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CM(2009)154 13 October 20091
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1071 (Budget) Meeting, 24-26 November 2009
11 Administration and Logistics


11.4 Staff Regulations

b. Modification of Appendix Vbis – New Pension Scheme “NPS”, Article 41 and its appendix “Staff members’ contribution – costing the scheme”
- Method of calculating the staff rate of contribution to the “NPS”
- Revision of the staff rate of contribution to the “NPS” at 1 January 2010
Prepared by the Pensions Section (JPAS)

Item to be considered by the GR-PBA at its meeting on 5 November 2009

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Background information on the NPS

1. The New Pension Scheme (NPS) came into force on 1 January 2002 at the OECD. For staff recruited on or after that date, it replaced the Co-ordinated Pension Scheme introduced in 1974. The Council of Europe also adopted the NPS for staff recruited on or after 1 January 2003. It was also adopted, with effect from 1 July 2005, by the European Union agencies deriving from the WEU.

2. The NPS was set up instead of the two pension schemes recommended in the 105th report of the Co-ordinating Committee on Remuneration, which were not approved by the Co-ordinated Organisations' governing bodies. The NPS offers the advantage, in particular, of remaining close to the spirit of the 1974 scheme, but at a lower cost and without introducing more cumbersome management constraints.

3. The NPS was established on the basis of a number of guidelines set, initially, by the governing body of the OECD, concerning changes to be made to:

- the benefits served under the Co-ordinated Pension Scheme (notably the retirement age and the method of adjusting benefits) and
- the level of staff contributions (40% of the cost of the scheme instead of 33.3%).

4. As for the Co-ordinated Scheme, Article 41 of the NPS Rules provides that the contribution rate shall be reviewed every five years. The previous review took place as at 1 January 2005, when the rate was increased from 8.8% to 9.2% following an actuarial study carried out by the JPAS and after consultation of the Pensions Administrative Committee of the Co-ordinated Organisations.

The current method

5. The current actuarial method is described in the appendix to Article 41 of the NPS Rules. This method is strictly identical to that set out in the CCR's 34th report, in force for the Co-ordinated Scheme, except for calculation of the discount rate, which is to be based on "observation of the curve showing nominal rates of return on zero coupon government bonds issued in the euro zone, as published by Eurostat", rather than long-term government bond yields for Co-ordination's reference countries.

Context of the current review

6. It should be noted that, as for the NPS, the rate of contribution payable by staff affiliated to the Co-ordinated Scheme is to be reviewed as at 1 January 2010. Furthermore, at the request of the CCR, the actuarial method used to determine the rate of contribution of staff affiliated to the Co-ordinated Scheme was revised in 2009 to take account of the scheme's highly specific situation (it is semi-closed to new entrants). The CCR's 197th report recommends adapting the method set out in the 34th report by taking as a basis a projection of the future entitlement to be acquired by serving staff (the "attained age method") instead of future expenses, on one hand, and a notional fund, on the other hand. This proposal has a neutral impact in terms of results but makes the actuarial studies less cumbersome to perform.

7. It can also be noted that, following a major internal re-organisation, Eurostat ceased publishing the nominal yield curve for euro-zone zero coupon government bonds as from 2004. The ECB resumed its publication in 2007. It is accordingly not possible to apply the curve on which the discount rate was initially to be based, for lack of data for the period 2004 to 2007.

Proposed changes to the method

8. Following the changes made by the CCR to the actuarial method for calculating the rate of contribution under the Co-ordinated Scheme, the question was whether to apply these changes to the NPS. The secretariats of the organisations concerned deemed it desirable to harmonise the actuarial methods for calculating the staff rates of contribution under the NPS and the Co-ordinated Scheme, so as to preserve the similarity between the schemes desired at the time of the introduction of the NPS and subsequently maintained with the successive amendments of the rules. For this reason, it is proposed that the attained age method should also henceforth be applied to calculate the rate of contribution payable by staff affiliated to the NPS. As for the Co-ordinated Scheme, this change has a neutral financial impact but makes the studies less cumbersome to perform.

