Despite the inauspicious timing, Guazo built on the the pension fund's strengths, which included a robust funding ratio, a healthy worker-to-retiree ratio, and a philosophy of managing the bulk of the portfolio in-house, the fund’s secret weapon to keeping costs low. UNJSPF today has a funding ratio of 111% and almost twice as many active participants as there are retirees.
“We’re a strong defined benefit plan — well run, well administered, with a healthy contribution rate and a healthy number of people coming in,” Guazo said.
In a March interview with Pensions & Investments at the pension fund's New York office, Guazo discussed the fund’s governance structure, investment processes and strengths, and why he believes it will remain well funded for the foreseeable future. Questions and answers have been edited for clarity, conciseness and style.
Q: Can you tell us about the structure and governance of UNJSPF?
A: We're a central pension fund for the 25 United Nations entities, including UNICEF, the World Health Organization, UNDP (the United Nations Development Program), and the World Food Program. We are the pension fund for all U.N. staff members around the world. We have 150,000 active employees contributing actively and 80,000 retirees. We’re big and youngish because we’re still twice the size of active staff than retirees.
We’re still in an accumulation period because when you talk cash flows, the 150,000 people who are making contributions on a yearly basis, all that money goes straight to pay the 80,000. The money that we invest does not yet go to pay pension benefits. We’re just growing by the returns of the plan.
Q: Do you expect that to continue?
A: In 10 to 15 years, we will start using the money of the fund to pay pensions because we will not have enough money coming in from contributions. We're in very good shape. The problem with a lot of pension funds around the world is that the ratio of retirees vs. active staff is not as good as ours. We're in very good shape overall because we are still flat on cash flow and we have a very good funding ratio of 111%.
Q: How did you get to a 111% funding ratio?
A: Governance. The United Nations General Assembly delegated to the board the authority to determine the contribution rate and the benefits of the plan, but the responsibility to make the investments goes to the secretary-general (António Guterres). The secretary-general hears suggestions and comments from the board on investment policy, but the full responsibility for investment decisions falls on the secretary-general. It’s not even approved by the General Assembly.
I am the representative of the secretary-general for the investments of the assets of the United Nations Joint Staff Pension Fund. That's my title, but in reality I'm the CEO of the office of investment management. The board consists of representatives from three groups — the member states, executive leaders of U.N. entities and the active staff of the U.N. entities. They have a vested interest in having a good plan, good enough so that you can attract people, but also that doesn't break the bank.
Q: What is the contribution rate?
A: The contribution rate is 23.4%. Two-thirds is contributed by the U.N. entity and one-third by U.N. employees.
One of the normal trajectories that not well-funded plans do is they move to defined contribution. Since we are so strong, we have not even considered that. We're a strong defined benefit plan, well run, well administered with a healthy contribution rate and healthy number of people coming in as well. One of the reasons why we're so strong is the board works to keep the long-term sustainability of the organization at heart.
Q: How does the board determine the contribution rate?
A: Every two years the board does an actuarial valuation to determine the number of people coming in and those retiring. Based on that, the board adjusts the contribution rate, the mandatory age of separation and benefits.
Q: What is the mandatory age of separation?
A: Now, it’s 65.
Q: Do you anticipate any major changes in the funding ratio or any demographic shifts that would hurt the funding ratio?
A: We don’t see any major changes in the trends. We believe that we will remain very well funded for the foreseeable future.
Our portfolio is not politicized. The General Assembly delegated the authority for investments to the secretary-general so that the management of the assets of the fund is completely professionalized and based on maximizing the long-term return of the portfolio. Government authorities in countries like Canada, Australia and even the U.K. often ask public pension funds to invest in certain state enterprises, requests that my colleagues tell me make them uncomfortable. We don't have that. By being managed professionally, we really put the money and invest the resources where we think that we will have the best risk-return formula. It’s driven really by risk and reward.
Q: Can you tell us about your investment process?
A: We structured our office and our process as any other asset manager that you’ll find out there, with one important difference. The UNJSPF is one of the few pension plans where we try to manage most of the portfolios internally. We manage close to 85% to 90% of the assets internally.
We have almost 80 people on the investment side because we have teams buying and selling public equities and fixed-income bonds. We always try to manage everything internally. The few mandates that we have with external managers are because it's a new asset class that we're learning, and then we hire an external manager on a temporary basis until we learn and then we bring it inside.
That is why we need to have such a strong team in risk management and compliance and in operations because my operations team has to have all the hardware, software and data to allow my investment officers to trade. We have a massive operations team because they have to service the investment officers. The risk management is a very strong area because they have to see the whole portfolio’s investment risks as well the operational risks that we have for managing the resources internally. We are an asset manager. We have the structure of an asset manager rather than just an asset owner.
Q: How do you set the strategic asset allocation?
A: Every four years we do an asset and liability management study, after which we run a scenario based on long-term capital market assumptions. We then run a Monte Carlo simulation, and boom, we have a proposed strategic asset allocation.
Q: What is your desired long-term real rate of return?
A: 3.5% annually. That's the minimum that we must deliver in order for our contribution rate to remain at 23% and for people to retire at 65 with the benefits that they have. When the actuaries put everything together, the 3.5% is what solves for the other requirements. It's interesting because the rate in some pension plans is higher. Some of them are chasing 4% or 4.5%, and you'll see they are chasing that because they're not that well funded.
If you are at a 65% funding ratio, you need to speed up the returns. Since we are in a very good position, we don't have to because returns of, say 7%, come with a level of risk, probably 25% of value-at-risk volatility. Our 3.5% in the long term can be achieved with 10% of volatility.
Q: Your asset allocation shifted from roughly 57% in equities and 28% in fixed income in 2020 to 44% equities and 38% in fixed income today. Why the shift?
A: We had 57% in equities in 2020 with volatility at that time around 15%. Fast forward three years, interest rates started to rise, fixed income started paying you 4% or 4.5%, depending where you put it, with less risk. The investment model is very smart and it tells us you can be achieving the same 3.5% with less risk if you divest from public equities and invest in fixed income. That's the whole explanation. It's just that interest rates made bonds more attractive with less risk than the public equities.
