A Deficit of Half a Billion Euros
The Afterlife, for believers in the Christian faith, is a place of peace and liberation from the body and from sin. But the attachment of Catholics to worldly evils, to be condemned, seems to be very durable, at least according to the charts of mortality rates in the Curia. Catholics, especially those who reside in Rome, in the Vatican, and in the rich West, live longer, even five to ten years more than the average.
If earthly life is lengthened, we should all be happy, but that is not necessarily the case. Rather than give joy, this statistic is a source of concern at the Holy See. This might sound absurd, but there are reasons for it. The longer a person lives, the longer they receive retirement pay, adding to a deficit that has been growing year after year without anyone paying adequate attention. But if this fact were made public, it could increase tensions among the employees within the Vatican walls. Can you imagine the demonstrations and picketing that would take place in the Vatican City?
The alarm was raised by the head of the Prefecture, Giuseppe Versaldi, who, with regard to the financial situation and expenditures—especially the management of social security funds—had even feared for the survival of the small state’s administrative bodies and, consequently, of the Vatican itself.
When a lay manager sounds the alarm on a troubling financial situation—in this case, the pension fund—few people take notice and even fewer pay any attention at all. There are two reasons for this: the ecclesiastical nomenclature of which Francis is so critical has very little sense of responsibility, and the long togas tend to minimize everything laypeople say, no matter how well supported it is by data and careful audits. “The Church does not consist of numbers but of souls”: this is the generic response of the cardinals when a lay official allows himself to make a criticism.
This is what happened in 2012, when the cracks in the pension system started to appear. On June 12, the consultant to the Prefecture, Jochen Messemer, spoke at the meeting of the international auditors. Many of his colleagues were literally astounded by the gravity of the situation that he described and the harshness of his words. His statement centered on the uncertain future of the pensions for the current 1,139 retirees and the 4,699 employees of the small state, when they themselves would retire, slowly but surely.1 “The bankruptcy of the diocese of Berlin,” Messemer thundered, “was caused by the inability to understand what was really going on, to grasp the risk that was being run.2 To underestimate the pension potential could lead to a disaster of this kind.”3
His alarm sparked no reaction. Six months later, on December 19, once again before his colleagues on the board of auditors, Messemer tried to be more explicit and incisive, as the minutes of the meeting make clear:
Mr. Messemer wishes to address the problems of the pension fund. Consideration should be given to three main liabilities that have accrued:
1. For employees who have already retired (current average value of pension contributions): 266 million euros;
2. For active employees (current average value of pending contributions—presently active): 782 million euros;
3. For employees who will be employed in the future (current average value of pending contributions—active in the future): 395 million euros.
This adds up to a total of an approximately 1.47 billion euro liability on the pension fund. The current endowment is the equivalent 369 million euros and, by comparison to the total liability of about 1 billion, can only guarantee 26 percent coverage. The value is too low by comparison to other pension funds. Even the poorest dioceses try to assure 60–70 percent coverage.4
Messemer then raised the question that was fundamental to sketching out a credible operating plan for the future: since retirement pay lasts for the duration of a person’s life, how could anyone project the average number of years that a pension will be paid to employees who go into retirement? The only data available, to which he was referring, came from the mortality chart:
As for the mortality chart, when was it last updated? According to some statistics, Catholics tend to live longer. This statistic, if true, could represent a serious problem since, by living 5–10 years longer, the whole chart would become unreliable because, with the accrual of liability, the deposits made until that moment would not be sufficient to cover them … There has never been any discussion of investment policies for this fund. In economic terms a pension fund cannot disregard the behavior of the market. We have to effect stress tests, and insert clauses on what to do in cases of loss.
These are technical but necessary aspects. When you manage a fund of this type you need a good dose of responsibility. The employees work for 40 years on 80 percent of their wages (excluding the 20 percent withheld for the pension fund). There’s nothing worse than saying that the fund is not solvent … We cannot err on the side of superficiality. The basic framework of the pension fund is outdated. We need to establish a working group to address these issues confidentially.
