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Lying to EPO Staff About Deficit
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The Central Staff Committee of the EPO has circulated the document shown in the video above or as text below.
"The EPO does not serve the public interest; heck, it does not even serve the interest of its own staff!"Writing to colleagues, their elected representatives wrote: "The Office systematically presents the operating results (i.e., the difference between the operating income or revenue and the operating expenditure) by referring to the standardised operating results, in accordance with the IFRS accounting method. By reading these figures, one would get the impression that the operating results of the Office are close to zero and may also move into negative territory. However, the actual or real achieved operating results have been strongly positive in the last years and are forecast to remain strongly positive in the upcoming years. The difference between standardised operating results and actual operating results and the influence of the IFRS accounting method is worsening the picture of the financial situation of the Office as explained in the full publication..."
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Zentraler Personalausschuss Central Staff Committee Le Comité Central du Personnel
Munich, 12/05/2022
sc22056cp
Office’s operating results and IFRS accounting
Is the financial situation of the EPO as critical as the management presents it?
Dear Colleagues,
The Office systematically presents the operating results (i.e., the difference between the operating income or revenue and the operating expenditure) by referring to the standardised operating results. By reading these figures, one would get the impression that the operating results of the Office are close to zero and may also move into negative territory.
However, the actual or real achieved operating results have been strongly positive in the last years and are forecast to remain strongly positive in the upcoming years.
Standardised operating results and actual operating results
When one reads the monthly Financial Status Reports, the monthly MAC (Management Advisory Committee) reports or the presentation on the financial situation of the Office given this year, one would get the impression that the total income (or revenue) and the total operating costs are substantially equal, i.e., that the operating result of the Office is close to zero. The example with the most recent data is the Financial status report December 20211, which reads:
“The standardised operating result for 2021 was €47.0m, which is €4.2m (9.8%) better than 2020”.
In this formulation the key word is standardised, which implies that the given figure has been subjected to some modification in order to comply with some standard. Indeed, the used standard is the IFRS accounting method, which comprises a set of international accounting standards, which state how particular types of transactions and other events should be reported in financial statements.
On the other hand, the yearly actual operating results tell a totally different story; the following is the sequence of the actual operating results of the last years:
2019 | EUR 391m (actual)2 2020 | EUR 376m (actual)3 2021 | EUR 332m (forecast)3 2022 | EUR 304m (budget)3
In particular, for 2020, the last year for which the actual figures are available, the operating income has been of EUR 2189m and the operating expenditure of EUR 1813m: the income is about 20% higher than the expenditure!
______ 1 Financial status report December 2021 2 2021 Budget - CA/D 1/20 (p. 18/167) 3 2022 Budget - CA/D 1/21 (p. 21/185)
It is also to be pointed out that the operating expenditure comprises the expenditure for the Pension and Social Security Schemes (PSSS), which amounted to EUR 309m in 2020, is forecast at EUR 325m in 2021 and is budgeted at EUR 361m in 2022.
A further indication that said actual operating results represent the real numbers is given by the significant yearly cash transfers from the Office’s Treasury to the Pension Reserve Fund of the RFPSS (Reserve Funds for Pension and Social Security) and to the EPOTIF (EPO Treasury Investment Fund). In 2021 the cash transfer to the RFPSS amounted to EUR 150m4 and the cash transfer to the EPOTIF to at least EUR 250m5.
Is the IFRS accounting method suitable for depicting the financial situation of the Office?
The management argues that the actual operating results are not suitable for depicting the actual financial situation of the Office and that the IFRS accounting method provides on the contrary the correct picture. Such statement has for example been made in said presentation on the financial situation of the Office given this year. However, no substantial arguments in support of this statement are provided, apart from generic arguments such as “Allows comparability and consistency over time” and “Recognises accrued pension rights of current active employees”.
On the other hand, a panel of financial experts has stated that the IFRS accounting method does not provide a good picture of the real financial situation of the Office. These experts are the actuaries of the Actuarial Advisory Group (AAG)6, which have given their opinion on the IFRS accounting method in the Joint report of the Actuarial Advisory Group to the President of the Office – Actuarial valuation as at 31.12.20207.
According to the actuaries, the advantage of having a prescribed basis for all employers is that it helps financial analysts compare results across a wide range of schemes and employers. It is therefore particularly appropriate for employers’ accounts.
However, IFRS has some major disadvantages:
● The discount rate may be very volatile from one balance sheet date to the next, generating volatility in the liability and pension cost accordingly;
● The choice of the discount rate does not take account of the scheme’s actual investment strategy; and
● The determination of the liability of the pension cost does not take into account the existence of funding assets held in a reserve fund at all.
There is therefore often a mismatch between the prescribed accounting basis and what the scheme expects to happen in real life. The result can show considerable volatility in the level of coverage shown in the accounting valuation and thus on the employers’ balance sheet. This is particularly true where the scheme invests predominantly in equities in order to obtain higher returns in the long term, as is common practice for funded plans and as is applicable for the Reserve Funds for Pensions and Social Security (RFPSS).
What the actuaries have stated for the RFPSS also applies to the EPOTIF, which also invests a significant part of its assets in equities.
______ 4Summary of Conclusions of the 127th BFC meeting - CA/67/21 (p. 5/6) 5 EPOTIF Performance and Risk Report Q3 2021 - CA/F 31/21 (p. 3/62) 6 The AAG consists of three independent actuaries and advises the Office on the conditions to be met in order to ensure the equilibrium of its pension scheme; was established by the President of the Office in 1992. 7 CA/41/21 (p. 10/44)
Conclusion
It is recommendable to be very critical when considering the picture of the financial situation of the Office provided by the management, who acts in the opposite way to the managers of private or public companies, who usually try to give a favourable picture. An overly negative picture of the financial situation of the Office is intended mainly to justify the massive cuts to the employment conditions that have already been made in the last years and further future potential cuts, which are absolutely ungrounded when considering the real situation. The real numbers of the operating results show on the other hand yearly surpluses between about 15% and 20% of the operating expenditure. This is also true at least on the medium term, as shown by the estimates for the years 2025 and 20263. And again, the operating expenditure also comprises the expenditure for the Pension and Social Security Schemes.
These are quite healthy figures for a non-profit organisation8.
The Central Staff Committee
______ 8 According to Article 42 EPC, the budget of the Organisation shall be balanced.