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08.15.16

Clawing Back the Staff Benefits at the European Patent Office (EPO)

Posted in Europe, Finance, Patents at 4:34 am by Dr. Roy Schestowitz

Clawback under Battistelli assures reduction in quality of staff (reduction in patent quality aside)

A clawback

Summary: Staff of the EPO is leaving (or retiring) in droves as abusive management continues to be the norm and staff benefits are being taken away or gradually revoked

CRACKDOWNS at the EPO carry on, even when staff is (mostly) on holiday. Don’t be misled by the silence. Things are not rosy at all. Some representatives appear to have gotten exhausted, whereas others are too afraid or away on holiday. Some are on permanent leave or effectively suspended. In the coming weeks we shall reveal some more information, potentially about individual stories as well. It’s not pretty and it serves to show what kind of management runs the European Patent Office these days. Rather than value staff, this management does a fine job driving staff away. Cherishing and respecting people (“assets” or “human resources” as management typically refers to them) is the key to an institution’s long-term success. Highly educated people have plenty of employment options, so they don’t tolerate abuse from their superiors. They have other career possibilities (private and public sectors) and they tend to be principled, not judgmental or overly opinionated. They also know their rights and actively defend these.

“Rather than value staff, this management does a fine job driving staff away.”Earlier this year we mentioned the attack on the pension of Els Hardon — probably an illegal move which Battistelli later had to withdraw/revoke. What kind of justice is that? Hardon was dismissed from the Office for her duties as a staff representative and she wasn’t alone. It is very sad that Battistelli’s war on the staff union left much-appreciated staff having to support their representatives with Broodfonds (literally bread funds). Some of them have entire families to support! What happened to human decency?

The crackdown is far from over as EPO management, notably Bergot (the wife of Battistelli’s former INPI colleague), still threatens staff representatives, even while they’re on holiday. Mr. Topić, for instance, blocked the publication of essential reading material in The Hague, without even notifying the Local Staff Committee The Hague. This was censored using threats of disciplinary measures. So the atmosphere of fear clearly prevails at the EPO and people are rightly afraid of communicating with one another. That’s a recipe for disaster that would certainly drive away the high-profile examiners. They would have no problem seeking and finding alternative employment, e.g. in fine universities or in the industry.

“Cherishing and respecting people (“assets” or “human resources” as management typically refers to them) is the key to an institution’s long-term success.”EPO management, moreover, is trying to punish strikers (perfectly lawful activity) even more severely. The management is getting pretty vicious right now, raising the ‘fine’ by 50% by essentially withdrawing a twentieth (instead of a thirtieth) of one’s salary. They are just taking away more and more of people’s money, so no wonder people flee or formally retire early. Watch what they’re doing to people’s investments, pension changes aside. Based on this document [PDF], workers’ interests are trampled and stomped on. Quoting from the summary in the PDF: “lowering the probability of reaching the long-term objective for the investment returns, but instead supported initially unfounded and expensive reforms.”

“Therefore,” it also says, “the Office representative’s reasoning appears to be so ill-founded and misaligned with the interests of the main stake-holders that one might conclude that it serves instead to realise another hidden (or at least undisclosed) agenda.”

There is also a part about Bergot: “Further statements made by Ms. Bergot left Staff representatives with the impression that the Office may also try to influence the investment return assumptions made by the three independent actuaries of the AAG. If successful, this might lead to pushing for a reduction in the assumed rate of return on investment in the actuarial study, which could consequently trigger a recommendation by the actuaries either to increase the contributions which the Office could follow and/or lower the benefits.”

“A lot of people are leaving.”“Unfortunately,” they conclude, “whatever the outcome, it is the staff (and only the staff) who will have to pay the bill.”

Well, they might not stick around to even pay the bill. A lot of people are leaving. Consider the aforementioned changes to pensions, which came under criticism in a report commissioned by SUEPO. These pension changes were recently assessed in a legal opinion (mentioned [PDF] here before [PDF]) and it’s just one among all sorts of ‘reforms’ that breach the fundamental rules and treat staff like dispensable machine operators. The EPO apparently suffers from a lack of money, as it is operating at a massive loss, which makes one wonder if the pensions will be reduced or become some kind of a Ponzi scheme one day. Later this summer we are going to give more examples of where money gets wasted by the millions (for little and sometimes no benefit/gain). Battistelli is terrible on fiscal terms and even some delegates openly speak about it nowadays (a subject to be explored in depth another day). Some say there is even financial fraud.

