World Meteorological OrganizationEXECUTIVE COUNCILSixty-Ninth SessionGeneva, 10 to 17 May 2017

EC-69/INF. 17.2Submitted by:

Secretary-General20.IV.2017

PLAN FOR FUNDING LIABILITY FOR AFTER-SERVICE HEALTH INSURANCE (ASHI)

I. Background and Introduction

The After-Service Health Insurance (ASHI) is a plan that allows eligible retirees and their eligible family members to continue participating in the WMO health insurance scheme beyond active service.

WMO offers health insurance cover to its staff members through the insurance plan of the United Nations Staff Mutual Insurance Society Against Sickness and Accident (UNSMIS). UNSMIS is a self-insured and self-administered plan. The health insurance premium is subsidized by 50% by the Organization. UNSMIS insures over 26,000 staff members worldwide.

Active staff members and their dependents account for 76% of the insured population and retirees with their dependents account for 24% of the insured population. WMO accounts for 3% of the population insured under the UNSMIS plan. The average loss ratio (%) of UNSMIS for the period of 2012 to 2014 was 95.17%. Premiums paid are currently higher than the claims reimbursed, making a premium increase very unlikely in the near future.

UNSMIS is a group plan with a principle of solidarity, a worldwide coverage and applies no exclusions to pre-existing conditions. After a 10-year vesting period, WMO staff members maintain coverage under the After-Service Health Insurance plan (ASHI), when retired. UNSMIS does not apply differences in coverage between active staff members and retirees. The premium for retirees is subsidized by 2/3 by the Organization.

UNSMIS reimburses 80% for all medical expenses and 90% for hospitalization. Credit accumulation applies for dental and optical reimbursements. UNSMIS negotiates with hospitals, clinics, treating physicians, pharmacies and laboratories for preferential UN rates and provides letters of guarantee to assist its insured population in case of emergency or for planned treatments. UNSMIS works with Global Excel to obtain cost reductions (generally above 30%) on treatments undergone in the US.

As at 2015, UNSMIS has reimbursed the equivalent of CHF 90,000,000 in 150 countries out of which 90% were in Europe. UNSMIS processes 414 reimbursement requests per day. A total of 316 WMO retirees and their dependents were covered under UNSMIS (ASHI) as at 31 December 2016.

WMO’s ASHI liability represents the present value of future streams of payments and revenues relating to ASHI, i.e. the total future costs associated with providing health insurance benefits to existing retirees and current staff upon their retirement. It is calculated by a professional firm of actuaries by discounting the difference between the outgoing cash flows i.e. the benefits payment, and the incoming cash flow from the participants.

The right to health insurance is accrued by staff during their active employment with the Organization. Following the adoption of IPSAS, the ASHI liability of WMO is calculated applying the Projected Unit Credit method. This method sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. The benefit obligation is then discounted to its present value.

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The total WMO liability as at 31 December 2016 amounted to CHF 68.5 million, an increase of CHF 30.6 million (93%) over the five-year period 2012 to 2016. The increase resulted primarily from a decrease of the discount rate, an increase in the healthcare cost increase rate and the health insurance premium rate, as well as a change of the normal retirement age from 62 to 65 for staff joining the Organization on 1 January 2014 or later. Table 1 shows that the total population (active staff and retirees) has increased by 6.3%, from 585 at the end of 2012 to 622 four years later.

Table 1: Summary of movements in the WMO ASHI liability during the five-year period 1 January 2012 to 31 December 2016 (amounts in thousands of Swiss Francs)

2016 2015 2014 2013 2012Balance at 1 January 58,508 53,042 41,538 42,861 37,920Service cost 1,525 1,460 1,109 1,081 953Interest cost 592 656 990 908 1,074Benefits paid (1,419) (1,375) (1,273) (1,447) (1,101)Actuarial (gains) or losses 9,286 4,725 10,525 (1,864) 4,645Adjustment - - 153 - -Balance at 31 December 68,492 58,508 53,042 41,538 42,861Population:- Active staff 310 335 304 314 304- Retirees 312 306 302 285 281- Total 622 641 606 599 585

The introduction of International Public Sector Accounting Standards (IPSAS) in 2010 brought the issue of ASHI to the forefront as it has a significant impact on the financial statements of the Organization.

