Q - United Nations



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

I. 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 regarding the 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).

II. BACKGROUND

A. 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 of how the system works.

It will be recalled that the secretariat received queries from several field duty stations in the first half of 2008, expressing concern that 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.

B. 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 was due 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 HR Network. 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 secretariat continue 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.

III. METHODOLOGY FOR ESTABLISHING AND UPDATING POST ADJUSTMENT INDICES FOR GROUP I DUTY STATIONS

A. 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).

B. 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.

C. 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 reviews between 2000 and 2009 for headquarters duty stations and Washington D.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

a) 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.

IV. 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.

A. 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.

B. 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.

C. 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.

D. Pension contribution

Pension contribution is paid by all staff in the same proportion for each grade and step of the pensionable remuneration scale. As it is computed and paid in US dollars, it has a different impact on NTP in local currency depending upon the prevailing exchange rate whenever the pensionable remuneration scale is updated. The chart in annex VI shows the temporal evolution, in absolute US dollar values, of the pension contribution of a staff member at P4, step VI with dependents.

The pensionable remuneration scale is updated at the time of the annual review of PAC of New York. Thus the reduction in the NTP that usually accompanies the annual increases in pension contribution for other Group I duty stations is not seen for New York. It should be noted that if the increases in pension contribution did not coincide with the annual PAC review for New York, then the NTP of staff in New York would be higher that the value published after the review.

E. Out-of-area index

The out-of-area (OA) component represents the portion of the remuneration of international staff is spent outside the location of the duty station. Such expenditures include those on items imported directly by staff because of limitations of the local market, private travel outside the country of the duty station (home leave, vacations), fees for education and support of dependants living abroad, maintenance of a dwelling in the home country, etc. Information about such expenditures is obtained through household expenditures questionnaires completed by staff in place-to-place surveys.

It must be remembered that the out-of-area component was introduced in the post adjustment index structure to reflect the international character of the United Nations staff population. It represents the portion of the post adjustment that is the same for all staff, irrespective of location, thereby providing a measure of stability in the salaries of staff members serving under the United Nations common system in locations across the world with varying economic conditions and levels of development.

The OA component consists of two parts: the OA weight and the OA index. The OA weight specifies the relative importance of the OA component in the PAI structure. For Group I duty stations, the OA weight is set at a minimum of 20 per cent of the net remuneration plus 5 per cent of net base salary (non-consumption commitments or NCC). If the actual OA expenditure, as derived from household questionnaires, is greater than 20 per cent, then the actual OA expenditure (as a proportion of total expenditure) plus the NCC is used as the OA weight. In practice, this never happens for headquarters or other Group I duty stations where the provision of goods and services is not limited and the local market is well developed. The OA weight is currently set at approximately 23.5 per cent of the PAI, with slight variations (less than 0.5 per cent) across headquarters duty stations.

The OA index currently used is a weighted average of US dollar-based inflation rates of 21 countries, which represents a world price level in US dollar terms. Owing to the results of a survey of OA expenditures conducted by the ICSC secretariat in October 2007, the list of countries used for this purpose in the 2010 round of cost-of-living surveys was revised, and now includes 26 countries. Table 1 below shows the list of countries included in the calculation of the OA index under the current methodology and that proposed for the 2010 round as well as the respective weights used in the calculation. Note that the weights to be used for the 2010 round were derived from the 2007 OA survey, whereas the weights under the current methodology are implicit weights generated by the grouping of the 21 countries into 11 groups.

