with the Fund have arisen. It is a bit surprising that the Pension Board itself has never considered it had a fiduciary responsibility for the operations of the Fund.
Definition of fiduciary
“Fiduciary (n) from the Latin fiducia, meaning ‘trust,’ a person (or a business like a bank or stock broker) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty. The most common is a trustee of a trust, but fiduciaries can include business advisers, attorneys, guardians, administrators of estates, real estate agents, bankers, stock brokers, title companies, or anyone who undertakes to assist someone who places complete confidence and trust in that person or company. Characteristically, the fiduciary has greater knowledge and expertise about the matters being handled. A fiduciary must avoid "self-dealing" or "conflicts of interests" in which the potential benefit to the fiduciary is in conflict with what is best for the person or persons who are the beneficiary of his/her actions.
According to Mosaic’s definition, best practice with regard to fiduciary standards and responsibility, includes the following elements: (1) undivided loyalty to the fund beneficiaries;
(2) the exercise of care, skill, prudence, and diligence appropriate to the prevailing circumstances; (3) the duty to act in accordance with plan documents governing fund performance; (4) the duty to avoid unreasonable favoritism toward one beneficiary group over another; (5) the duty to limit fund expenses to amounts that are reasonable and appropriate; (6) the delegation of duties, when appropriate, to prudently select, instruct, and monitor agents; and (7) the duty to refrain from prohibited or conflicted actions.
The governing laws and regulations of best practice pension organizations: (1) Identifies those who are fiduciaries; (2) Identifies the duties of fiduciaries; (3) Defines the fiduciary standard to which decision-makers will be held accountable, and (4 Expressly provides that the assets of the plan will be held in trust.
Representational vs fiduciary mindset
Mosaic noted that the majority of Board members, alternates, and representatives demonstrated a representation-focused mindset rather than a fiduciary mindset. Board members, alternates, and representatives lacked clarity “on applicable fiduciary standards and responsibilities.” It therefore recommended that the Pension Board: (a) seek changes to the Regulation to clarify its role as a fiduciary to the Fund, and expressly state the duties and standards to which fiduciaries will be held accountable; and (b) provide appropriate fiduciary training to Pension Board members, alternates, and representatives, upon initial induction to Board service and periodically thereafter.
How to monitor and enforce fiduciary responsibility
But the issue becomes how to monitor and enforce fiduciary responsibility, if either individual members, or the Board, itself, fails to uphold this standard. As the Mosaic advisers report, “The Fund currently lacks a comprehensive Board-approved policy that clearly articulates the standards for professional and ethical conduct expected of Board members and other fiduciaries participating in Board decision-making.” Although the Board does implement a self-evaluation process that asks members to disclose “potential or actual conflicts of interest, the current mechanism to implement ethical and code of conduct disclosures and monitor and enforce compliance is limited in scope and not viewed by the Board as effective.”
Other than through self-evaluation, how is the Pension Board held to a fiduciary standard? To whom would a pension beneficiary file a claim against actions of the Board that were believed to be a violation of its fiduciary responsibility. Even in member countries, legal standards and practices with respect to upholding fiduciary responsibility vary. Different jurisdictions regard fiduciary duties in different ways. Canadian law, for example, has developed a more expansive view of fiduciary obligation than American law, while Australian law and British law have developed more conservative approaches than either the United States or Canada. In Australia, there is no comprehensive list of criteria by which to determine a fiduciary relationship. Courts have so far refused to define the concept of a fiduciary, instead preferring to develop the law on a case-by-case basis and by way of analogy.
Adopting a culture of integrity and ethical values
The Mosaic Report suggests that a culture of integrity and ethical values includes elements such as: a comprehensive board-approved policy, regular training, routine required reporting and disclosure, board monitoring, and prompt enforcement of infractions. But how would enforcement work in the case of the Board? Unless it adopts a method of investigation and adjudication, expecting members to self-report cases where they have deviated from their responsibilities seems unrealistic.
Can the Board change its culture and mindset?