“What will their retirement mean in terms of pensions?”The brain drain at the EPO is measurable and it is not a matter of ‘gut feeling’ or intuition. One report we saw gives us a rough idea of who left (or is leaving) other than top management. The report says that numbers are made apparent from the EPO’s own reports. To quote: “The social report shows that the Office could not maintain staffing levels at their overall target despite a vigorous recruitment campaign. 2015 saw a net decrease of 77 staff members; in particular the BoA saw a reduction of 15. Furthermore, there were no new recruits from a number of countries including Sl, CZ, CH, NO, and GB. While up to 2014 typically around 100 staff members would retire, in 2015 this number had nearly doubled. The average retirement age has also decreased from around 63 years to about 61 years.”

What will their retirement mean in terms of pensions? Well, to be frank, I’m no accountant and my knowledge regarding accounting is scarce, but the subject was recently explored in IP Kat comments. For record and future reference, here is what one person wrote about the pensions:

The benefits are not over-generous. I can explain the situation about pensions. I’ll try to do that in non-accounting terms. I’ll use round numbers out of my head to make calculations simpler.

The offices self insures the pensions. It simply pays the pensions out of the budget and write the pensions off the salaries as “contributions”. So if we have, say, 1000 examiners with a salary of 10000€/month and 200 pensioners with a pension of 5000€/month, every examiner needs to contribute 1000€/month for the system to be in balance. They can pay that out of their 10000€ salary.
If suddenly, the office lowers the average pay to 5000€, each examiner still needs to pay 1000€ a month, but out of a lower salary. It looks as if the pension contribution is doubled for them.
If suddenly, the office improves efficiency massively and only needs half the examiners (but they keep their pay), we have the same effect: each examiner needs to contribute 2000€ (out of a 10000€ salary).
If we both halve the salary and the number of examiners, contributions quadruple.

Is the office planing to lower both the number of examiners and their salaries? I don’t know. But it does not appear to be planning to lower the fees on patent or the number of granted patents. So the budget would stays the same and the capacity to pay the pensions out of the budget would also stay the same. The office would just need to keep the contributions of salaries at the same level for the examiners and meet the old obligations out of its budget. They would still save massively on salaries by having less active examiners and paying them less in that hypothesis.

But, if the office says “pensions must be a fixed percentage of the salaries” (10% in the above example) and then lowers the total salary mass, there is a problem. It is an artificial problem, but would be called “increase percentage of liabilities” in accountant speak.

Then we have the so called “pension reserve fund”. This was never designed to be a pension fund, but designed to smooth things in case of changes. It was created because in the first years of its existence, the Office had no pensioners (where would they have come from). So the contributions were put aside in that RESERVE fund. This reserve fund is invested in state bonds, its regulation prevent using investments which would be to volatile. The so called “losses” are simply “smaller gains”, because the interest rates are now very low. 10 years ago, we expected a return of maybe 5%, now we don’t have that.

This reserve fund is massive. I think I have read that it could pay the pensions completely for the next 20 years or so. So it can hardly be described as bankrupt.

Then there is that vision floating around that the office would have a “pension fund”. Like some massive amount of money from which only the interests would be enough to pay pensions forever. That is completely wrong: the pension reserve fund was originally designed to pay the benefits out of the fund itself, when necessary.

RFPSS is then mentioned as follows:

Would the “RESERVE” fund you mentioned happen to be the “RFPSS” fund mentioned in the EPO’s financial statement? If so, I note that the assets of that fund were EUR6,600 million at the end of 2015 (with only EUR1,300 million being in bonds). Is that enough to pay pensions completely for the next 20 years or so? If so, what on earth does the EPO’s financial statement mean when it refers to a “Defined benefit liability” of EUR15,800 million? Could that be a projected total spend on pensions over the lifetime of all current and former employees?

Apologies for all of the questions. Like I said, I am no accountant, and so this is all a bit of a mystery to me.