Apart from the collective dismay, his criticism would never go beyond the perimeter of the room in the Prefecture where the experts were assembled. The summary of that meeting, nine pages written by the trusted note taker Paola Monaco, was too disruptive to be addressed, so the document remained in the ironclad safes of the Prefecture. It was only six days away from Christmas: the last Christmas for Ratzinger as Pontiff and for Bertone as Secretary of State.
With the election of Bergoglio to the papacy in March 2013, the wall of silence started to crumble. Messemer’s appeal was welcomed in May by the cardinals chosen by Francis to help the Pontiff in his leadership of the universal Church.5 So the minutes made it out of the locked box and ended up discreetly in the black leather [carpette] of the senior prelates who had the full trust of the Pontiff. From the Secretariat of State, Cardinal Wells proposed that Messemer become a member of the COSEA Commission because of his expertise in the field of social security.
In August 2013 the troubled issue of the pension fund was taken up as one of the official subjects of inquiry of COSEA. This was all done with the utmost secrecy, to avoid disturbing the peaceful sleep of the precious hardworking community that every day labors away at the Vatican and knows nothing of the pension system, which is so severe that it could compromise the future of many employees.
In the end, Messemer’s proposal that a task force be formed did not fall on deaf ears, and action to that effect was quickly taken. The mission was assigned to a giant in the field of management consultancy: Oliver Wyman, a multinational company headquartered in New York with offices in more than fifty countries. Wyman was delegated to conduct an actuarial study to estimate the financial health of the pension fund and assess whether the paychecks withholdings were sufficient to guarantee a safe future for everyone. COSEA also asked Wyman to “develop a proposal to cover the deficit,” as the internal documents indicate, and to restore the health of the fund, assuring a serene old age to all the Vatican employees, from the cardinals to the Swiss guards.
Here, too—as was often the case on the various critical fronts opened by the teams deployed by Francis—well-informed cardinals, bishops, and monsignors were divided into two factions. The optimists, loyal to continuity with the past, proposed the sale of some real estate to balance the budget. And they spread the word that the actual deficit amounted to “only” 40 million euros. This is the number that had been circulating ever since the last audit of the pension fund, in 2011, by a Roman expert, who estimated the deficit at precisely this amount. For them there was no reason to panic, and the situation was under control.
The realists, instead, described the actual situation. They were the loyalists of Francis, including the Spanish Cardinal Santos Abril y Castelló and the Frenchman Jean-Louis Tauran. They knew that the size of the deficit was much greater than the unofficial figures being circulated, and that all the data showed the Vatican social security system on the edge of collapse. The picture they painted was hardly reassuring. The cardinals closest to the Pope proposed another set of urgent and, above all, serious inspections. They were all rightly convinced, as the other financial questions had made crystal clear, that viable countermeasures could only be identified and enacted through solid data.
Francis’s collaborators were shrewd enough not to contradict the optimistic reports circulating within the Vatican walls, which downplayed the size of the deficit, saying it only amounted to a few tens of millions. Their strategy was aimed at reassuring the people and preventing the spread of panic or alarm. On the issue of pensions, a very delicate hand was being played: it was essential that the pensions be safeguarded to prevent unpredictable reactions by the employees of the Holy See, which might spark a domino effect with repercussions in the media, and provoke a chain reaction of rampant destabilizing events such as strikes and protests.
In late September Wyman’s team was able to offer a preliminary assessment on the basis of data collected from various Vatican dicasteries. A top-secret document was drafted and sent in a sealed envelope on October 11 to Zahra, the Chair of the COSEA Commission, and to Messemer, who had been assigned to follow this specific project. The next day was a relatively peaceful Sunday. The COSEA commissioners met early in the morning for the third time. After a quick coffee and welcoming remarks, Messemer and Zahra did not conceal their desire to share all the information they had received. Wyman’s report gave a sharp photograph of the situation that shocked the experts assembled at Casa Santa Marta. Their profound distress emerges clearly in a few lines of the meeting summary:
The consultancy company that was hired, Oliver Wyman, presented already on October 11 a preliminary report on the data it had acquired on about forty Vatican offices. Now it will focus primarily on the pension fund, which at first glance shows a heavy exposure to risk that is extremely troubling.
