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For debate in the Standing Committee see Rule 47
Pour débat à la Commission permanente – Voir article 47 du Règlement
Doc. 8222
5 October 1998
Situation of the pension scheme for Council of Europe staff
Report
Committee on the Budget and the Intergovernmental Work Programme
Rapporteur: Lord Ponsonby, United Kingdom, Socialist Group
Summary
Pension system reform is at the forefront of policy discussions and changes in several countries and international organisations.
Given the serious difficulties experienced by the current Council of Europe pension system, the Parliamentary Assembly, through its Committee on the budget and the intergovernmental work programme, has taken the initiative to prepare a report aiming at evaluating the implications of substituting the Council of Europe non-capitalised pay-as-you-go system with a funded scheme.
The text also takes into full account the discussions that the Rapporteur had with prominent personnel representatives and builds on the conclusions of two independently-conducted actuarial studies.
I. Draft recommendation
The Parliamentary Assembly,
1. Having regard to the report of its Committee on the Budget and the Intergovernmental Work Programme on the situation of the pension scheme for Council of Europe staff and the actuarial studies of May and August 1998;
2. Recalling that the Committee of Ministers should ensure that the Council of Europe staff enjoy the social protection and guarantees provided for in its own adopted texts in the social and employment field, notably those of the Revised Social Charter;
3. Aware that the present budgetary financing arrangements of the Pension Scheme give rise to concern within the Organisation’s own budgetary authorities, notably the Ministers’ Deputies, their Rapporteur Group on Administrative and Budgetary Questions, the Budget Committee of the Committee of Ministers and the Board of Auditors amongst the staff, and also within the Co-ordinating Committee on Remuneration;
4. Recalling that in Opinions Nos. 203 and 205, on the 1998 and 1999 budgets of the Organisation respectively, it called upon the Committee of Ministers to set up a privately managed guarantee fund to guarantee the payment of pensions and to consider alternative financing arrangements for the Council’s pension scheme so as to alleviate the increasing budgetary impact of the states’ share of the cost of the scheme and to provide the staff with the guaranteed rights earned by their contributions to the scheme;
5. Re-emphasising the importance it attaches to matters concerning the status of the Organisation’s staff, and reiterating the views it has already expressed in this regard, notably in Recommendations 944 (1982), 1000 (1984) and 1102 (1989), in particular concerning negotiation policy in the Co-ordinated System and the principles of the international civil service;
6. Concerned that proposals put forward by the Co-ordinating Committee on Remuneration (CCR) for amendment to the benefits payable under the Scheme have engendered a vigorous reaction from the staff, including strike action, and that these proposals run the risk of disturbing the smooth functioning of the Secretariat by bringing into question the acquired and contractual rights of staff members past and present ;
7. Aware that similar staff concerns about contractual and acquired rights and the absence of genuine negotiation within the Co-ordinated framework are leading to parallel staff protest and action in other Co-ordinated Organisations also;
8. Alerted by the Association of Pensioned Staff of the Co-ordinated Organisations and of their dependants (AAPOCAD) to current fears amongst beneficiaries of the Pension Scheme about their future security;
9. Convinced of the necessity to provide current and future staff with the long term security essential for the recruitment and retention of a dedicated and motivated secretariat of the highest competence and integrity, itself vital to the efficiency and effectiveness of the Organisation;
10. Apprised of the decision of the Committee of Ministers to authorise the Secretary General to take steps to introduce a private health insurance scheme for staff with effect from 1 February 1999;
11. Drawing the attention of the Committee of Ministers to the circumstance that only about a quarter of the Council of Europe’s 40 member states currently take part in the CCR’s discussions and hence in the formulation of recommendations concerning the Organisation’s staff;
12. Considering that this circumstance should logically lead the Committee of Ministers to exercise greater vigilance as regards the conclusions reached by the CCR and to bear in mind that all the member states suffer the consequences of any decisions adopted on the basis of CCR recommendations which are legally flawed;
13. Recommends that the Committee of Ministers,