Table 1: List of Countries included in the calculation of the OA index

|Reference country |Weight |

| |2005 round |2010 round |

|United States |9.09 |21.07 |

|France |9.09 |19.70 |

|United Kingdom |4.55 |12.47 |

|Canada | |6.09 |

|Germany |4.55 |3.60 |

|Italy |9.09 |3.30 |

|Australia | |3.23 |

|Belgium |3.03 |2.43 |

|Switzerland |9.09 |2.38 |

|Spain |3.03 |2.27 |

|Kenya | |2.10 |

|India | |2.07 |

|Netherland |3.03 |2.03 |

|South Africa | |1.79 |

|Japan |9.09 |1.78 |

|Philippines | |1.62 |

|Denmark |2.27 |1.49 |

|Brazil | |1.39 |

|Austria |4.55 |1.35 |

|Sweden |2.27 |1.25 |

|Russia | |1.22 |

|Thailand | |1.21 |

|Senegal | |1.17 |

|China, HK |4.55 |1.01 |

|Nigeria | |0.99 |

|Ghana | |0.98 |

|Luxembourg |3.03 | |

|Norway |2.27 | |

|Finland |2.27 | |

|Ireland |4.55 | |

|Singapore |4.55 | |

|Portugal |3.03 | |

|Greece |3.03 | |

The chart in annex VII shows the evolution of a rebased series of the OA Index (January 1996 = 100). Note that the current list of countries is heavily dominated by the Euro and the US dollar, and the currencies affiliated with these two currencies (other European currencies to the Euro; and Canada, Japan, Hong Kong to the US dollar). It is therefore easy to see that during a period of sustained weakness of the US dollar relative to the Euro, the index would rise much faster for all US dollar-based than Euro-based duty stations, as staff members would need more US dollars to maintain PPP for a basket of currencies dominated by the Euro. It must be noted that this situation would be reversed during a period of sustained strength in the US dollar relative to the Euro.

We now turn to the specific issues raised by the IAEA regarding the evolution of NTP in Euro-denominated European duty stations.

V. IAEA ISSUE #1: PROFESSIONAL SALARIES NOT KEEPING UP WITH LOCAL INFLATION IN EURO-EUROPE

A. Effect of Local Inflation on the PAI

In the updating of the PAI over time, only the in-area (excluding housing) component of the PAI is adjusted by local inflation, as measured by the local CPI published by the national statistical offices of the duty stations. It should be noted that the CPI used in the PAI calculations is the local CPI disaggregated by sub-component, and re-weighted in accordance with the expenditure patterns of United Nations common system professional staff. These adjustments affect only the post adjustment component of the NTP, not the entire NTP.

There are several other components of the PAI that are not affected by such local economic conditions as inflation and exchange-rate fluctuations, and are adjusted not by CPIs but by other mechanisms specified by the approved methodology. These include the housing (rent), medical insurance, pension contribution and out-of-area components. Thus evolution of professional salaries is expected to reflect movements in all these components, and it would be erroneous to expect it to be in tandem with local inflation alone.

B. Evolution of total CPIs and NTPs for Headquarters duty stations

The evolution of the adjusted CPIs used by the ICSC is a bit more conservative than that of the total CPIs published by national statistical offices. The charts in annex VIII show the evolutions of the total CPIs and the NTPs for each Headquarter duty station over the period 1995 to 2008. The charts show clearly that the evolutions of the two series are close in the long run. However, given that the five-yearly place-to-place surveys (indicated by vertical bars in the charts) lead to exact PPP of salaries in duty stations relative to New York, it is more appropriate to compare the two series during the time intervals between surveys. During these time intervals, the two series are close or divergent depending on the results of the adjustment mechanisms described in sections III and IV.

VI. IAEA ISSUE #2: THE OA WEIGHT BEING SET HIGHER THAN THE LEVEL SURVEYED IN 2005 IS THE MAIN CAUSE FOR THE DECLINE IN PROFESSIONAL STAFF SALARIES IN EURO-EUROPE

A. Effect of Reducing the OA Weight to the level surveyed

As mentioned in Section IV.E, the actual OA expenditure in Group I duty stations would always be lower than 20 per cent of the PAI, and therefore the OA weight applied to all Group I duty stations would always be higher than that derived from the household expenditures surveys. The IAEA proposes a reduction of the OA weight to the level obtained from the household expenditures surveys conducted in 2005. However, this proposal does not necessarily lead to an increase in the PAI and, in fact, could lead to a reduction in the PAI for some duty stations. It all depends on the relativities of the other components with New York, as is illustrated in the simulation studies below.