More on the same subject:

Indeed, as stated above, the sum shown is the pension Reserve fund to cover the eventuality that the EPO is unable (or unwilling?) to pay pensions. Indeed originally, the final burden was to be shared between the member states as a sort of guarantor grouping. As is their won’t, the AC simply decided they didn’t agree anymore and passed the honour to the EPO – I’m not sure the legality of that was ever clarified as it didn’t fall within their right to simply dump the agreement of a international treaty.

With regard to the mysterious 4 billion euros appearing from nowhere, that relates to the future liabilities which are referred back to the current date by applying the notionally agreed interest rate. In good times, the rate is high, in bad times, less so. In layman’ terms,if I need to pay 1000 euros in 12 months time and I can get 10% interest, then I need to have 909 euros or so today. If I can only get 1%, then I need 990.1 today. Of course, the sums and time spans are far greater so that compound interest applies. 2 years at 10% would mean I need about 827 today but 1% means 981 etc.
In practice the rate has been falling quickly from 2011 to 2014 and in 2014 the rate was about 1.65% if my memory serves (you can find it in that link). In 2015 the rate rose and thus the liability of 19 billion in 2015 fell back to 15 billion. The rate changes regularly but is applied long term so that the biggest change to liabilities comes from small interest rate changes! In fact the fund has outperformed the rate (and its target) for 30 years.

Yes, the Reserve fund is the “RFPSS”.

I am not an accountant either, but as far as I understood from suepo documents of the time, the “Defined benefit liability” of EUR15,800 million indeed means that the office closes down today, has no incoming revenue whatsoever (no renewal fees on already granted patents) and still has to pay all liabilities. If memory serves, this liability first appeared under Brimelow who insisted that the office use the IFRS accounting system. The choice of that accounting system was criticised at the time. It makes more sense for, say, a car factory which has to put money aside for the goods it orders (e.g. steel, car parts) in case it goes bankrupt.

If my memory is correct, the idea that the reserve fund could pay pensions for 20 years comes from simply dividing the assets by the pensions that the office pays each year at present, possibly correcting by the expected number of pensioners in future years (I am not sure).

All this is to show that there is a large amount of interpretation in the financial statement. Depending on the chosen accounting rules, one can make the office look very rich or very poor. What is clear, however, is that in the past years the office generated several hundred millions euros profit per year (while paying salaries and pensions and constructing new buildings regularly). This money was partially paid to the reserve fund in “extra payments” (in addition to what is paid each year according to the pension scheme). There have been several documents from suepo analysing the situation, but I am not sure whether they are on the public section of the suepo website.

Last but not least, I insist that the regulation for pensions are not any different than in most companies: accrue benefits each year till one is 65 and then get a percentage of your salary. Early pensioners get a discount corresponding to the projected additional pension years, etc… The pensions are also taxable. There are no “lavish benefits” as one sometimes reads.

“The EPO changed the pension system from “defined benefit” to “defined contribution”,” explains the comment below.

I would not know the precise meaning of the expressions used in the Financial Statements. What I do know is that the discount rate is a key factor.

To my best knowledge, every fund promising a certain return, not just the EPO fund, projects how much money will be needed in the future, usually split by calendar year. The fund normally has already some cash, and every fund manager would like to know whether this cash is sufficient to cover the future obligations. To check this, these future obligations are converted in the currently needed amount of money, to cover them fully or as is frequently the case, to 80%.

This conversion considers how much interest you will get on the cash in the fund. This interest is called “discount rate”, implying that you need less than say 100 euro today if you want to have 100 Euro in 20 years. With the current EU politics, the interest you can get is pummeling down, lowering the discount rate. This, in turn, requires you to have more money today. If the European Central Bank changed their strategy next week, this would impact the finances and funding ratios of all funds relying on discount rates.

The catch of the story is that small variations in the discount rate will have a massive impact. A simple 0.2% more or less of the discount rate, over a projection of say 25 years, will make you bankrupt or filthy rich.

The EPO changed the pension system from “defined benefit” to “defined contribution”. The “old guys” get a percentage of the salary as pension, and the EPO carries the risk if the fund “underperforms”. The “new guys” get what the fund delivers, they carry the risk.

