Long Overdue: A New Boss at the UN Pension Fund, and a Reformed Board
Last Month, Secretary-General António Guterres appointed Sudhir Rajkumar of India to succeed Carol Boykin as his representative for investments of the $61.5 billion fund, but was it enough to address the serious problems at the joint staff pension fund.
An important change was made to the United Nations pension fund last month, when Secretary-General António Guterres announced he was appointing Sudhir Rajkumar of India to succeed Carol Boykin as his representative for investments of the $61.5 billion fund.
Guterres needs to make another major change, however, to address serious problems at the joint staff pension fund. Two recent UN internal audits detail irregularities in procurement and contracts in the fund’s secretariat, headed by Sergio Arvizu, the chief executive officer. Many fund observers inside and outside the UN consider these new developments not only more indication that Arvizu must go, but also that the pension board needs to improve its oversight and requires structural reform.
Amid reports in the last two years by UN governing bodies of the fund’s chronic investment underperformance, billions of dollars in foreign-exchange losses and shaky compliance and risk management worsened by prolonged job vacancies in these key functions, Boykin’s job was advertised in July and her three-year contract extended to the end of the year.
According to Guterres’s announcement, Rajkumar, who was most recently head of the global pension advisory program at the World Bank Treasury, brings 28 years of global investment experience to his new position. Some pension-fund observers who discern more bureaucracy rather than investments experience in his background are nevertheless cautiously optimistic.
The two new UN internal audits, completed in October by the UN Office of Internal Oversight Services (OIOS), reveal disturbing findings about lax controls and management on the secretariat side as Arvizu’s five-year contract ends in December. At its annual meeting in July, the dysfunctional and deeply divided pension board pushed through a recommendation for an additional — but final — three-year contract for Arvizu, albeit with special oversight measures.
UN participant representatives to the board sent a letter to Guterres on Aug. 28 saying that the compromise was made under duress to avoid a divisive vote. They requested that Guterres, who has the final say on the recommendation, not reappoint him.
The UN internal audits reiterate the findings of serious managerial deficiencies detailed in a February 2016 internal audit (2017/02) of an unprecedented backlog in pension payments that has roiled the fund since a new IT system was rolled out in 2015. The auditon the IT implementation sheds more light on the flawed managerial decisions behind the payment backlog that caused beneficiaries to wait for months and some for more than a year to receive payment.
Major glitches in the new IT system
The audit finds that when the fund decided to go live with the IT system in August 2015, there were several incomplete and untested elements of the original contract with the vendor. Nevertheless, the fund signed acceptance certificates in November 2015 to pay the vendor, indicating that the software was performing according to contractual specifications and reported to the pension board that all components were interacting as expected. It then outsourced some of the major undelivered functions for an additional $4.7 million in one-time and annual recurring costs.
The audit directly contradicts statements made by Arvizu to the pension board in 2016 and 2017, when he reported that the system was working successfully. It also contradicts a largely positive report from July 2016 by PriceWaterhouseCoopers (PWC) on IT implementation and other issues, to which Arvizu wrote an introduction endorsing the report and its recommendations, presenting it to the pension board in 2016.
The OIOS internal audit found that project costs of the new IT system have more than doubled, from $16.7 million with a completion date of 2014 to $34.5 million plus $3.5 million of annual recurring costs and a new expiration date of 2020. Further, the extra costs and extended completion date were largely needed to cover the incomplete and untested elements of the original contract, with many elements rated as critically or highly important to the proper functioning of the system.
The audit notes that while the fund reported to the board and to the UN General Assembly recurring annual savings of $2.95 million, the actual savings were $1.28 million, taking into account the cost of all components of the project.
Among the audit’s findings are that weaknesses in the system have increased manual processing; the system and its infrastructure may be susceptible to security breaches; and a majority of top-priority benefit types (survivor, disability and reinstatement benefits) were not included in testing.
Moreover, the average number of monthly processed cases (689) was below that of the previous IT system (783). Even with a boost to the new system from a $1.3 million task force set up to defray the backlog, the monthly processing average is 807 cases a month, and, as the UN participant representatives noted in their Aug. 28 letter to Secretary-General Guterres, thousands of survivors, including widows, orphans and retirees, remain unpaid.