In fact, the first indications report a deficit that was far greater than what had been imagined in the spring, comparing the available data with the reports prepared in past years. The unofficial figure that had been rumored in the corridors of the holy palaces shot up to incredible levels: the deficit had increased to half a billion. But even this projection would prove to be too optimistic.
“The Vatican Risks Extinction” According to the Head of the Prefecture, Cardinal Versaldi
Francis’s goal was to return the Holy See to the dictates of the Gospel in every sector, from finance to management and administration. Health insurance and pensions also had to be rethought, according to these criteria. The reform of the pension system should thus not be studied in isolation but rather in connection to a new model relationship between the worker and the Holy See. The functions and role of the Labor Office had to be reviewed, correcting and rationalizing three key points: human resources, pensions, and health insurance. This is made clear in a COSEA memorandum of late October 2013, which proposes the creation of a new strategic office to manage everything having to do with workers. The document appears to be the draft of a speech written in the first person and bearing the signature of the Pope.
The title is revealing: Pontificum cura.
The concern of the Pontiffs for all the collaborators has always been a unique characteristic of the government of the Apostolic See. In recent times many measures have been taken to render their service more serene and fruitful. In 1988, through the Apostolic Constitution Pastor Bonus (art. 36), the Labor Office of the Apostolic See was established … Since 1993 the pension fund has been operative, unifying, for all Vatican employees, the administrative center for the treatment of retirement and the allocation of the pension check.
Over the years the health insurance fund has been kept updated to provide a good level of services, allowing health care that, while it can always be improved if adequate resources exist, can stand comparison in timeliness and drug coverage with the care afforded citizens of many more economically developed countries.
In recent times … a commission has been established at the Secretariat of State to regulate, standardize and make more transparent procedures for the hiring of new lay personnel. Finally, mention should be made of the not infrequent increases in the base salary and special mention should be given to the existing system of automatic pay raises. This system, adopted in the past by various countries, has been deactivated almost everywhere as a result of the economic crisis under way. By the same token, also in state organizations in our vicinity, profound changes have been made to the criteria for calculating the pension check.
The Providence of the Father has always assured the Holy Church the necessary means to perform its duties: spiritual means and material means. This fills us with serenity, but it should also commit everyone to use these means in accordance with the letter and the spirit of the Gospel. In particular, the use of material means, which through the charity of the faithful throughout the world arrive at this Apostolic See, must be directed toward the primary purpose for which they are given. They must therefore not be diverted from their immediate goal, wasted, or used in a way that is inappropriate.
All the gifts received must be accounted for in accordance with what the Gospel indicates to us and urges us to assess. All the more so in the midst of a profound economic crisis like the present, which creates so much distress and poses so many material and spiritual problems for the people involved. I wish to contribute to the serenity of all those who, to any degree, collaborate in the service of the Bishop of Rome for the Universal Church.
Therefore, for the sake of achieving correct use of the material assets and while awaiting the contribution that the Commission of Eight Cardinals will make to the achievement of the broader reform of the Roman Curia, I felt it was advisable to begin gradually to take measures in this direction, so as to assure also for the future the economic resources that enable, for all employees, job stability, a fair salary, adequate health care and an appropriate economic allotment that will allow them to live with dignity after their working life is over.
These are important words because they anticipate the de facto reform of the Curia on the key issue of employee relations. Francis’s challenge was to redefine the balance between temporal power and religious power and to translate it into the architecture of a new state.
In particular, the investigation highlighted that there were too many workers and too many personnel offices. According to the latest data available to the commissioners there were actually 21 personnel offices with 35 staff members employed throughout the territory of the Holy See. Each one of them administered its own small share of the 4,699 total of employees.
This situation applied not only to APSA and the Governorate, whose human resources offices have a staff, respectively, of 7 and 14 employees. There were also similar structures at Propaganda Fide (2 units), Vatican Radio (3 units), the IOR, the Printing Shop, and Osservatore Romano, and so on, all the way to the St. Peter’s Chapter (2), the Fabbrica of St. Peter’s (2), the Vicar’s Office (2), and even the library, with 2 units, while the cutting of paychecks is handled by APSA.