9. Moreover, to remedy the lack of data on the Euro-zone zero coupon yield curve (no curves published between 2004 and 2007), it is proposed that the method be brought into line with that adopted by Co-ordination. The discount rate would accordingly be based on observation of the average real yields for Co-ordination's eight reference countries (Germany, Belgium, France, Italy, Luxembourg, Netherlands, Spain, United Kingdom), weighted by the number of staff of the organisations having adopted the NPS holding posts in these countries as at the effective date of the study.

Application of the method and impact of the proposed amendments

10. As was the case for the previous exercise, the calculations, entrusted to the JPAS, have been performed separately for each Co-ordinated Organisation where the NPS is in force and have then been aggregated to obtain a statistically sounder valuation of the rate of contribution payable by staff affiliated to the NPS.

11. The outcome of applying the above-described method, on an aggregated basis for the two organisations, is a staff rate of contribution to the NPS of 9.3% (9.2% at present).

12. Pursuant to Article 43 of the NPS Rules, the Pensions Administrative Committee of the Co-ordinated Organisations (PACCO) has been formally consulted concerning this proposed amendment of the rules. It has given a favourable technical opinion on all the recommendations.

13. The proposal is also to seize the opportunity of the amendment of Article 41 of the NPS Rules so as to supplement this article with regard to two points previously not mentioned in the rules, i.e. the date of effect of adjustments of the rate of contribution and the rounding rule.

Recommendation

It is recommended that:

- the actuarial method used to calculate the rate of contribution payable by staff affiliated to the NPS, described in the appendix to Article 41 of the NPS Rules, should be amended as set out in Appendix 1;
- on the basis of the calculations performed using this method, the contribution rate of staff affiliated to the NPS should be increased from 9.2% to 9.3% of basic salary as from 1 January 2010;
- the NPS Rules should specify the date of effect of adjustments of the staff rate of contribution and include a rule on rounding the rate;
- Article 41, paragraph 3, of the NPS Rules should be amended accordingly.

APPENDIX 1
Proposed modification to the 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 past contributions and benefits and of future benefits entitlements and salaries.

2. To establish the present value of past contributions and benefits, reference is made, year-by-year, to the actual amounts of validation payments, of contributions paid by staff and of 40% of benefits paid since the Pension Scheme was created.

3.2. Projections of annual amounts of benefits that will be paid under the Scheme as from the date of the study are also established, as are projections, year-by-year, of the salaries of staff currently affiliated and also 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 the Pension S this scheme in the years to come. Projections of salaries for these populations will also be established year by year. Each of these amounts is will be projected over a period of 80 years and discounted to present worth.

4.3. Combining these past and future 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

5.4. 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.

6.5. 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.

7.6. The rates obtained are adjusted so as to eliminate distortions resulting from insufficient data in certain organisations.

Economic assumptions

8.7. The discounting process is based on observation of the curve showing nominal observed rates of return on zero coupon long-term government bonds issued in the reference countries, as from the date when they become a reference country euro zone, as published by Eurostat.

9. As regards the updating of the past, the figure taken for a given year is the nominal rate for bonds with a maturity of 30 years.

10.8. As regards the discounting of future expenditure and resources, the A discount rate used is net of inflation shall be used. It is 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 for bonds with a maturity of 30 years, observed since the euro came into force, with an observation period of thirty years once sufficient time has elapsed.

11.9. 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 nominal 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 estimated by the euro-zone Harmonised Consumer Price Index (HCPI), published by Eurostat.

APPENDIX 2
Proposed modification Article 41

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 9.32%. 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.

1 This document has been classified restricted until its examination by the Committee of Ministers. / Ce document a été classé en diffusion restreinte jusqu'à la date de son examen par le Comité des Ministres.


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