Yet according to the audit, some of its recommendations remain unaccepted by the fund, whose position is that the project is closed, although several components of the original project are not done. The audit also notes that the fund has declared its intent to procure further services to perform a security assessment and measure user experience, notwithstanding pararaph 29 of General Assembly resolution 71/265 exhorting the fund to use internal capacities and avoid hiring consultants. Recommendations that are unaccepted by the fund, the audit notes, “may be reported to the General Assembly indicating management’s acceptance of residual risks.”
More problems: procurement, consultancies and illegal actions
The second audit identifies disturbing deficiencies in procurement and contract management in the fund’s secretariat, recalling concerns in recent years about Arvizu’s attempts to change the financial rules on procurement. The audit found that contractual services were the largest segment of nonstaff costs (63.2 percent) during the 2014–2015 biennium.
A major finding is that from April 14, 2016 to June 30, 2017, the fund spent $2.2 million on a contract with a vendor, reportedly PWC again, for accounting consultancy services. Of the total amount, only $497,815, or 21.8 percent, was for services within the scope of the contract.
The remaining 78.2 percent of the work was related to nonaccounting services outside the contract, yet the work was “awarded, certified, and paid,” according to the audit, including $495,000 not listed in the formal proposal and resulting from “top-heavy billing of hours.”
Recently, two pension-fund staff members, elected as UN participant representatives to the board, were denied their seats because of a legal action initiated by the fund, which claimed conflict of interest. They won their case last month in the UN Administrative Tribunal, which ruled that the attempt to block their participation was illegal. The most recent audits raise the question as to whether Arvizu felt he needed to break the rules to keep the two representatives off the board because they knew too much about the inner workings of the fund’s secretariat.
It is increasingly evident that the fund’s leadership is part of a larger problem of a lack of oversight, transparency and democratic practices by the board. Both the former and current board chairs of the fund have occasionally moved to silence the UN staff associations and the UN participant representatives to the board and supported the move to block elected representatives from taking their seats.
Most recently, the chair of the board, Annick Van Houtte, in a Sept. 13, 2017 letter, berated the UN participant representatives for writing to Guterres to request that he not reappoint Arvizu. The secretary-general, Van Houtte said, has no “discretionary authority” over reappointment of the fund’s chief executive but “merely performs administrative actions related to the Board’s recommendation.”
In two communications to the UN administration (July 26 and Aug. 10, 2017) responding to messages to UN staff sent by the staff associations and participant representatives, Van Houtte requested “direct and urgent intervention . . . to prevent the use of the UN IT infrastructure and systems” and “the premises of the UN” to “disseminate lies about the Pension Board or the Fund.” The participant representatives say they broadcast the messages to report on their activities to those who voted for them.
The 33-member board’s internal divisions, size and infrequent meetings hinder oversight and supervision of the fund. Further, the board’s structure of 12 UN members for two-thirds of participants and 21 agency members for one-third of participants is unbalanced and unrepresentative. In its current form, the structure exacerbates the board’s split into UN and non-UN groupings and its dysfunctional decision-making.
The board’s recent failure to act on the unprecedented rejection of the 2018 actuarial valuation (estimating future liabilities) by the UN Board of Auditors — based on unreliable data provided by Arvizu and the board’s tacit acceptance of the fund’s secretariat to use the previous valuation of 2013 — is further evidence of its failure to exercise its oversight role.
Since taking office, Guterres has stressed the importance of accountability and transparency — a spirit of integrity — throughout the UN. Virtually all the issues of managerial deficiencies raised by fund whistleblowers and staff associations over the last several years have been borne out in reports of UN governing bodies, in internal audit reports and in the General Assembly resolution.
The report on the status of the new IT system shows clearly that although Arvizu reported to the board that the system was ready before its launching, he also knew that many critical elements, including benefits to survivors, were not. This act is a serious breach of the highest standards of competence and integrity of UN staff, as enshrined in the UN Charter. The findings of both audits also clearly indicate the deleterious effects of mismanagement combined with lax oversight.
Secretary-General Guterres must take action now within the fund and its oversight body to safeguard its future.