It should be remembered that expenditure weights are essentially the amount of US dollars (out of the salary of a staff member at the P4-Step VI with dependents) spent on the various expenditure categories. Thus the excess weight arising from the reduction of the out-of-area weight must be redistributed proportionally (based on common expenditure weights) to other expenditure categories under the In-area component, thereby increasing the weights of these components. This process might lead to a lower PAI if the components with the biggest increases in weights happen to be those with very low indexes relative to New York. Otherwise, it could lead to an increase in PAI, as illustrated in the next sub-section. In any case, as the out-of-area index is only about 23 per cent of the overall index, this process could certainly not bring the evolution of the NTP in line with that of the CPI for short intervals of time, as asserted by the IAEA.

B. Simulations to test the effect of reducing the OA Weight

To assess the impact of a reduction in OA weight on the PAI, the ICSC secretariat conducted simulations comparing the PAIs for all headquarters duty stations, calculated for the month of December 2008 under the present specification of weights with those calculated under the following four scenarios of OA weight specification and redistribution regimes:

Scenario 1: The OA Weight is reduced to 10 per cent. Excess OA weight redistributed to the total in-area component in proportion to the common weights.

Scenario 2: The OA Weight is reduced to 6 per cent. Excess OA weight redistributed to the total in-area component in proportion to the common weights.

Scenario 3: The OA Weight is reduced to 10 per cent. Excess OA weight redistributed to the total in-area component, excluding Housing, in proportion to the common weights.

Scenario 4: The OA Weight is reduced to 6 per cent. Excess OA weight redistributed to the total in-area component, excluding Housing, in proportion to the common weights.

Since medical insurance and pension contribution components have fixed monetary values, the redistribution of the OA weight would affect only the in –area component. The overall impact of the reduction in OA weight, therefore, depends on the relativities of elements of this component with New York. For those duty stations where both the in-area excluding housing and the housing components have indexes lower than the out-of-area index (which are the majority of duty stations covered by the post adjustment system), assigning larger weights to those components would result in a lower PAI. In rare situations the PAI might increase but, even then, not significantly. The results of the simulations are summarized in Tables 2 and 3 below:

Table 2: Results of simulation study for all Headquarters duty stations: current method versus Scenarios 1 and 2

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Table 3: Results of simulation study for all Headquarters duty stations: current method versus Scenarios 3 and 4

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The results presented in the above tables clearly show that a reduction in the OA weight would lead to a reduction in the PAI most of the time and for all scenarios considered. The reductions in the PAI are even more pronounced for scenarios 1 and 2, when the redistribution of the excess weight to the in-area components includes the housing sub-component. Only when the housing sub-component is excluded from the redistribution of excess OA weight does the PAI increase marginally for two duty stations (Geneva and Vienna).

VII. IAEA ISSUE #3: EVOLUTION OF PROFESSIONAL SALARIES PRODUCED BY ICSC METHODOLOGY FOR EURO-EUROPE IS BELOW AND MORE VARIABLE THAN THOSE BASED ON OECD PPPs

In various documents on this issue, the IAEA compares the ICSC-published NTPs for selected European duty stations (“ICSC NTP”), to hypothetical NTPs (“OECD NTP”) that are calculated by using the New York salary level in US dollars as a base for any given point in time. Then, for each of the duty stations compared with New York, and for each year from 1996 to 2007, the value of the base (New York’s salary level) is multiplied by the “PPP for actual individual consumption” available from online databases at the OECD web site. The IAEA and PWC have used the OECD PPPs under the central assumption that “These ‘ICSC NTP’ data can be compared with a calculated ‘OECD NTP’, by using the New York ICSC NTP and OECD PPP indices”. There are several flaws in this assumption:

First, it must be remembered that even though the principle of post adjustment is close to that of PPP, there are important differences, including the fact that PPP indices are based on straight comparisons of prices of goods, while the post adjustment index is meant to also compare expenditures and costs (see also ICSC/ACPAQ/13/R.2 on the review of the post adjustment system in 1988). Also, PPP index calculations take into account only local (in-area) prices, while the PAI calculation takes into account in-area expenditures in both local and other currencies, as well as expenditures incurred in other countries (out of area).

