Net Take-Home Pay (NTP)Issues for Group I Duty Stations

ICSC/68/CRP.7

18 March 2009

ENGLISH ONLY

Sixty-eighth session

New York, 23 March-3 April 2009

Item 6 (c) of the provisional agenda

Report of the thirty

Net Take-home Pay (NTP)issues for Group I duty stations

1. INTRODUCTION

The objective of this note is to provide detailed information on the issues surrounding the evolution of net take-home pay (NTP) for United Nation common system professional staff members serving in Group I duty stations. It is prepared in response to a claim by International Atomic Energy Agency (IAEA) that has been repeated in several fora, that there was a decline in professional staff salaries in Euro-denominated European duty stations during the period 2001-2007, and a resulting loss of purchasing power parity (PPP) of such salaries relative to New York, attributing this to the following factors:

(a)The evolution of NTPs not keeping pace with local inflation during this period;

(b)The out-of-area (OA) weight being higher than the level actually surveyed in 2005;

(c)The evolution of NTPs produced by ICSC not keeping pace with, and being highly variable relative to, those based on OECD PPPs as calculated by IAEA; and

(d)The decision of the Commission not to add Betriebskosten to the rent data for Vienna in 2005.

The note provides a detailed description of the methodology underlying the post adjustment system, as approved by the Commission, focusing on those aspects that pertain to the calculation of the post adjustment index (PAI) as well as its adjustment over time to account for temporal economic conditions at Group I duty stations. It also provides responses to the specific issues raised by the IAEA. It is hoped that the material covered would help dispel some of the misconceptions regardingthe operation of the post adjustment system that are evident in the IAEA presentations and, in the process, facilitate a better understanding of salary-setting procedures applied by the International Civil Service Commission (ICSC).

1. BACKGROUND

1. Queries about NTP Issues from Organizations and Staff Federations

The ICSC secretariat regularly receives queries from organizations, staff federations, and other interested parties, frequently expressing dissatisfaction with various aspects of the operation of the post adjustment system as it relates to the circumstances of specific duty stations. Responding to these queries is considered a critical function of the ICSC secretariat. The issues in question are resolved as soon as the secretariat provides detailed explanations that facilitate understanding ofhow the system works.

It will be recalled that the secretariat received queries from several field duty stations in the first half of 2008, expressing concernthat the sustained appreciation of their respective local currencies relative to the US dollar was leading to an erosion of the purchasing power of their post adjustment, education grant, and mobility and hardship entitlements, paid in US dollars, under the current operational rules of the post adjustment system. In response, the ICSC secretariat conducted research on several modifications of the operational rules, including one that was proposed by the duty stations expressing concern: more frequent reviews of the post adjustment classifications (PACs) than the current four-month cycle. The secretariat submitted its findings to the sixty-seventh session of the Commission.

After due consideration of the secretariat’s findings and the arguments presented by the organizations and staff federations, the Commission concluded that the current approach was fulfilling the goals for which these compensation elements were established, that no single remedy would yield optimal results for all duty stations, that the proposed approaches for the review of post adjustment amounted to a redistribution of NTP from one group of duty stations to another, and therefore that no change in the operational rules was warranted. At the request of the Commission, the secretariat conducted further research on this issue using updated information on exchange rates for the second half of 2008. The results were essentially the same as before, except for the fact that the reversal of the exchange-rate situation, with the US dollar strengthening against most world currencies, led to a corresponding reversal in terms of the duty stations “winning” or “losing” from the current approach. This outcome effectively validated the Commission’s earlier conclusions.

1. Queries Regarding Evolution of NTPs for Professional Staff in Euro-Europe

Regarding the issues surrounding the evolution of NTP for professional staff in Euro-denominated European duty stations, the ICSC secretariat has tried, as usual, to respond to all queries posed by IAEA, and to provide all the relevant information about the methodology underlying the post adjustment system in general, and the Commission-approved operational rules for setting salaries for Group I duty stations, in particular. The following summary and timeline of the ICSC’s interactions with IAEA provide some indication of the level of effort that has been expended so far by IAEA to advance its arguments on the issue, and by the ICSC secretariat to explain the approved methodology and to demonstrate that it is being applied correctly and consistently, to all duty stations, including those in Euro-Europe.

July 2008:A paper entitled “Declining Professional Staff Salaries in Europe” was circulated presented by the IAEA at the sixty-seventh session of the Commission, during the discussion of the ACPAQ agenda. After taking note of the IAEA’s presentation, the ICSC approved the ACPAQ agenda and decided to refer the matter raised by IAEA to ACPAQ for its review at its 31st session as an extra-agenda item. Furthermore, it reiterated its previous decision for ACPAQ to give due consideration to the issue of Betriebskosten before the 2010 round of surveys was launched.