i. act immediately upon the Assembly’s earlier recommendations concerning the setting up of a fund to alleviate the increasing budgetary impact of the payment by states of their share of the cost of the pension scheme and to provide the staff with the guaranteed rights earned by their contributions to the scheme;
ii. ease the short-term burden of the establishment of a pension fund by means of the savings achieved by the transfer of staff health insurance cover from the French Social Security System to a private insurance scheme;
iii. when examining any proposal for modification of the existing benefits under the pension scheme rules, take the fullest account of the rights contractually acquired by the staff, in accordance with the general principles of the international civil service, and in particular:
a. to address forthwith a recommendation along these lines to the CCR, alerting it in particular to the serious problems which pensions reform raises with regard to serving staff and which in principle lie outside its technical remit as laid down in the Regulations concerning the Co-ordination System (Article 1, paragraph a);
b. to conduct a fuller study of the nature and extent of these rights with the aid of lawyers competent in these matters;
c. to reject or amend any CCR proposal which might violate these rights and thereby incur the censure of the Organisation’s Administrative Tribunal;
iv. avoid any modification to the current pension scheme which would work against the flexible management practices advocated by the Assembly with a view to ensuring the Organisation’s capacity to recruit new blood and to fully integrate nationals from the new member states into the secretariat;
v. use every means at its disposal to encourage the CCR to hold genuine tripartite negotiations with the representatives of the Secretaries General and of the staffs of the Co-ordinated Organisations with a view to reaching, as far as is possible, a tripartite consensus which alone can guarantee social peace in the Co-ordinated Organisations;
vi. remind the CCR of the imperative need to safeguard the long-term security of former servants of the Organisation and of their dependants in the name of both equity and the law;
vii. ensure that the establishment of a different system for future staff does not result in a situation in which the Organisation’s staff are divided into two “classes” as a consequence of the introduction of excessively diminished benefits for new entrants;
viiii. continue to take fully into account the views of serving and retired staff on this very important issue and take due account of their legitimate concerns;
ix transmit this recommendation to the CCR.
II. Explanatory memorandum by the rapporteur
Introduction
1. At its meeting on 18 March 1998, the Bureau of the Assembly invited the Committee on the Budget and the Intergovernmental Work Programme to prepare a report on the situation of the pension scheme for Council of Europe staff. Prior to this, the Committee on the Budget and the Intergovernmental Work Programme had decided at it meeting in June 1997 that it would keep a watching brief on this pensions question, and in particular the financing arrangements of the pension scheme, and that this should become a standing item on its agenda.
2. Indeed, the attention of the Committee on the Budget has been drawn on a number of occasions to the future budgetary implications of the present, non-capitalised financing arrangements of the pension scheme. This has already led the Committee, on two occasions, to include in its draft Opinion on the budgets of the Organisation a call upon the Committee of Ministers that alternative financing arrangements be examined. In adopting Opinions Nos. 203 and 205 (on the 1998 and 1999 budgets of the Organisation respectively), the Assembly first called upon the Committee of Ministers “to set up a guarantee fund to guarantee payment of pensions”, and then “to consider alternative financing arrangements for the Council’s pension scheme so as to alleviate the increasing budgetary impact of the states’ share of the cost of the scheme and to provide the staff with the guaranteed rights earned by their contributions to the scheme”.
3. In April 1998, the Co-ordinating Committee on Remuneration (CCR) issued particulars of the review which it was undertaking of the Pension Scheme of the Co-ordinated Organisations. This review, whilst evidently touching upon the financing question – which strictly speaking lies beyond the CCR’s remit and is the affair of each individual Organisation within the Co-ordinated System – seeks principally to examine options for changes to the benefits payable under the scheme.
4. In consequence, this report has to address not only the initial financing question, previously the principal concern of the Committee on the Budget, but also the issue of possible modification to the benefits payable under the scheme, and the subsequent effects on the staff, past, present and future.
