Financial liabilities of the government in international organisations

Conclusions and recommendations of the National Audit Office

Finland is a member of several international organisations. When joining an organisation, a member state must enforce treaties regarding the organisation. With such treaties, the member states commit to being responsible for already existing commitments and liabilities. These include, among others, non-current employee benefits, such as pensions and after service health insurance.

The compliance audit on liabilities of the government in international organisations investigated what is Finland’s portion of the contingent liabilities caused by non-current employee benefits. Another investigated issue was whether the current reporting practice of central government finances takes into account contingent liabilities and commitments that arise from Finland being active in international organisations.

Pension benefits are a major part of the liabilities that arise from non-current employee benefits.

Pension systems are divided into defined benefit plans and defined contribution plans. A defined benefit plan is partially based on actuarial assumptions and values. There are significant uncertainties involved in the assessment of these values. In a defined benefit plan, the community carries more responsibility for the benefits to be paid than in a defined contribution plan.

Based on the audit, the conclusion is that according to the 2016 financial statements, the non-current employee benefits of the international organisations that were part of the audit were EUR 109 billion, of which approximately 90 per cent were not funded. A valuation was made in the audit that Finland’s share of the employee benefits liabilities that are not funded is approximately EUR 1,4 billion.

Based on the audit, it is recommended that the sums to be paid to international organisations should be verified annually.

Attention should be paid to any discrepancies between the government accounts and the payments declared by the organisations. Furthermore, it is recommended based on the
audit that in the future, information on memberships in international organisations and the related financing contributions and liabilities should be collected in a centralised manner, and the information should be kept up to date.

The conclusion of the audit is that organisations are poorly prepared for the payment of their non-current employee benefits.

Some organisations have assets in foundations or funds to cover the liabilities, but others plan to pay the liabilities directly from their budgets on a “pay-as-you-go” basis. This could have an impact on the organisations’ operating conditions if, in the future, a large share of their budget is tied down to funding past operations.

International organisations have determined liabilities on member states in different ways in their treaties.

Some organisations are permanent by nature while others have determined beforehand the effects of a potential resignation of a member state. Indicating the contingent liabilities of Finland that arise from the non-current employee benefits of international organisations is challenging, but not impossible.

Based on the audit results we find that the contingent liability that lies in international organisations forms a significant item in terms of true and fair information on the financial position of the central government.

According to section 17 a of the State Budget Act (423/1988), the annual final central government accounts should include the notes to the accounts needed to provide the true and fair information referred to in section 18 of the State Budget Act. Under section 18 of the State Budget Act (423/1988), the annual final central government accounts and information on central government finances and the state’s financial management and operative performance included in the report on the final central government accounts must provide true and fair information on compliance with the budget, state revenues and expenditure, the state’s financial position, and performance (a true and fair view).

Parliament should have at its disposal, based on the financial statements of the state, the necessary information about the status of central government finances to secure its budgetary power. Reporting the contingent liabilities is already possible by virtue of the current legislation.

On the basis of the audit, the National Audit Office issues the following recommendations:

• Financing to international organisations should be verified annually. Attention should be paid to any discrepancies between the government accounts and the payments declared by the organisations.

• Information on memberships in international organisations and the related financing shares should  be collected in a centralised manner, and the information should be kept up to date.

• The Ministry of Finance and the State Treasury should ensure with their guidelines that financial statements of the state and the financial statements of all government institutions and offices offer a true and fair view of the contingent liabilities arising from memberships in international organisations.

• When joining an international organisation, special attention should be paid to the financial effects of the commitment, including contingent liabilities. Furthermore, it should be taken into consideration before joining an international organisation how the liabilities are spread between the member states in case a member resigns from the organisation.