Eroding the protection of pensions - ILO Administrative Tribunal states that “pensions are subject to the same basic rules as salary”, but are they?

By Frédéric Dopagne, Saskia Lemeire and Bert Theeuwes

In a decision of 6 February 2019 (Judgment No. 4057) , the Administrative Tribunal of the International Labor Organization (ILO Administrative Tribunal) confirmed an its earlier statement that pensions are “deferred pay” and subject to the same basic rules as salary (Judgment No. 2793), only then to erode the protection of pensions.

The claimant was a retiree whose pension was subject to an annual adjustment based on the evolution of the consumer price index. The year 2015 saw a reduction of the consumer price index, which led to a downward adjustment of her pension below the amount of her initial pension. While the salaries of the retirees were reduced by the Organization, there appeared to be a practice to freeze the salaries of serving staff rather than reducing them even if the method for salary adjustment would have required a downward adjustment. The claimant contested the reduction of her salary on various grounds, stating that while salary and pensions are not identical, the adjustment methods should be alike.

In its decision, the Tribunal considered under consideration 5 that:  “The Tribunal has, in its case law, spoken of pensions being “deferred pay” and stated that because “pensions are subject to the same basic rules as pay, a method establishing the terms of adjusting the pensions paid to the retirees of an organisation is to be considered as being governed by the same requirements” (see Judgment 2793, consideration 20).

The Tribunal further clarified that: “This was a reference to the need that any methodology adopted to determine staff members’ salary adjustments must result in stable, foreseeable and clearly understood results. […] The principles governing the adjustments to salary also include the Noblemaire principle which, additionally, applies to pension benefits (see Judgment 986, consideration 7).”

The statement is then refined by pointing out that “the Tribunal’s case law does not establish a principle that there can never be a downward adjustment of pensions […] and indeed there is a theme in the case law that it is entirely appropriate to have, in the rules governing pension funds, a provision to preserve the purchasing power of the pension, to protect staff members from “the adverse repercussions of a rise in the cost of living on their purchasing power and hence in theory to maintain the standard of living their pension initially secured for them” (see Judgment 2615, consideration 6)”.

However, after recognizing that salaries and pensions should enjoy similar protection, the Tribunal entirely distinguishes the treatment of salaries and pensions in the case at hand:  “The complainant appears to argue that she (like other recipients of the pension presumably) is being treated unequally because of a practice to freeze salaries of serving staff rather than reduce them even if the methodology for salary calculation and adjustment might otherwise suggest a downward adjustment. However these two classes of individuals are not in the same position in fact or in law (see, for example, Judgment 4029, consideration 20). The former are not members of staff, the latter are. Moreover a salary, at base, is to reward specified work. A pension, at base, is to provide an income stream to a pensioner to maintain a particular standard of living during retirement. This argument is unfounded and is rejected. While these types of payments may be interrelated, they are sufficiently different for the purposes of the application of the “equal treatment” principle.”

With this decision, the ILO Administrative Tribunal considerably narrowed down the statement that “pensions are deferred pay and subject to the same basic rules as salary”. The protection of pensions seems to be limited to the methodology for adjustments having to result in stable, foreseeable and clearly understood results.

The conclusion reached by the Tribunal does not come as a surprise as there is indeed a fundamental difference between salary and pensions and various international organizations are facing financial issues with their pension funds. The protection of pensions and the effective purchasing power of the pension is, however,  an issue that will only gain in importance and – although different from salary – will need to be assessed in the light of the relevant principles of international civil service law.