General background
5. The current Pension Scheme entered into force on 1 July 1974. It is a scheme common to the six Co-ordinated Organisations (Council of Europe, OECD, NATO, WEU, ESA, and the European Centre for Medium Range Weather Forecasts (ECMWF). It covers only permanent members of staff. Previously the Council of Europe had had its own funded Pension Scheme, financed by contributions of 7% from staff and 14% from the Organisation. On entry into force of the new scheme, all the assets of the Council of Europe’s fund were paid over to the member Governments.
6. The pension scheme is “co-ordinated’ in the sense that the Pension Scheme Rules are common to all six Co-ordinated Organisations. The Rules relate to the benefits provided under the scheme and their level, and to the staff rate of contribution. The Rules do not deal with financing, each individual Organisation being responsible as it sees fit for financing the scheme as far as its own staff are concerned.
7. The member states jointly guarantee the payment of the benefits due under the Scheme. In other words, were it ever to occur that a state was unable to fulfil its obligations under the scheme, the other member states would be jointly liable for the shortfall. The Rules also provide that in the event of dissolution or transformation of the Organisation, the Council or any ad hoc body set up shall take the necessary steps to ensure uninterrupted payment of the scheme benefits until cessation of entitlement of the last beneficiary.
8. The Scheme is currently financed on a budgetary, ‘pay as you go’ basis, with benefits paid under the Rules being charged to the annual pensions budget. This budget is credited with staff members’ contributions (currently at a rate of 8% of basic salary) and sundry receipts, notably contributions from member states of Partial Agreements equal to 16% of the basic salary of staff employed by the Partial Agreements, and transfer and validation payments from staff joining the Scheme. The staff rate of contribution is determined at the Co-ordinated level, and is equal to the cost, in the long term, of one-third of the benefits provided under the Co-ordinated Scheme, as assessed by periodic and independent actuarial studies (the rate was 7% until 1994). The balance is made up by contributions from the member states of the various Organisations. As with all such budgetised systems, the net payments by the employer are very low at the inception of the scheme, offering significant short- and even medium-term advantages to the employer, but these payments rise substantially as the scheme matures and the number of beneficiaries increases. This gives rise to the fear that difficulties may be encountered by the employer in meeting future obligations, leading to proposals designed to reduce the level of benefits, and to knock-on budgetary pressures which, in the case of the Council of Europe might strike into its operational capacity.
9. With hindsight, the decision in 1974 to switch from a capitalised system to the current budgetised one may seem questionable. It should be understood however that although there might have been a degree of short-term opportunism on the part of the Governments at that time, the decision was taken at a time when inflation was extremely high, if not rampant, and there were genuine fears that rising inflation might outstrip the investment income capacity of the fund. It proved not to be the case – nearly all mature pension funds currently show a very healthy surplus – but this was not so easy to foresee at the time. Indeed, the collective guarantee of the member states seemed comforting and re-assuring in the prevailing economic climate, and was generally welcomed by the staff.
10. At any event, the budgetary advantage to the member states of this switch has to date been considerable. Not only did the Governments benefit from the winding up of the earlier fund, for the first five years of the new Scheme, they also made a net gain on the pensions budget as staff contributions more than covered benefits payable. During the first 24 years of the Scheme, total benefits paid amount to some 1058 million French Francs expressed at the 1997 value, of which 664 covered by the staff in contributions and validations, and 394 by the states. This is to say that to date staff contributions have met 62.8 % of the total disbursements of the Pensions Budget, and member states the remaining 37.2 %.
11. The total of disbursements to date is of course only part of the story. What is more significant is the actuarial value of accrued pension rights, i.e. the value of future payments to both individuals currently receiving benefits under the Scheme and of active, currently serving staff members. The 1998 actuarial study of the pension scheme estimated the value of these accrued rights at between 2.1 and 2.24 billion French Francs, the precise estimate varying according to the discount rate used in the calculation. To be clear, this sum in excess of 2 billion French Francs is the amount of the Organisation’s existing debt under the Pension Scheme were the Council of Europe to be closed down today. The study also revealed that the annual cost of benefits under the Scheme would rise, in constant French Francs, i.e. in real terms, from 100 million in 1998 to around 180 million in 2020, and to 230 milllion in 2045, this last amount being about equal to one quarter of the Organisation’s current Ordinary Budget.