Second, as has been pointed out by ACPAQ in the past, as well as other experts, the use of OECD PPPs for the purpose of comparing NTP across duty stations is not appropriate. In fact, at the thirty-first session of ACPAQ, a Committee member pointed out that “the OECD PPPs were not an appropriate indicator, since they were based not only on a different basket of products but also on multilateral comparisons, not bilateral comparisons with New York” (ICSC/68/R.9, paragraph 43). It is interesting to note that Eurostat and OECD themselves run their own expenditures surveys to determine the proper weights to be used in the determination of salaries for their staff. They do not use their own general population-based PPPs, because they are not applicable to their expatriate population.

Third, the OECD PPPs are fundamentally different from the price ratios produced by ICSC. In fact, OECD PPPs are statistical constructs used consistently with the macro-economic concepts of national accounts (such as Gross Domestic Product); they are not produced with the purpose of adjusting salaries of international staff, even staff of OECD or other international organizations. The OECD PPP Manual itself states clearly that PPPs are used typically “either as currency converters to generate volume measures with which to compare levels of economic performance, economic welfare, consumption, investment, overall productivity and government expenditure on defence, health, etc., or as price measures with which to compare price levels, price structures, price convergence and competitiveness.”

Finally, the series chosen by IAEA and PWC was that of “PPP for actual individual consumption”. In other words, the OECD PPPs reflect the capacity to consume, rather than the capacity to pay, which is a clear departure from the ICSC’s concept of “expenditure”. The ICSC questionnaires ask detailed information about household expenditure, and not its consumption, on various goods and services. As the OECD PPP Manual itself explains, there is a great difference between expenditure and consumption, especially in the context of the OECD PPPs, for which “actual individual consumption” is linked with the expenditures not just of households (constituting about 75-90 per cent of total expenditure for most European countries), but Non-Profit Institutions Serving Households (NPISHs) and the General government, both constituting the remaining 10-25 per cent of the total expenditure). Aside from the fact that households of international staff do not have the same expenditure patterns as households of the general population, it must be noted that households of international civil servants do not generally “consume” the services paid for by non-households (NPISHs and the government) for housing, health, recreation and culture, education, unemployment benefits and so forth (about 10 to 25 per cent of national GDP).

Despite all these substantive methodological differences between the OECD PPPs and the PAI, IAEA analyses appear to consider the NTP based on OECD PPPs as the gold standard against which the ICSC NTP must be measured, and on this basis has concluded that there are large variations between the “ICSC NTP” that is actually paid, and the “OECD NTP” and that these large variations, between “ICSC NTP” and “OECD NTP” occur over very short periods of time. This assertion does not really have any merit. It should not come as a surprise that indices targeting different populations with different methodologies and baskets of goods and services, would produce different results. For instance, the cost of living in London, as measured by the “Big Mac Index”, was about 28 per cent higher than that of New York in July 2008, but the difference was only about 11 per cent according to the ICSC’s post adjustment index. Does this mean that professional staff in London can claim that the ICSC NTP was not “keeping pace” with the “Big Mac NTP” and that “the Big Mac Index” was a better measurement simply because it produced a favourable result for London?

The IAEA also states that there is no apparent reason why the “ICSC and OECD methodologies” would closely agree on an appropriate NTP in 2002, and then differ by 15 per cent only 5 years later. However, it must be remembered that the ICSC methodology is not in disagreement with any OECD methodology, but with an overly simplified approach to the calculation of NTP, proposed by the IAEA and PWC. Furthermore, in light of the clearly defined fundamental differences between the two series, any closeness or disparity between the “OECD NTPs” and “ICSC NTPs”, at any given point in time, is purely coincidental.