September 2008:The IAEA contacted the secretariat reiterating its argument that the decline of salaries wasdue primarily to the size of the OA weight. The Executive Secretary of the ICSC responded, via email dated 12 September 2008, stating that the Commission disagreed with the claims made in the IAEA paper and explained why.

The IAEA presented the same case to the sixteenth session of HLCM. The ICSC prepared a response to be delivered by the ICSC Chairman, but he did not have an opportunity to do so, as the IAEA’s presentation was made at the last minute.

October 2008:The IAEA requested the ICSC to conduct analyses “to better understand why we are in the current situation (with salary levels not keeping pace with inflation), and whether there are implications for member states in the near future (should pay levels rise ahead of inflation)”. The ICSC designed a research plan and initiated work on the extensive modelling required, looking at global data and proceeding at a pace that was consistent with its limited human resources, overall work programme, and other priorities.

November 2008:The IAEA made the same claims about declining professional staff salaries in Europe and loss of PPP relative to New York at a scheduled videoconference with the HRNetwork. The ICSC Chairman, in a brief response, cast doubt on the claims being made, and the merits of the methodological changes being proposed, by the IAEA. It was suggested that the ICSC should organize a workshop to address all the issues raised by the IAEA. The ICSC secretariat started preparatory activities for the workshop and continued with the modelling exercise requested by IAEA. As the ICSC was also busy with the preparatory activities for the thirty-first session of the Advisory Committee on Post Adjustment Questions (ACPAQ), the penultimate session before the launch of the 2010 round of surveys, it was decided that the workshop would be conducted immediately prior to the ACPAQ session, and that representatives of all organizations and staff federations would be invited.

January 2009:The IAEA engaged the services of Price Waterhouse Coopers (PWC), an accounting firm, to analyze salary data provided by the ICSC. PWC agreed with IAEA’s position on the issues.

The ICSC organized a one-day special-topics workshop for all United Nations common system organizations and staff federations. A representative of PWC was also invited by the IAEA to attend the workshop as an observer. All issues raised by the IAEA were addressed. The workshop provided detailed analyses, in some cases more than was requested by the IAEA, to address the issues raised.

Among other things, the workshop:

(a)Facilitated a deeper understanding of the Commission-approved methodology underlying the post adjustment system as it relates to issues of NTP evolution for Group I duty stations;

(b)Provided results of simulations that showed that reducing the OA weight to the level proposed by the IAEA does not necessarily lead to an increase in the PAI, and may very well lead to a decrease in the PAI for some headquarters duty stations; and

(c)Explained in detail the factors that influence the evolution of the NTP in Group I duty stations; including the weights and indices for all major components. Participants were made to understand why the evolutions of professional staff salaries, calculated under the current methodology, are different in different duty stations.

The ICSC received very positive feedback from all participants, including IAEA, whose representatives conveyed their positive evaluation of the workshop during a telephone conversation with the ICSC Executive Secretary.

At the thirty-first session of ACPAQ, the IAEA presented a paper along with the PWC report, dropping the issue of the OA weight but re-stating its position on the issue of the evolution professional salaries in Euro-Europe. ACPAQ considered irrelevant the report prepared for the IAEA by PWC and, in particular, cautioned against the use of PPPs published by OECD in the calculation of salaries of United Nations common system professional staff, and also comparisons of United Nations salaries to those of the Austrian national labour market. ACPAQ also:

(a)Suggested that one possibility for the future might be to reduce the five-yearly frequency of place-to-place surveys; and

(b)Re-affirmed that the existing methodology was being applied correctly and consistently by the ICSC secretariat in the calculation of PAIs for all duty stations including those of Euro-Europe.

(c)Suggested that the ICSC secretariatcontinue to work with organizations and staff federations on the issues surrounding the evolution of NTP for professional staff.

In the spirit of the above ACPAQ conclusions and recommendations, the ICSC distributed to all participants a document it had prepared containing explanatory notes on the post adjustment system specifically covering all the relevant issues discussed at the workshop and at ACPAQ.

March 2009:The IAEA submitted to the HR Network meeting in Madrid another paper with a different title but with the same message, that salaries in Europe have lost PPP with NY but this time on the basis of NTPs calculated by IAEA using PPPs produced by OECD, considered by the IAEA to be the gold standard against which the ICSC-calculated NTPs must be measured. The paper also appeared to ignore or downplay all the efforts expended by the ICSC secretariat since September 2008, to address IAEA’s concerns.

1. METHODOLOGY FOR ESTABLISHING AND UPDATING POST ADJUSTMENT INDICES FOR GROUP I DUTY STATIONS
2. Objectives of the Post Adjustment System – principle of Purchasing Power Parity

The objective of the post adjustment system is to maintain PPP of salaries of United Nations common system professional staff members serving worldwide relative to their counterparts at the base of the system, New York. The post adjustment index determines salary levels that take into account the relative difference in the cost of living between a specific duty station and New York.