The Post-Retirement Benefits Reserve (PRBR) was established by Resolution 7 (EC-LII) to meet After-Service Health Insurance (ASHI) benefits of WMO’s staff members on a pay-as-you-go basis. It is funded from a 3 per cent charge on payroll costs, with effect from 1 January 2009, in accordance with Resolution 14 (EC-LXI). The movements in the PRBR over the four years ending 31 December 2016 are shown in Table 2.

Table 2: Summary of movements in the WMO Post-Retirement Benefits Reserve during the four-year period 2013-2016 (amounts in thousands of Swiss Francs)

2016 2015 2014 2013Balance 1 January 2,292 2,402 (1,013) (1,063)Funding from 3% load on payroll costs

1,269 1,181 1,166 1,128

Payment of premiums (1,352) (1,291) (1,214) (1,078)Adjustment(s)* - - 3,463 -Balance 31 December 2,209 2,292 2,402 (1,013)

* Adjustment of a transaction in 2010, when an actuarial loss was charged to PRBR instead of expenditure of that year, resulting in a deficit in the reserve. This adjustment restores a positive balance in the reserve.

As of 31 December 2016, the balance of CHF 2.2 million in WMO’s reserve for ASHI liabilities represents 3.2% of the funding of its liability of CHF 68.5 million at that time.

II. The development of future ASHI liabilities

EC-69/INF. 17.2, p. 3

In the recent years, the liabilities calculated according to relevant IPSAS standards as part of the WMO financial statements have increased at a steady rate, and in 2016 they amount to CHF 68.5 million, i.e. CHF 10.0 million more than in 2015. This development has created concerns in the Secretariat and among Members as it has raised some doubts on the long-term sustainability of ASHI.

Part of this increase is explained by the decrease in the reference interest rate used for the actuarial calculations. Since ASHI liabilities are the result of the difference between the present value of the future streams of revenues and payments relating to this scheme, a decrease of the interest rate used for discounting these money streams determines an increase of the liabilities.

However, in addition to the assumptions made on the future interest rates, there are also structural causes that explain this trend. In summary, the major ones are:

(a) Assuming that the WMO workforce will remain stable at the present level, the number of WMO retirees will continue to increase in the coming years, before reaching a plateau. This is due to the fact that the number of staff retiring will exceed the number of deceases among retirees for a number of years;

(b) Additionally, the increase in the average expectation of life also contributes to an increase in the number of retirees supported by the ASHI scheme;

(c) Finally, ASHI liabilities tend to increase because of the growing cost of medical care, as the treatments available become more complex and expensive.

In order to better understand the likely future scenarios relating to IPSAS, the WMO has tasked a professional firm of actuaries to perform an actuarial study on the long-term financing of ASHI benefits. The study confirms that, if no corrective measure is taken:

(a) The costs for the payment of the insurance premium will increase at a faster pace than salaries and pensions;

(b) The total amount needed to finance the ASHI scheme will increase from 7.9% of the payroll in 2017 to 9.5% in 2045, with the WMO contribution raising from 5.0% to 6.1% and the contribution paid by retirees raising from 2.9% to 3.4%;

(c) This increase will place a considerable additional burden on both WMO and the retirees.

III. Possible cost containment measures

In order to limit the growth of future liabilities, different approaches can be considered, one of which aims at the reduction of the overall cost of the scheme.

With regards to reductions in the cost of the ASHI scheme, different proposals have been considered and are being discussed in the context of the UN Inter-agency Working Group on ASHI, established by the former UN Secretary-General under the auspices of the Finance and Budget Network of the UN system Chief Executives Board for Coordination (CEB) Hig-Level Committee on Management (HLCM).

This group developed a number of proposals for cost containment, which are summarized in the report of the Advisory Committee on Administrative and Budgetary Questions (ACABQ) to the UN General Assembly (doc. A/71/815 dated 28 Feb. 2017). In summary, these are to:

(a) Undertake collective negotiations with third party administrators;

(b) Undertake collective negotiations with health care providers;

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(c) Underwriting reviews and negotiations with insurers;

(d) Standardize the general valuation methodology and the establishment and application of key after-service health insurance liability valuation factors.

In addition the working group recommends to continue exploring the possibility of providing primary coverage by National Health Insurance schemes and is considering a proposal by the UN Secretary-General to introduce the principle of funding the After-Service Health Insurance liability in respect to staff recruited as from 1 January 2020 so as to fully cover the UN pay-as-you-go obligations to those officials.