Regarding IAEA’s assertion that the ICSC NTP has recently evolved at a significantly lower rate than the real purchasing power needs of staff in Europe, while at other times it has evolved at a higher rate, it must be remembered that the purpose of post adjustment is not to produce NTPs to suit the purchasing power “needs” of staff, in Europe or anywhere else, but rather to equalize PPP of salaries of United Nations common system professional staff members serving around the world with those of their counterparts in New York.

VIII. IAEA ISSUE #4: EXCLUDING BETRIEBSKOSTEN FROM RENT IN VIENNA HAS CONTRIBUTED TO THE LOSS IN PPP FOR PROFESSIONAL SALARIES RELATIVE TO NY

Representatives of Vienna-based organizations and staff federations have stated repeatedly over the years that in Vienna, Betriebskosten was a mandatory part of rent covering costs of maintenance, insurance, etc., but renters in Vienna are instructed to report only net rent exclusive of Betriebskosten, and to report Betriebskosten under “other housing costs”. In contrast, renters in Manhattan, New York, mostly report gross rent because maintenance and utility costs are often not separated from the rent. They concluded that this apparent unequal treatment of the housing component was in part responsible for the loss of PPP of Vienna relative to New York since 2005.

It should be noted that the issue of Betriebskosten was discussed in great detail by both ACPAQ at its twenty-seventh session and by the Commission at its sixty-second session. The Commission agreed with the Committee’s findings that the rent data collected by IOS (used in the calculation of the housing index for Group I duty stations) are pure rents, and concluded that IOS “followed the same data collection methodology in Vienna, New York, and other duty stations”, and that “adding the Betriebskosten component to rent would destroy the comparability of rental data and introduce double counting since “running costs” were already represented by other components of the housing index”.

However, the Commission left the issue open for further investigation on the basis of any new relevant information. Accordingly, the Committee, at its thirty-first session suggested that the secretariat investigate the issue of Betriebskosten further in consultation with the management and staff representatives of Vienna-based organizations and submit its findings to the Committee for its review and final recommendation at its thirty-second session.

Regarding the treatment of the housing component in the expenditures surveys for Vienna and New York, it should be noted that:

i) Housing-related expenditures provided by staff are used to derive the housing weight and to establish rental subsidy thresholds and these two statistics are, by definition, duty station-specific. Thus minor distortions in the distributions of the housing weight across the various housing sub-components in New York (for instance entering gross rents instead of net rents in the survey questionnaires) does not affect the housing weight of any duty station other than New York;

ii) The housing index is calculated by aggregating the relativities of “market prices” of various sub-components of the housing component (rent, utilities, maintenance, other housing costs), using the weights specific to the duty station (not New York); and

iii) The aforementioned relativities are established by direct comparisons of the “market prices” of the respective sub-components, which are collected in a consistent manner across duty stations. For instance, the rent index is based on pure-rent data collected by IOS in all Group I duty stations, including New York. The other sub-component indices are based on data collected by the local survey coordinator at the duty station, a process that is completely independent of the individual expenditures on the sub-components by staff at the duty station.

It is therefore irrelevant to the PAI for Vienna (or any other duty station) whether or not, in recording housing-related expenditures on the housing survey questionnaires, professional staff members in New York are able to separate utility and maintenance costs from the rent data.

IX. CONCLUSIONS AND RECOMMENDATIONS

We conclude by reiterating a few relevant facts:

a) The methodology underlying the post adjustment system was not designed to perfectly fit the economic circumstances of every duty station, but to be applicable to all duty stations, ensuring that United Nations common system professional staff members at the same level receive a remuneration that has the same purchasing power as that of their counterparts in New York.

b) Thus evolution of professional salaries reflects movements in all these components of the post adjustment index; not just local inflation, which affects only the in-area (excluding housing) component.

