The Staff Representatives to the OAS Retirement and Pension Committee, in collaboration with the other members of the Committee and in consultation with the OAS Staff Committee, have decided to distribute this document. The expectation being that its content will help to answer questions on aspects of the Plan about which participants may want to have a better understanding, such as the nature of the Plan and its institutional foundations.
In presenting the document, the Staff Representatives want to remind all participants that last May the Plan reached an important milestone: its 70th anniversary. What participants witness today was initially conceived at the VI International Conference of the Americas held in Havana in 1928 and formally approved on May 2nd of the same year. The first meeting of the Committee took place on May 15, 1928 and the first participants joined the Plan the following July 1st.
August 5, 1998
The purpose of this note is to contribute to a better understanding of the OAS Retirement and Pension Plan (RPP), particularly with regard to the relationship between benefits and contributions.
Introduction
The ultimate goal in setting up a retirement and pension plan is to help protect the employee, as well as h/his family, not only from the time of retirement but, when applicable, throughout the entire period of h/his association with the employer. The OAS RPP is no exception as envisioned by the founders of the Plan on May 2nd, 1928. In response to this vision, the RPP seeks to provide basic protection not only for the post retirement years, but also against disability and premature death by covering qualified beneficiaries, while in the employment of the Organization. In 1981 (effective on January 1, 1982), the General Assembly strengthened this vision of the RPP by improving the protection against the unexpected occurrence of disability and premature death and by extending, for the first time, direct surviving benefits to spouses and qualified children.[1]
Over the years, participation in the RPP was extended to institutions associated with the OAS who requested such association; for example, the IICA and the Inter-American Defense Board.
Nature of the RPP
Retirement plans are usually of a defined benefit nature or of a defined contribution one. The RPP has the rather unique feature of incorporating both approaches into one plan. On the one hand, it defines benefits in terms of age, years of participation and the average pensionable salary during the last few years of participation. This is the defined benefit window of the RPP that attempts to provide long term protection. On the other hand, an account is maintained in the name of the participant where both the personal and the institutional contributions are credited and to which interest is also credited periodically in accordance with the terms of the RPP. This is the defined contribution window of the RPP that allows participants to build credit over a relatively short period of time in case they want to separate from the Organization or they are terminated before they qualify for retirement benefits. This unique feature of combining a defined benefit and a defined contribution window has provided considerable flexibility.
The Provident Plan
The Provident Plan (PP) is a separate Plan that is not, technically speaking, part of the RPP, although it is jointly administered with the latter. The PP was created in the late 1950s by the General Secretariat[2] to provide a savings vehicle for employees who were expected to remain associated with the Organization for just a short period of time, for example, providing consulting services to member States. At present, participation in the PP is considered temporary, with participants being moved to the RPP as soon as permitted if they stay employed for over a combined 12 months period so that they begin to build protective benefits (premature death, disability, and pension) at a relatively early stage of their employment.
Institutional background of the RPP
The RPP is under the authority of the Retirement and Pension Committee (Committee). The latter serves as Trustee of the plan and, as such, have very significant fiduciary responsibilities for the resources entrusted to the OAS Retirement and Pension Fund (Fund)[3]. The member States, the Secretary General, and the Participants in the plan are all represented in the Committee.
The RPP is subject to the rules and regulations of pension trusts as established by the host country so that it can enjoy not only the very important benefit of investing the Fund’s resources without a tax burden, but also for the overall protection of participants in such plans. The RPP is also subject to the decisions of the OAS Administrative Tribunal to whom participants who are not satisfied with the decisions of the Committee can appeal. Finally, the RPP is periodically subject to independent actuarial reviews to insure that it will be able to meet its current and future liabilities, as well as to verify the compliance with strict financial accounting (FASB rules) and independent auditing procedures.
The Trust Fund
The contributions, both personal and institutional, are placed into a trust fund that must also meet all the rules and regulations applicable to fiduciary funds, including the complete separation of pension assets from the employer’s assets. The contributions are then invested according to specific guidelines approved by the Committee and must also meet existing rules and regulations.[4] It is the return on these investments when added to the contributions what allows for the necessary growth that the Fund needs in order to meet current and future liabilities.