Giving lots of crappy patents to applicants is a recipe not to financial success, as the following comment notes:

I now realise that this has all been discussed before.

http://ipkitten.blogspot.co.uk/2014/11/the-finances-of-european-patent-office.html

With the benefit of hindsight, the predictions at the end of the 3rd (anonymous) comment on that thread now look to have been startlingly accurate. Perhaps the BB phenomenon really is all about balancing the books after all.

Whilst it may be that income from renewal fees represents a missing part of the puzzle, there is one thing I don’t understand. Where is the financial benefit to the EPO in rushing applications through to grant (which appears to be the current mantra)? Does this imply that the EPO gets more (on average) from its share of national renewal fees than it does from a full share of its own internal renewal fees? If not, then is the push for earlier grant all about BB keeping the Member States sweet by giving them an ever increasing share of renewal fees?

Perhaps we will never know. With the full knowledge and approval of the AC, one of BB’s first actions as president was to disband the only body (the Audit Committee) that could have provided transparency / independent oversight in connection with the EPO’s finances. So I guess that those affected (current and former EPO employees, patent applicants and the public) will just have to trust that the EPO’s finances are being handled with the utmost propriety by BB and his cronies… what could possibly go wrong?

Another person added:

My original comment related to the problem created (in many countries) where defined benefit (eg final salary) pension schemes were offered without the companies concerned ensuring that they had adequate funds in hand to cover the anticipated liabilities (eg taking into account increases in average life expectancy). Current examples of where things have gone badly wrong with pension funds are BHS and British Steel.

A similar issue applies to state pensions. In that instance, there is no “pension fund” as such, just a country’s GDP. For those countries offering (relatively) generous pensions and (generally) free healthcare, an ageing population will command an ever increasing proportion of public spending.

Please note that I am not placing any blame at the door of the (soon to be) pensioners concerned. I am merely making the observation that bad judgements made by companies, countries and organisations (ie failing to set aside sufficient resources to cope with the retirement of the “baby boomers”) has led us to the situation where the current workforce is lumbered with the problem of making up the shortfall.

I remember people in the 1980s warning us all about the coming “demographic crisis” in Europe. Well, now that the crisis is upon us, I can honestly say that it is almost impossible to identify any national government that has ever done anything significant in the intervening 30 years to defuse the problem.

At least the EPO has the reserve fund… though, curiously, it appears that it has no intention to use that fund to pay pensions. I would have thought that the whole point to having a reserve fund is to ensure that the pension “tail” does not wag the “dog” that is the everything else that the EPO does. However, I have my suspicions that the tail is indeed beginning to “wag the dog”…

“Anonymous” wrote: “I thought that an actuarial study last year showed that the EPO would only need to resort to the reserve fund briefly at some point in the future and that the amount required would be met by the annual return on the fund rather than depleting its capital. I’ll try to find it – I think Suepo got a copy and published it. Cannot imagine BB would let any good news be released – keep the stick and hide the carrot…”

“As to the future of the EPO,” the following commenter said, “the new career system is a net loss for the majority of the employees,” which is probably true. Here is the full comment:

I don’t think ageing of the population is significant for the EPO. Actually, we will have a younger “population”, because we only hire younger staff. On the other hand, the effect I explained about reduced salaries is probably significant.

It is also interesting that you cite British Steel. The steel industry used to employ lots of people but with modern production techniques a lot less people were needed: productivity per person increased considerably (and we could make a parallel with patent examination here, especially if examination is “streamlined”). What also happened is that the industry was privatized and a select small party of people made huge financial gains by keeping the usable parts and refusing to bear the liabilities, including pensions.

As to the future of the EPO all I can say is that:
-the new career system is a net loss for the majority of the employees and huge gains for the select few
-if someone tells me on disputable short term interest rate projections that a fund is bankrupt when this fund has increased regularly in the past 30 years and covers at least a decade of liabilities, I consider that a political message and not a financial analysis.

For those who are into accounting and care to explain this to us, feel free to get in touch or leave a comment below. The consensus appears to be that things are getting worse — not better — for EPO pensioners and verified figures show that the number of retirements have doubled in just one year. This doesn’t bode well for Battistelli. He’s ruining the Office he was entrusted to manage. Why was he not fired in June?

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