12. In his report, the actuary also estimated what would have been the situation had the Governments continued, in 1974, to make regular contributions to the Scheme at twice the rate of staff contributions as had been the case with the Council’s earlier fund. A ‘notional’ fund, i.e. one to which staff and Government contributions since 1974 had been credited, and from which actual benefits payable had been paid, and on which interest income was generated at the rates actually realised by the Provident Fund of OECD (which continues to exist) would at the end of 1997 have exceeded 1.12 billion French Francs. The actuary concludes that this amount “represents the value, at 31 December 1997, of the savings made by the member states by not contributing to the Scheme and, indirectly, benefiting from investment income on the moneys they have retained”.
The future
13. The present situation of the Pension Scheme as outlined above is giving rise to varying degrees of concern in various bodies, including this Committee. There is obvious concern amongst the staff and existing pensioners, who see at best uncertainty for their future, at worst what might amount to pure misappropriation of their investment in the Scheme. At the same time, the Council’s budgetary authorities, notably at the level of the Committee of Ministers’ Budget Committee and its Rapporteur Group on Administrative and Budgetary Questions, are examining the situation, and have charged the secretariat with commissioning from the Council’s actuary proposals for future financing options. It is obvious though that the search for financing solutions is not the only approach possible: another tack would be to seek to reduce the charge accruing under the Scheme by reducing the benefits payable under it. Indeed, it should be said that the two approaches are not necessarily mutually exclusive. However, it is in this second area that the Coordinating Committee on Remuneration – the committee of Government budget experts – has decided to concentrate its attention and where it is currently examining a number of options which have provoked very deep concerns amongst the staff. Insofar as these staff anxieties affect the smooth functioning of the Organisation, as we shall see, they must give rise to a careful examination by the Assembly, and to an appropriate reaction.
14. On a general level, there would seem to be no immediate grounds for altering the existing position of the Assembly with regard to this pensions question. As is indicated at para. 2 above, the Assembly has in recent years chosen to define the problem as a financing issue, urging the Committee of Ministers to research means of returning the Pension Scheme to some form of capitalised basis. In this, the Assembly found common ground with the Committee of Ministers’ own Budget Committee, which in particular raised the possibility of easing the short term burden of the establishment of a pension fund by means of the savings which would be achieved by the transfer of staff health insurance cover from the French Social Security System to a private insurance scheme, such as is proposed by the Secretary General in his budget proposals for 1999. A progressive return to a capitalised scheme would allow the member states more easily to meet their future obligations under the Scheme, reduce future downward pressure on funding of the activities of the Organisation, and provide the staff with long term security essential for the recruitment and retention of a dedicated and motivated secretariat.
15. With regard to the proposals of the Coordinating Committee on Remuneration (CCR), however the situation is rather different. As was pointed out earlier, the search for a funding solution need not necessarily rule out review of benefits, but this is a question of degree. No doubt that some adjustments may be justified: what seemed reasonable in 1974 may now be proving more onerous than initially foreseen, as life-expectancy increases, and some existing benefits may by today’s standards seem overly generous. The Pension Scheme however was conceived as a defined benefits scheme, and such evolution is inevitable, and is taken into account in the periodic actuarial studies on the basis of which the rate for staff contributions is fixed. The CCR appear though to wish to consider options which go beyond the correction of what might with hindsight be classified as anomalies in the benefits system. These options include reducing the annual accumulation rate from 2% to 1.66%, applying this rate to average career salary instead of the existing provision which takes salary paid during the last twelve months as the basis for calculation of a pension, abolishing certain minima (which affect almost all C-grade and B1-B3 grade staff) raising the retirement age, and the abolition of the automatic linkage between pensions and serving staff salary scales and of the tax adjustment, which is an additional amount of pension partly taking into account the fact that pensions, which are taxable, are calculated on a salary net of tax and not on a gross salary, [as perhaps they might have been.]. Quite aside from contractual and legal aspects of such proposals, which are considered below, certain of them cut across and contradict management policies for which the Assembly, in other contexts, has pleaded. A reduction in the accumulation rate, and a raising of the retirement age, for example, would work against the flexible management practices advocated by the Assembly in order to facilitate the arrival of new blood into the secretariat and to speed up the full integration of the new member states.