The majority of the proposals considered by the working group aim at leveraging the size of the UN system and the related contractual strengths to obtain better conditions from commercial partners, without direct impact on the benefits provided by ASHI. Other measures, for example, establishing that the primary coverage be provided by National Health Insurance Schemes, point more in the direction of reducing the benefits of the scheme.

Whilst the measures being considered are expected to deliver substantial benefits to the UN system as a whole in terms of overall reduction in the cost of ASHI, it is clear that they cannot be implemented by WMO in isolation, since we would not have a sufficient critical mass to achieve substantial contractual advantages.

Additionally, the implementation of cost savings measures in isolation from the rest of the UN family would reduce the relative attractiveness of WMO as an employer and would expose our Organization to increased legal risks in relation to acquired rights of staff or retirees.

In view of these considerations, it appears that the most effective and prudent approach is to await the results of the on-going discussion within the working group and the implementation of the agreed measures at UN level.

IV. Stabilization of the scheme

Even if it is advisable – for the above reasons – to avoid implementing possible cost saving measures in isolation from the rest of the UN system, the Secretariat believes it is still necessary to define and implement an approach aiming at stabilizing the ASHI scheme, i.e. to avoiding a further growth of the liabilities, until the cost savings measures that are currently being considered are implemented and deliver the expected results.

This approach has been defined and quantified in one of the scenarios (base scenario plus) developed by the actuaries.

According to this scenario, the future growth of the ASHI liabilities would be stopped by introducing an additional contribution to the scheme to be provided by:

(a) Active staff, in the measure of 1% of their salaries;

(b) Members, in the amount equal to the contribution provided by staff, currently estimated at ca. CHF 500k per annum.

These additional contributions would be administered in a separate fund, and invested preferably under the management of the UNSMIS, if this was acceptable to them, or by a commercial fund manager under the overall responsibility of WMO and within investment guidelines defined by it.

The purpose of this fund would be to offset future payments as from the moment when their cumulative level will exceed the level of annual contributions by Members, staff and retirees. In this way, the amount of annual contributions would remain stable and foreseeable.

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From the point of view of staff, this approach introduces an element of solidarity among retirees and active staff, the latter contributing to a scheme from which they receive no benefits during their active life, whilst contributing to the long term viability of it.

From the perspective of retirees, the present proposal would maintain the current benefits, and would avoid an increase in the contribution up to a level that could become no longer economically affordable.

From the viewpoint of Members, the proposal would have the advantage of bringing the ASHI liabilities under control, thus avoiding the need for larger payments to finance the scheme in the future. Additionally it would introduce a principle of co-funding of the ASHI scheme which would now include not only retirees and Members, but also active staff members.

Finally, the proposed approach would also have the advantage of establishing a permanent review mechanism that could lead to adjustments in the contribution level of all parties as cost saving measures are implemented and bear results. For example, the level of additional contribution to the scheme by both active staff and Members could be adjusted upon confirmation that the future ASHI cost are decreasing.

V. Conclusion and recommendation

The result of the actuarial review conducted in respect to long terms ASHI liabilities confirms the trend towards an increase of these liabilities over time. This is not only the result of the recent downward trend in the market interest rates, but it is also the result of structural elements which are explained in this document.

Whilst various cost containment measures are being considered at UN level, this process has not yet reached a stage where a coordinated implementation of these measures can take place. An implementation of some of these measures by WMO in isolation is not recommended.

Until the time when the above measures are agreed and implemented at UN level, the Secretariat considers that there is an urgent need to stabilize the ASHI scheme, to stop the above upward trend in the level of long-term liabilities.

This objective can be achieved by implementing the recommendation resulting from the actuarial study, i.e. by introducing a supplementary contribution by active staff members in the level of 1% of the salary and an additional contribution by Members in the same annual amount. Both contributions would be administered in a dedicated fund, for which the most cost-efficient and administratively simple solution would be sought. The level of these supplementary contributions would be reviewed regularly on the occasion of annual actuarial reviews and could be reduced in case the saving measures being considered at present are implemented and bear the expected fruits.

EC-69/INF. 17.2, p. 6

In addition to these measures, the above fund could be financed by extraordinary one-off contributions, such as allocation of budgetary surplus.

Members are invited to give favourable consideration to this proposal by adopting draft Decision 17.2/1 (EC-69) – Plan for funding the ASHI liabilities, as given in EC-69/Doc. 17.2.

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Annex: 1 (available in English only)

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ANNEX

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