Liberalization of participation and the shortening of the vesting period
Up to 1980, many staff members remained in the PP for as long as they continued to be employed under fixed-term contracts. However, it became obvious that many staff members stayed under that arrangement for quite a number of years (10 to 15 years was not unusual). Then, at the end of their careers in the Organization, they did not have the benefits usually afforded to participants in the RPP. In recognition of this situation, the Secretary General, after 1980, extended the participation in the RPF to all fixed term staff members.
By 1985, in addition to the previous challenge, a new one came into play. There were many employees with successive very short-term contracts. This time, by recommendation of the Retirement and Pension Committee, the Secretary General extended the participation in the RPP to those employees who as a result of successive very short-term contracts complete one year of employment.
By the same token, up to 1985, staff members in positions of trust, unless they were already part of the career system, were incorporated into the PP as a result of the nature of their employment. The Secretary General, in 1985, decided to incorporate trust staff members into the RPP so that they have the opportunity to accumulate more benefits before leaving than they could otherwise, had they stayed in the PP.
The above liberalization of participation became even more convenient to most contract and trust staff members when the General Assembly, by recommendation of the Committee, significantly shortened, within the limits permitted by existing pension legislation, the period required to achieve full vesting rights. The previous period for full vesting was 15 years, but after 1990 it was reduced to 7 years with progressive vesting accumulating from day one[5]. The significance of this adjustment will be seen in the next section.
A note on contributions with reference to the liberalization of participation
The institutional contribution to the RPP is 14% while that to the PP is 5%; however, vesting in the RPP is gradual while in the PP is 100% at all times. Notwithstanding this difference, it is important to note that the 5% amounts to 35% of the 14%. Why is this 35% so important? The answer is that if a participant is separated during the first 3 years of participation in the RPP s/he will be entitled to receive 35% of the institutional contribution plus h/his personal contribution and interest. Receiving this 35% insures that if the participant leaves too early for whatever reason, s/he will still receive the same amount that s/he would have received had s/he been placed in the PP where s/he would have been fully vested from day one but at a contribution level of only 5% instead of the 14% in the RPP. However, if they stay longer, they will begin to accrue a higher percentage of the institutional contribution until, at the end of the 7th year of participation s/he will receive 100% of this contribution[6]. In addition, they may, at the completion of 5 years of participation, gain protective benefits (disability and premature death benefits) which, as will be seen later, are quite important.
Forfeitures in retirement and pension plans
Forfeitures are the non-vested funds that a participant who leaves too early is not entitled to receive. Forfeitures go into the General Reserve Account, an item that will be explained at a later point in this note. Unfortunately, the role of forfeitures in a pension plan is sometimes misunderstood because of a tendency to confuse a pension account with a savings account. There are no forfeitures in the PP because of its savings plan characteristics.
When a participant joins the RPPs s/he doesn’t know for sure whether s/he will become disable, or die while in the employment of the Organization, or even stay until retirement age. Furthermore, those who retire may live longer than they are expected to, according to existing actuarial mortality tables. Forfeitures are used to help defray the cost of benefits, such as disability and premature death, provided by the RPP for all participants.
A note on early separation and Administrative Tribunal decisions
In general, when participants are separated against their will, the Plan treats them as fully vested. However, the Administrative Tribunal has ruled that “contract expiration” is not a separation against the participant’s will, only a contract interruption is. Likewise, the Administrative Tribunal has ruled that the separation of a trust staff member is not against h/his will because of the nature of h/his appointment.
A note on disability and death benefits
It is important to note that a participant in the RPP who becomes disable after 5 years of participation is entitled to significant protection. For example, in calculating h/his pension benefit, the RPP assumes that s/he is 65years old and that has participated in the RPP for at least 15 years. This means that a participant who becomes disable will be entitled to a pension for life that does not necessarily reflect what s/he may have in h/his account. The same situation applies to premature death. The surviving spouse will be entitled to a pension for life that is based also on the above formula. Up to certain age, the participant’s children will also be protected. If any of these children are themselves incapacitated they will be protected for life.