c) The calculation and time-to-time adjustments of the PAI determine and maintain over time equivalent levels of remuneration for international staff in different countries by comparing the cost of a fixed basket of goods and services purchased both inside and outside the duty station of assignment. For Group I duty stations, PPP of professional salaries relative to New York is guaranteed to be exactly correct only once in five years when the baseline place-to-place surveys are conducted. PPP is maintained approximately by the time-to-time adjustments of the PAI taking into consideration inflation, exchange-rate movements, as well as movements in the other major components (housing, pension contribution, medical insurance, and out-of-area).

d) Under the current methodology, salaries of professional staff in Group I duty stations are maintained at approximately the same level in local currency, protected against currency fluctuations. In line with pay systems in both public and private sectors around the world, the salaries of staff members serving in Group I duty stations are due for a possible increase only once a year. The size of the increase depends on the movements in the various PAI components since the last review, and also on what gains or losses have accrued from the monthly adjustments designed to stabilize NTP in local currency.

e) Getting different results from indexes based on different target populations, methodologies, baskets of goods and services, index structures, and data processing procedures, is nothing new. Indeed, one can always produce an index for a particular location, based on a different methodology that generates results that are favourable for that location. However, the ICSC secretariat does not have the luxury of implementing duty station-specific methodologies. The approved methodology is one that works for the United Nations common system as a whole. As the ICSC secretariat recently discovered from its analysis of the effects of currency fluctuations on staff salaries in field duty stations, a methodology deemed to be favourable for a particular location may actually be the opposite for others or for the United Nations common system as a whole.

f) Comparisons of ICSC-published NTPs to those based on OECD PPPs are not appropriate. It is interesting to note that Eurostat and OECD themselves run their own expenditures surveys to determine the proper weights to be used in the determination of salaries for their staff. They do not use their own “general population” PPPs, because they are not applicable to their expatriate population.

g) The ICSC has done its best to respond to the queries from the IAEA regarding the evolution of NTPs that are calculated according to the methodology approved by the Commission. We will continue to fulfil our obligations to United Nations common system organizations and staff federations. However, it is clear that the existing methodology is being applied correctly and consistently for all duty stations, including duty stations in Euro-Europe (see ICSC/68/R.9, para. 45).

h) The ICSC secretariat would welcome concrete proposals from the IAEA and other interested parties regarding specific changes in the methodology that would also achieve the overall objectives of the post adjustment system. Such methodological proposals need to be presented through the usual consultative process within and among organizations and staff representatives, and ultimately presented to ACPAQ for consideration and final recommendations to the Commission. The ICSC secretariat is technically capable of implementing any constructive modifications to the existing methodology that are approved by the Commission.

Annex I

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Annex II

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[pic] Note: Madrid became a Headquarter and a Group I duty station on 1 January 2003.

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[pic]Note: Although in New York place-to-place surveys are conducted, they cannot be used to update New York’s PAI. As a matter of fact, as New York is the base of the system, a comparison with itself would not make any sense. Rather, results from New York's place-to-place surveys are the benchmark against which results of all other place-to-place surveys are measured.

Adjustment of the PAI for New York is made purely on the basis of the local CPI and of the other PAI components' adjustment mechanisms.

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[pic]Note: in the months of Sept.-Dec. 2000 and Mar.-Jun.2001, the multiplier of Rome was 0, therefore only the base salary was being paid in those months and this explains, after conversion of that fixed amount into local currency, the irregular evolution of the NTP in local currency in those periods.

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Annex III

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Annex IV

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Annex V

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Annex VI

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Annex VII

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Annex VIII

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Note:

In the first complete survey cycle available since 1995 (July 1996 to July 2001), the NTP Index in Geneva, registered an increase from 101.2 to 104.3 (+3.1%) against a movement of the CPI from 101.7 to 106.4 (+4.6%).

During that period, two important components of the PAI, the housing index and the OA Index, were on descending trend: the chart of the rent index for Geneva (annex III) shows lower than 100 values in the years 1995 to 2001, whereas following that period the rent index turned over 100 on an upward, uninterrupted trend. The OA Index (annex VI) is available as of January 1996, but it shows a declining trend.