16. It should also be borne in mind that even such radical measures as those being examined by the CCR have a relatively low impact on the level of annual expenditure, slowing the rate of growth rather than producing dramatic short term economies. True, they reduce the overall actuarial cost of the Scheme, but it should also be noted that since the staff rate of contribution is fixed as a function of this cost – in the proportion of one third, this rate of contribution should logically be reduced if the cost falls, thus reducing income to the scheme from serving staff.
17. Equally important, however, is the effect of these proposals on the staff and former members of staff, in terms of their contractually acquired rights, and of the consequent effect of the defence of these rights on the smooth functioning of the Organisation. On 29 May 1998, at an extraordinary session of the General Meeting of Staff, the staff of the Council of Europe adopted a Resolution calling for steadfast defence of the basic principles of the international civil service as regards pensions, including staff members’ contractually acquired rights. The staff is convinced in its view that pensions are deferred salary and an essential component of employment conditions, and they are resolute in their determination to defend these rights. In consequence, General Meeting of Staff took the extremely rare step of calling a strike on the morning of 10 June 1998, during a meeting of the CCR held in the Palais de l’Europe, a strike in which over 61% of the staff participated. There is every reason to believe that if the staff of the Council of Europe, and their colleagues in other Coordinated Organisations (as is the case) are prepared to take strike action when CCR proposals are still at a preliminary stage, then the risk is very real of more serious disruption to the Organisation in the future, should implementation of such proposals come under serious consideration.
18. The staff has also voiced concern at the absence of genuine negotiation within the Coordinated framework, and the arbitrary procedures followed by the CCR in developing its proposals for options for adjustments to the benefits system. It notes that this again is contrary to the principles of the international civil service. It is also concerned that respect for contractual and acquired rights should not signal the establishment of a cheaper, second-rate pension scheme for new entrants, which would threaten the capacity of the Organisation to attract the services of people of the utmost competence and integrity, and create the risk of a two-speed secretariat with a divisive gap between the employment conditions of older and new recruits.
19. The Association of Pensioned Staff of the Co-ordinated Organisations and of their dependants (AAPOCAD) has also formally communicated to the Assembly its concerns about the future security of pension scheme beneficiaries, the future of the Co-ordinated system as such and about the acquired and contractual rights of its members.
20. In the light of the foregoing, it is proposed that the following draft Recommendation be examined with a view to its future adoption by the Assembly and transmission to the Committee of Ministers.
Reporting committee: Committee on the Budget and the Intergovernmental Work Programme
Reference to committee: Standing mandate
Budgetary implications for the Assembly: none
Draft recommendation unanimously adopted by the committee on 24 September 1998
Members of the committee: MM Schreiner (Chairman), Theis (Vice-Chairman), Goovaerts (Vice-Chairman), Koulouris (Vice-Chairman), Aleffi, Anusz, Atac, Begaj, Behrendt, Mrs Bielikova, MM Bordas, Bulic, Calin, Mrs Calner, MM Cangemi, Fernandez Aguilar (Alternate: Martinez), Gill, Gregory, Gyuga, Jonsson, Kittis, Kriedner, Mrs Luhtanen, MM Luis, De Marco, Matvienko (Alternate: Yemets), Mautner Markhof, Mularoni, Mrs Novakova, MM Oorzhak, Pantelejevs, Plattner, Lord Ponsonby, MM Popovski, Rise, Rupar, Soendergaard, Stanoiu, Stoyanova, Valk, Zhirinovsky.
N.B. The names of those members present at the meeting are printed in italics
Secretary to the committee: Mr Stefano Bertozzi