Who pays for the above benefits on behalf of the unfortunate participants who become disable or die prematurely? All participants do, and that is precisely one of the nicest features any plan can have because the most fortunate participants pay for those benefits on behalf of the less fortunate ones!
A note on post retirement death
When a participant retires with a pension, actuarial tables assume that s/he will die at a specific age. For example, a 65 year old retiree is expected to reach 83 to 85 years of age depending on whether the participant is male or female. However, when a retiree reaches that age, and many do, the RPP cannot stop paying the pension benefit to h/him because the pension is for life. Those payments will continue and are financed by those who may die before their actuarially expected age and by the forfeitures.
General Reserve
This is another area where considerable misunderstanding exists, but maintaining a healthy General Reserve Account (GRA) is an essential tool in the management of a plan, like the RPP, that has liabilities for many years to come.
The General Reserve Account (GRA) has several objectives, but none is more critical than to help the Fund meet the challenge of market fluctuations. On the one hand, pension plans with future obligations that grow with time need to invest in the equity markets—the main investment that allows for growth. But on the other hand, it is investing in the market, particularly in the equity market, that increases the need for a healthy GRA that can withstand the increasing volatility of capital markets. This challenge is particularly critical in the case of the RPP because of the requirement that a minimum interest rate be credited to the participants’ account regardless of the performance of the Fund’s investment portfolio.
Another role played by the GRA is to help meet the additional cost of participants who become disabled or suffer a premature death with qualified beneficiaries. Because of the favorable formula employed in these cases, the value of the participant’s account at the time of the occurrence is not sufficient to cover the reserve/actuarial value of that pension. An example may assist. Lets take the case of a participant with 5 years of participation who dies at 35 years of age leaving behind a spouse (30 years old) and three children (ages 8,5, and 3). The spouse is entitled to a pension for life that is calculated assuming that the deceased participant was 65 years old at the time of death and had participated in the RPP for 15 years. In addition, in the above example, the children will receive a combined total of 25% of the deceased pension benefit until they turn 18 or 21 if attending college full time. Bear in mind that the additional life expectancy of the spouse in the example at the time of the participant death was approximately 48 years. The amount of funding that will have to come from the GRA is quite significant.[7]
Finally, although in the investment policy an effort is made to anticipate future COLA adjustments to pensions, in the event that the investment may not meet this requirement, the GRA would have to provide the necessary resources for the RPP to meet this very important obligation.
Reserve Account for pension payments
When a participant retires and opts for a pension, the Fund must set aside a reserve that is actuarially determined. This reserve must also take into account any obligation that the RPP creates on behalf of beneficiaries. To insure that this account remains fully funded at all times the actuarial consultant periodically provides an updating of the total funds that must be available in this account. This is essential to guarantee the trust that retired employees who opt for a pension have placed with the Fund and its Trustees.
[1] Later on the protection for disable children upon the death of the participant or de pensioner was strenghtened too.
[2] Initially at the request of participating agencies and later extended to the General Secretariat.
[3] The basic duty of a fiduciary is to act solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits for participants and their beneficiaries.
[4] Among the most important rules is that Trustees must follow in investing plan assets what is known as the “prudent person rule”, and they must not engage in self-dealing.
[5] Existing pension legislation offers two alternatives: a) The progressive rule adopted by the RPP where the participant begins to accumulate vesting rights in the institutional contribution from day one, but needs 7 years to reach full vesting; or b) what is termed 5 year cliff meaning that the participants is not entitled to any share of the institutional contribution for the first 5 years, but then becomes fully vested on the 5th anniversary.
[6] For example, at the end of 5 full years of participation, the participant is entitled to 60% of the institutional contribution. After 6 years the percentage rises to 80%.
[7] It must be stressed that the younger a spouse is at the time of establishing the reserves to pay h/his pension, the higher is the probability that the Fund may have to use the GRA to cover the entire cost of the required reserve.