Ministers’ Deputies
CM Documents
CM(2014)106-add 15 October 2014[1]
1213 Meeting, 26 November 2014
11 Programme, Budget and Administration
11.2 Staff Regulations – Pensions schemes ‒
b. Review of the staff contribution rate to the New Pension Scheme (NPS) –
Technical opinion of the Administrative Committee on pensions of the co-ordinated organisations (CAPOC)
Item to be considered by the GR-PBA in November 2014
1. Under Article 43 of the Rules of the New Pension Scheme (NPS), in effect in the OECD, the Council of Europe, the ESA, the EUMETSAT, the Satellite Centre and the European Union Institute for Security Studies, the CAPOC “shall give technical opinions” on the regulation and “ensure appropriate co-ordination” between the organisations having adopted this scheme. It is on this basis that the Committee has already issued favourable technical opinions during the first two exercises reviewing the contribution rates for staff affiliated to the NPS; the first defining the actuarial method with the addition of an Annex to Article 41 to the Rules, the second was focused on replacing the so-called "Aggregate Cost Method" by the method of "attained age", as well as on the harmonisation with the co-ordinated pension scheme for determining the discount rate.
2. The current contribution rate for staff affiliated to the New Pension Scheme is 9.3%. The deadline of 1 January 2015 for the review of the NPS contribution rate coincides with that of the co-ordinated pension scheme.
3. The technical opinion of CAPOC to the Organisations in which the NPS is in place is set out as follows in this document. It recommends that the contribution rate for staff affiliated to the NPS remain unchanged at 9.3%.
NPS background
4. The NPS was implemented on 1 January 2002 for the Organisation for Economic Cooperation and Development (OECD). It replaced, for the staff members who took up duty after that date, the Co-ordinated Pension Scheme, established in 1974. Three other Co-ordinated Organisations adopted the scheme at a later date: the Council of Europe, as at 1 January 2003; the European Space Agency (ESA), as at 1 January 2010; and EUMETSAT, as at 1 January 2011. It was also adopted by the two agencies of the European Union formerly part of the WEU (SatCen and Institute for Security Studies) from 1 July 2005.
5. The NPS was established on the basis of a number of guidelines laid down by the governing bodies which involved the following amendments:
- scheme benefits (in particular age of retirement and the pension adjustment in retirement);
- the proportion of staff contributions of the total cost of the scheme (40% instead of 33.3%).
6. Article 41 of the NPS stipulates, as for the Co-ordinated Pension Scheme, that the rate must be reviewed every 5 years. The previous revision was carried out on 1 January 2010. The rate was then increased from 9.2% to 9.3%, following an actuarial valuation conducted by the Joint Pensions Administrative Section (JPAS, now the ISRP) and the consultation of the CAPOC. The next review should take place on 1 January 2015.
7. It is recalled that in the previous contribution rate revision carried out in 2009 (to be applied from 1 January 2010) only two organisations had adopted the NPS (OECD and Council of Europe). Two more (ESA and EUMETSAT) have been included in the current calculations.
Context of the ongoing revision
8. According to the NPS Rules (see Appendix 1), the contribution rate should be revised every five years and adjusted automatically in the fifth anniversary of the preceding adjustment.
9. The previous adjustment, calculated in accordance with the method, was recommended by the CAPOC at the end of 2009. The corresponding actuarial studies began in 2008, using data available at the end of 2007.
10. The next adjustment must take place on 1 January 2015. Following the same timetable as the previous exercise, the actuarial studies have been carried out on the basis of data available at the end of 2012.
Actuarial Method
11. Article 41 of the Pension Scheme Rules stipulates the method to be used to set the contribution rate of the staff of the Co-ordinated Organisations affiliated to the NPS. This rate, applied to the monthly salary, is calculated so as to represent forty percent of the long-term cost of the benefits under the Scheme.
12. The actuarial method, so-called attained age, is identical to the one used for the Co-ordinated Pension Scheme, established by the 197th Report (cf. CM(2009)153], dated 8 October 2009 (see Appendix 2); the perimeter of the actuarial studies is however restricted to affiliates of the NPS. The long-term cost of the benefits is obtained by establishing the present value of future benefits and salaries. These values must be established individually for each Organisation, and then consolidated in order to establish a single average rate.
Actuarial parameters
Discount rate
13. The Appendix to Article 41 gives a precise stipulation of the principles to be used for calculating the present value of the various quantities. These principles are based on observation of the rates of return on
long-term bonds issued in the reference countries.
14. Every year, the average of the rates in each of the reference countries is used, weighted by the number of staff posted in the country in question for the Organisations having adopted the NPS, taking into account data for Spain since 2007. This rate is net of inflation, equal to the arithmetical average of rates observed over a moving period of thirty years prior to the date of the study.
15. It has to be taken into account that as two new organisations (ESA and EUMETSAT) have been included in the calculations since the last revision in 2010, the active population proportion by country has changed accordingly, affecting the weightings.
16. At the date of the study, the discount rate was determined to be 3.81%. The discount rate was 3.96% in the previous valuation.
Increases in salaries
17. As in the previous exercise, the increase in salary assumption has been set equal to the one calculated for the Co-ordinated Pension Scheme.