In the absence of any meaningful mechanisms for monitoring, investigation and enforcement, fiduciary responsibility seems more like a state of mind, more of a personal commitment to put the interests of the participants and beneficiaries above all other considerations. It’s like an oath of loyalty – only your own personal sense of honor causes you to abide by it.
The important question is how do members of the Board transition from a representational mindset to a fiduciary mindset? It means shifting focus from your constituent groups, leaving them behind, to focus exclusively on the welfare of all participants and beneficiaries of the Fund. This may prove difficult for many Board members, particularly for the government representatives who operate on the basis of instructions from their governments. How could they ever really adopt a fiduciary approach that puts beneficiaries first, if this conflicts with accountability to their governments?
To work towards a fiduciary framework, Mosaic recommended the Board should: (a) ensure timely completion of the code of conduct as developed by the Governance Working Group; (b) develop a comprehensive policy in accordance with best practice elements; (c) ensure proper resourcing of the ethics and compliance program to effectively support the policy; and (d) subject Board members to the same financial disclosure process as Pension Fund staff.
Transition Board
Mosaic has proposed a complete overhaul of the current Pension Board structure resulting in a smaller board with an exclusively fiduciary focus. This would be accomplished through the establishment of a Transition Board that would serve for two years and have as its main purpose implementing the recommendations of the Mosaic report. (For more details about the structure of the Transitional Board, see the report itself, Annex XIV to the Pension Board report, A/75/9, link below, pp 239 to 288.)
Where good ideas go to die
The next step is for the General Assembly to pronounce itself on the Mosaic Report. The most likely scenario is that the GA will refer to the Report back to the Pension Board for its comments and actions, “as appropriate.” And as someone suggested, the Pension Board is the place where good ideas go to die. To take only one example. The OIOS in its report (UN Office of Internal Oversight Services, OIOS, A/73/341, September 2018) proposed that beneficiaries (retirees) should be allotted an appropriate number of seats on the Board, with voting rights, “directly elected through a transparent and democratic process similar to that for participant (staff) representatives so that the elected individuals are accountable to beneficiaries and fully represent their interests on the Board.”
This idea was sent to the Pension Board for study, which referred it to its Governance Working Group. There, it died a quiet death leaving FAFICS as the only claimant to represent all retirees, even though, according to OIOS, they represent only, 18,500 beneficiaries (approximately 25 per cent) of a total beneficiary population of 74,788 as at 31 December 2016.”
Kicking the ball down the road
Like the OIOS report before it, Mosaic Advisers have made useful and concrete proposals for reform – for bringing UN Pension Board practice in line with best practices in other jurisdictions. Change is always hard and changing practices and structures that have been in place for years will be particularly hard for this Board, which has grown comfortable with the way things are and has proven adept at “kicking the ball down the road.” Changing from a representational mindset to a fiduciary mindset will be even harder because each of the representational groups (administrations, staff participants and FAFICS) are accustomed to defending what they see as their particular interests. And for government representatives, many see themselves as only accountable to their governments.
In sum
Given the importance of the Fund’s health and sustainability, and the efficiency of Board operations, a system of more frequent internal audits of Board activities should be put in place to provide the basis for building a culture of fiduciary responsibility. Also critical, will be Mosaic’s recommendation for the Board to: a) ensure timely completion of the code of conduct developed by the Governance Working Group; b) develop a comprehensive policy in accordance with best practice elements; c) ensure proper resourcing of the ethics and compliance program to effectively support the policy; and d) subject Board members to the same financial disclosure process as Pension Fund staff.”
*Lowell Flanders joined the UN in 1970 and served in various capacities until his retirement in 2002. He served with the UN Relief Operation in Bangladesh, as Assistant Resident Representative with UNDP in Venezuela and with the Commission on Sustainable Development. He was active in staff affairs as President of the UN Staff Union for two terms and is now a member of the AFICS/NY Board focusing on pension issues.
PLEASE NOTE: The views expressed in this article are entirely my own and in no way reflect the views of the AFICS/NY Board of which I am a member.
https://documents-dds-ny.un.org/doc/UNDOC/GEN/N20/221/23/PDF/N2022123.pdf?OpenElement
No comments:
Post a Comment