The second complete survey cycle (August 2001 to April 2006) the NTP Index moved from 104.3 to 112 (+7.4%) against a movement of the CPI from 105.8 to 110.9 (+4.8%). During that period not only the local inflation, but also rents and the OA Index recorded positive trends and lifted the increase of the NTP Index over the local inflation.

In the current survey cycle (data from May 2006 to November 2008), the CPI went from 111.1 to 114.2 (+2.8%) and rent and the OA Index were still on an overall upward trend. During the same period, the NTP Index moved from 112 to 113.1 (+1%).

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In the period June 1996 to July 2001, the CPI moved from 104.8 to 111.7 (+6.6%), whereas the NTP Index from 115.3 to 124.7 (+8.2%). Rents, after an initial decrease, recuperated a little and the out-of-area index decreased.

The second period August 2001 to April 2006, the CPI moved from 112.1 to 120.7 (+7.7%), and the NTP from 124.7 to 140.2 (+12.4%). As a matter of fact, although rents turned again on downward movement with values lower than 100, the out-of-area component compensated this negative effect and contributed to lifting up the NTP over time.

In the current survey cycle, all major components of the PAI are on a raising path: from May 2006 to November 2008 the CPI moved from 121.3 to 130.4 (+7.5%) and both rents and the out-of-area index are on upward trend again. Consequently, the NTP Index in this shorter interval moved from 140.2 to 148.8 (+6.1%).

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Note:

Madrid became a Headquarter and a Group I duty station on 1 January 2003.

The analysis for Madrid becomes comparable to that of other duty stations only from the year 2003. In the period July 2003 to April 2006 (but, for that matter, also earlier) Madrid experienced an inflation more sustained than New York, with its CPI (January 2003=100) moving from 101.2 to 112.4 (+11.1%). Rents also grew with a pace higher than New York and the out-of-area index was on a rising path. The consequence was a movement of the NTP Index from 113.2 to 119.6 (+5.7%).

In the current survey cycle the trends of these factors have still the same rising trend: the CPI moved from 112.4 to 121.6 (+8.2%, thus a little less than the previous period), rents and out-of-area index again on a rising path and the NTP Index records a move from 121.6 to 124.0 (+2.0%).

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Note:

In the period June 1996 to July 2001, both the CPI (from 102.9 to 112.7, +9.5%) and rents moved strongly upward (+27%), thus compensating the downward movement of the out-of-area index (-17.7%). The overall result was an NTP Index moving from 119.6 to 145.6 (+21.7%).

From August 2001 to April 2006, the CPI accelerated 112.9 to 125 (+10.7%), whereas rents, although increasing until 2005, they did with a lower pace and in 2006 recorded a decrease. Nonetheless, the out-of-area index went on an upward movement and the NTP Index showed an increase from 145.7 to 159.9 (+9.7%).

In this last, shorter, period after April 2006, the CPI moved from 125.5 to 131 (+4.4%), while rents are lowering and the out-of-area index gained, bringing the NTP Index from 160 to 161.8 (+1.1%).

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Note:

Although in New York place-to-place surveys are conducted, they cannot used to update the PAI. As a matter of fact, as New York is the base of the system, a comparison with itself would not make any sense. Rather, costs data from New York's place-to-place surveys are the benchmark against which results of all other place-to-place surveys are measured. Adjustment of the PAI for New York is made purely on the basis of the local CPI and of the other PAI components' adjustment mechanisms.

This chart indicates the dates of the place-to-place surveys conducted in New York as opposed to the dates of implementation of the place-to-place survey results for the other duty stations. In reality, one cannot look at joint evolution of the NTP Index and CPI in separate segments as done for the other duty stations.