Even though the underlying principle of the post adjustment system is to equalize PPP of professional staff salaries relative to New York, this parity is guaranteed to be exactly correct for headquarters duty stations only once every five years when the baseline cost-of-living surveys are conducted at the beginning of a new round. Between the surveys, the PAC of each duty station evolves according to its local economic circumstances with no direct linkage to cost-of-living movements in New York. However, any minor disparities in purchasing power occurring during a survey round are compensated for by time-to-time adjustments (see subsection C below) and at the beginning of the following survey round, when the place-to-place surveys are conducted. It should be noted that the post adjustment for New York is derived from regular updating of the relevant components of the PAI, using time-to-time movements in these components as measured by CPI data published by the United States Bureau of Labour Statistics (BLS).

1. Role of place-to-place surveys

Place-to-place surveys provide benchmark data used for periodic comparisons of cost of living between locations around the world and New York. These data are used to determine the post adjustment of those locations. For headquarters duty stations, place-to-place surveys are conducted every five years at the beginning of a round. As already mentioned, when the results of these surveys are implemented, the PPP of salaries of professional staff members at these duty stations are presumed to be equivalent to those of their counterparts in New York.

1. Adjustments in between place-to-place surveys (accounting for inflation and exchange rates)

Between cost-of-living surveys, approximate PPP of professional staff salaries is maintained by updating the various PAI through time-to-time adjustments reflecting movements of its various components. Under the approved methodology, post adjustment multipliers are adjusted on a monthly basis to account for exchange-rate movements only, in order to achieve the operational objective of stabilizing NTPs in local currency. Adjustments to account for inflation are made only once every twelve months (PAC reviews), unless a full five per cent movement in the cost of living is measured earlier, in which case the adjustment is made at that point. The PAC reviews take into account not just local inflation and exchange-rate movements, but also movements in the other major components, including the housing, medical insurance, pension contribution and the out-of-area components

The charts in annex I show the impact of inflation exchange-rate fluctuations on the disparity between the evolution of the nominal pay index (prevailing multiplier plus 100) and the updated PAI, and hence on the magnitude of the salary increases coming from the annual PAC reviewsbetween 2000 and 2009 for headquarters duty stations and WashingtonD.C. The effects of the five-yearly place-to-place surveys and the PAC reviews are also shown. Specifically, the charts show that:

(a)The disparities between the updated PAI and the pay index are corrected at the time of the PAC reviews; and

(b)The size of the correction at the annual PAC reviews (in other words, the size of the salary increase) depends on the amount of gains or losses that have accrued from the monthly adjustments designed to stabilize NTP in local currency since the last PAC review.

The charts in annex II present the evolution of NTPs for all headquarters duty stations during the period 2000-2009, clearly indicating the impact of the two five-yearly place-to-place surveys that were conducted during this period. The next section discusses the factors that influence the evolution of NTP for Group I duty stations.

1. FACTORS THAT INFLUENCE THE EVOLUTION OF NTPs FOR GROUP I DUTY STATIONS

This section provides more detailed information on how the evolution of the NTPs is influenced by factors other than the implementation of the results of place-to-place surveys, such as local inflation, exchange-rate fluctuations, as well as movements in the other components, namely, housing, medical insurance, pension contribution and the out-of-area components.

1. Local inflation

The charts in annex III illustrate the evolution of local inflation, as measured by the total CPI,for headquarters duty stations from 1995-2008. The charts show clearly that New York has the most rapidly increasing inflation, slightly overtaken by Madrid as of 2001. On the other hand, Geneva has the lowest inflation during the period under consideration, followed by Vienna.

1. Housing Component (Rent)

For Group I duty stations, the rent index is based on rent data provided by the Inter-Organizations Section (IOS) of the OECD. These rents are surveyed annually through real estate agencies. The charts in annex IV show the evolution of pure rents for each headquarters duty station. Again, New York has by far the fastest increases in rental costs of all duty stations, overtaken by Madrid as of 2004. Vienna has the lowest increases in rental costs.

1. Medical insurance contribution

The average medical contribution at a duty station is calculated as the weighted average of different contribution amounts (for a staff member at grade P4, step VI, with dependant status) according to the medical insurance plans available and chosen by staff at the duty station. Weights are the number of staff under an available medical insurance plan. The charts in annex V show the evolution of the medical insurance contribution over time, indexed to January 2002 (Jan. 2002=100). In this case, the fastest increases, relative to New York, are in Vienna, but the medical insurance index is the component of the PAI with the lowest weight.