18. Maintaining an unchanged approach in comparison with the previous valuations, it was noted that the cumulative yearly average of scale increases represented a decrease in real value over the last five years. As a result, the CAPOC has recommended a new assumption for valuing future salaries at 0.27% above inflation.
Mortality Table
19. Similarly for this essential parameter of the actuarial studies, there was no justification for a difference between the Co-ordinated Pension Scheme and the NPS. It is therefore the 2013 update of the ICSLT table (International Civil Servants Life Table) that has been used for the actuarial studies of the revision of the contribution rate for staff members affiliated to the NPS.
20. In accordance with what had been said previously and in a common agreement between the ISRP and Eurostat, the mortality table was updated with additional data gathered from 2008-2013 with an increased number of international organisations based in Europe. This additional data permitted the correction of the tables from 2008. Furthermore, in order to respond to converging comments concerning the prospective version of the mortality table, the ISRP developed a new prospective trend. First of all, it is applied over a period of 30 years. In addition, it now consists of a trend obtained by averaging the trend of the United Nations retained in 2008 with those of the country tables for Germany, France, the Netherlands, Switzerland and the United Kingdom.
21. The ICSLT table for 2013 has been reviewed and approved by experts of other International Organisations, which will use it for their own calculations. The independent consultant firm Ernest & Young, under a contract with Eurostat, reviewed the table, confirming that the approach for the new trend was adequate, and recommended following the current practice of updating the table every five years.
Application of the method
22. As in the previous exercise, the calculations were entrusted to the ISRP, and were conducted separately in each of the Organisations where the NPS is in place. The results have then been consolidated to obtain a statistically robust estimate of the rate contribution to the staff members affiliated to the NPS.
23. The result of the implementation of the method described above, consolidated for the four Organisations, results in an unchanged contribution rate of staff members affiliated to the NPS of 9.3%.
24. This stable rate of contribution of staff members affiliated to the NPS can be explained by a set of factors. The first driver is the change in the perimeter of the studies and the inclusion of staff affiliated to the NPS in ESA and EUMETSAT. The second factor is a lower decrease in the discount rate for the NPS in comparison with the Co-ordinated Scheme, due to the differences in the number of staff in each country. The last factor relates to the regulatory changes that have an impact on the demographic assumptions of the organisations; in this context, it is worth noting the impact of the reforms implemented by the Council of Europe.
Recommendation
25. It is recommended to retain Article 41, paragraph 3 of the Pensions Scheme unchanged.
Appendix 1: extract of the NPS rules (Appendix V bis of the Staff Regulations)
ARTICLE 41 – STAFF MEMBER'S CONTRIBUTION – COSTING THE SCHEME
1. Staff members shall contribute to the NPS.
2. The staff members' contribution shall be calculated as a percentage of their salaries and shall be deducted monthly.
3. The rate of the staff contribution shall be set so as to represent the cost, in the long term, of 40 % of the benefits provided under these Rules. The rate shall be 9.3 %. This rate shall be reviewed every five years on the basis of an actuarial study, the procedures for which are appended hereto. The staff contribution rate shall be adjusted, with effect from the fifth anniversary of the preceding adjustment, the rate being rounded to the nearest first decimal.
4. Contributions properly deducted shall not be recoverable. Contributions improperly deducted shall confer no rights to pension benefits; they shall be refunded at the request of the staff member concerned or those entitled under him without interest.
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Appendix 2
APPENDIX TO ARTICLE 41 - ACTUARIAL STUDIES
Method
1. Calculation, as at the effective date of the study, for all the Co-ordinated Organisations which have adopted the NPS, of the rate of contribution payable by staff in order to finance 40% of benefits provided under the Scheme, establishing the present value of future entitlements and salaries.
2. Projections of annual amounts of future entitlements will be calculated, on the one hand, for staff affiliated to the NPS at the date of the study and, on the other hand, for the population of staff who will be recruited and affiliated to this scheme in the years to come. Projections of salaries for these populations will also be established year by year. Each of these amounts will be projected over a period of 80 years and discounted to present worth.
3. Combining these results will make it possible to determine the rate of contribution needed to finance 40% of benefits provided under the Scheme.
Demographic and salary-related assumptions
4. The demographic assumptions are derived from detailed demographic studies for each of the
Co-ordinated Organisations which have adopted the NPS. These studies examine past experience over a period of 15 years, where the information is available, and also take account of available forecasts regarding future staff numbers.
5. The assumptions relating to salaries are based on detailed observation of the past, over a period of 15 years, where the information is available, and also take account of practices and forecasts available in this field.
6. The rates obtained are adjusted so as to eliminate distortions resulting from insufficient data in certain organisations.
Economic assumptions
7. The discounting process is based on observed rates of return on long-term government bonds issued in the reference countries, as from the date when they become a reference country.
8. A discount rate net of inflation shall be used. It shall be equal to the arithmetical average of average real rates observed over the thirty years preceding the date when the actuarial study is conducted.
9. The average real rate for a given past year is obtained from the real rates in each country, calculated as the difference between the rate of gross return on bonds and the corresponding rate of inflation, as shown by the national consumer price index. The average is obtained by weighting the real rate in each country by the number of serving staff in that country at the effective date of the study.