A dynamic of rents running faster than the total inflation, and also a rising out-of-area index since 2001, kept the NTP for New York higher than its inflation: while inflation grew with +41.3 per cent since January 1995, rents recorded a +87 per cent from 1995 to 2008, resulting in an NTP growth of +73.8 per cent

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Note:

Earlier than January 2000, the currency of France was the French franc. NTP in local currency for the period 1995-1999 was converted into Euro by using the irrevocable exchange rate of the European Central Bank, which was 1 € = 1 FRF 6.55957 (French francs)

In the first cycle, from June 1996 to July 2001, the CPI for Paris moved from 103 to 109.6 (+6.4%) and the NTP Index from 108.6 to 111.7 (+2.9%). Rents first went down and then regained at a level close to that of 1996, whereas the out-of-area decreased during that period.

In the second cycle, Paris experienced a more sustained inflation (the CPI moved from 109.6 to 120.9, +10.3%) but in this occasion both rents and the OA Index moved up, resulting in an NTP Index move from 122.9 to 133.4 (+8.5%).

In the current cycle, although the CPI (from 121.4 to 126.6, +4.3%) and the OA Index went up, rents remained rather flat resulting in a slight negative NTP index move from 133.5 to 132.5 (-0.7%).

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Note:

In the months of September to December 2000 and March to June2001, the multiplier of Rome was 0, therefore only the base salary was being paid in those months and this explains, after conversion of that fixed amount into local currency, the irregular evolution of the NTP in local currency in those periods.

Note: Earlier than January 2000, the currency of Italy was the Italian lira. NTP in local currency for the period 1995-1999 was converted into Euro by using the irrevocable exchange rate of the European Central Bank, which was 1 € = 1 ITL 1936.27 (Italian lire)

From June 1996 to July 2001, the CPI for Rome moved with decision from 107.5 to 119.2 (+10.9%). In the same period, rents lowered between 1996 and 1998, then moved up again until 2001 and while the OA Index moved down, the NTP Index recorded a record increase from 114.6 to 144.4 (+26%). To be noted: prior to the implementation of the survey results, higher base salaries and the strength of the US dollar in that period, resulted in increases in NTP also with a multiplier was very low, or even 0, since March 2000.

From August 2001 to April 2006, the CPI moved from 118.8 to 134.1 (+12.9%), rents and the OA Index also went on the rise and the resulting move of the NTP Index was from 144.3 to 159.4 (+10.5%).

After April 2006, the movements of CPI and NTP Index were from 134.1 to 142.7 (+6.4) and from 159.4 to 159.5 (+0.1) respectively.

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Note:

Earlier than January 2000, the currency of Austria was the Austrian schilling. NTP in local currency for the period 1995-1999 was converted into Euro by using the irrevocable exchange rate of the European Central Bank, which was 1 € = ATS 13.7603 (Austrian schillings).

Vienna's CPI moved from 102.4 to 109.5 (+6.9) in the first examined cycle (June 1996 to July 2001), whereas the NTP Index during the same period recorded a movement from 102.9 to 119.4 (+16%) a result due to a strong correction following the implementation of the place-to-place survey. Rent levels as well as the OA Index declined.

After the large correction brought by the implementation of the place-to-place survey, in the second cycle the movement in NTP remained more stable, the index moving merely from 119.2 to 123.8 (+3.9%), whereas the CPI accelerated from 109.2 to 119.4 (+9.3%).

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Note:

During the period June 1996 - July 2001, the CPI moved boldly from 104.3 to 118.1 (+13.2%). Rents, after an initial slight decline, moved upward too, whereas the OA Index in that period decreased. The NTP Index recorded a move from 105.1 to 119.6, or a +13.8%.

In the second survey cycle under analysis, the CPI kept its high pace moving from 118.1 to 134.1 (+13.5%), and while rents continued to grow until 2005. The OA Index in this period was on an upward move and the overall result was a move of the NTP Index from 119.6 to 153.7 (+28.5%).

In the current cycle, following April 2006, with a CPI move from 134.7 to 141.3 (+4.9%), stable rents and an overall gain of OA Index, NTP grew, with the index moving from 153.7 to 164.5 (+7%).

( ICSC/68/R.1

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