VOL. 65, NO. 2 Mars – March 2006 - AAFI-AFICS, Geneva - UNOG

(iii) Because of this, plus a third historical reason(namely that when the Fund was created, the USdollar was the dominating currency forming thebasis of the worldwide exchange system) UNpensions are statutorily fixed in dollars.Heritage of the pastThe US dollar was for many years the onlycurrency recognised by the Fund’s statutes forcalculating pensions. This held good until theearly 1970s, when the stability of the dollar wasundermined.The trend of world economic and monetary affairs,that was bit by bit noted, understood and thenaccepted by the Fund’s administrative bodies, ledto a reappraisal and the introduction of a newconcept.What had been the vision of the world when theFund was created? On the monetary andfinancial side, it had been what we would now calla unipolar world. The dollar was the system’spivot; the value of all (or nearly all) othercurrencies against it was precisely defined in order toensure harmony and cohesion. With the end of theSecond World War, all economies would henceforthprogress in parallel. A pension of $1000 would havean identical purchasing power anywhere in the world,even when converted into local currency.It was a fine abstract concept making the futureappear reassuringly rosy, and it must be admitted thatfor several years this illusion was maintained as thedistortions that appeared in the real world were notlarge enough to dispel it. It should be added thatduring this period the number of active participants inthe UN pension fund was growing much faster thanthe number of beneficiaries, and the protests of theselatter at the gradual erosion of the system were barelyaudible.MutationAfter twenty-five years of loyal service, themonetary system established by the BrettonWoods agreements began to show signs ofweakness; maintaining the original exchangeparities created growing tensions that affected thevery basis of the system, the US dollar, which in1971 ceased to be the immutable reference factorand joined other currencies in a general free driftwhich came to be known as ‘floating exchangerates’.The effect was that in some countries a $1000pension, converted into local currency, no longerhad the same purchasing power as in New York,and this disparity took on catastrophic proportions.After some years of inaction, followed by oftenbitter discussions, the need to adapt the system toreality was accepted. But in such a sensitivecontext touching on national politics, diplomacyrequired constant pussyfooting.The dollar idol was saved, like the golden calf in thetemple, but into its hollow brain a subtle new idea wasintroduced in the form of the income replacementconcept.Instead of letting the pension system be governedsolely by obvious numerical factors—entitlement to adollar amount as a result of the application of a fewarithmetic formula and, at the risks and peril of thebeneficiary, exchange rates (themselves dependenton the invisible hand of the exchange markets)—itwas finally agreed that what was important was toensure protection of purchasing power anywhere inthe world at the equivalent purchasing power in NewYork of the statutory dollar pension. To do this, thecalculation includes other currencies plus a factor thattakes account of the difference between the cost ofliving in the pensioner’s country of residence and thatin New York.Basic mechanismsLet us recall the elements incorporated in thedelicate application of the formula now in force.First of all comes the abstract figure known aspensionable remuneration that is determined forthe whole UN system by the International CivilService Commission based on the salary scalesand income tax rates in the countries in whichorganizations of the UN system have theirheadquarters.Averaging the pensionable remuneration over the last36 months of a retiree’s service gives his final averageremuneration (FAR). This is multiplied by the totalaccumulation rates corresponding to various years ofservice (the rate now varies during a participant’s33