The guidelines provided in Pontificum cura thus set the goal of creating a single personnel office:
Among the many changes that should be made to achieve proper use of economic resources, having listened to various collaborators, I have decided to proceed with the unification of all the resources destined for the management of the activities relative to the personnel of all the administrative bodies that, to any extent, report to this Apostolic See. Therefore … until the new decision is made the regulations indicated below shall be observed, regarding in particular the functioning of the personnel offices of the bodies of the Holy See.6
The new Personnel Office will handle in particular the following matters … It will be a special task to draft and propose suggestions in order to achieve regulations that are more in compliance with the principles of equity and justice. In particular the teachings of the Second Vatican Council will be kept in mind and fully enacted.
In this episode, too, unfortunately, the appeals to be more careful about hiring and assigning jobs went unheeded. The Curia was not sensitive to the Pope’s warnings. His every instruction would be ignored: “We have to change our way of thinking”—Versaldi had thundered at the closed-door meeting with the auditors on December 19, 2012—“by trying to look beyond our own limited reality … the Vatican can be inspired by the pursuit of common values, which are proclaimed by the Gospel. In any case, rejecting a reduction of expenses would signify risking the extinction of the whole structure.”7 But this appeal also fell on deaf ears. The offices proliferated, duplicating one another’s work and increasing expenses in the process. New employees were hired according to criteria that was not always endorsed by the Pope. But he knew nothing of it. The situation was out of control.
An 800 Million Euro Deficit in the Pension Fund
In the meantime, the investigation into the pension system continued. In the next three months, the expert analysts went to the root of the problem—and they were scathing in their reports about what they found. By cross-referencing information, they discovered “a significant deficit in the financing of almost 700–800 million, which was identified in the pension fund.” The fund was quickly approaching collapse: the promise of a pension tied up 1.2 to 1.3 billion euros against an endowment not much higher than 450 million, with a deficit of 700–800 million.8
This was a structural question that in a few years’ time risked jeopardizing the whole pension system for employees who had already retired or were making plans to do so. The risk would only grow because of the incompetence of the persons assigned to administer the fund. The report emphasized, “the lack of knowledge in the fields of insurance and asset management on the part of the fund’s oversight bodies.”9
This was the unvarnished conclusion made by COSEA in the documents it prepared for the February 17 and 18 meetings with the Council of Cardinals of the Economy, which were recently approved by Francis (which will be discussed later). In other words, the pension fund was caught in a bind: on the one hand, there was the rock of the deep deficit, on the other, the hard place of the professional incompetence of the persons called on to manage the accounts.
These assessments seemed to be confirmed by the management of the fund’s assets, consisting of real estate and securities with their own significant risks: “The asset management of the fund is not aligned with the debts of the fund and there are major investments into risky positions [such as] Italian government bonds.”10
There were also some questions about the real estate portfolio, since it was invested entirely in the municipality of Rome and not distributed among various realities, to prevent overexposure to the market fluctuations of a single city. In reality, in a country, pension funds are not structured around reserves and real estate investments, but count on the contributions of employees and new hires, which steadily finance the pensions of persons who go into retirement. The Vatican is a unique case, however, since the mortality rate is so low and births, for obvious reasons, are so few.
These negative evaluations were not offset by the positive data that Cardinal Versaldi, as the President of the Prefecture, found in the 2013 budget and 2014 estimated data received on December 19, 2013, directly from Cardinal Calcagno:
Most Reverend Eminence,
… The YTD budget shows a possible financial surplus of 27.7 million euros, the 2014 estimated budget projects it at 28 million. The results predicted for the 2013 and 2014 fiscal years are thus high enough to foresee pension fund assets at the equivalent of 479.1 million as of December 31, 2014. I am grateful for this opportunity to confirm the assurances of my highest esteem for Your Most Reverend Eminence.
Most respectfully, Domenico Calcagno
In financial management, income from bonds amounts to 10.9 million, from active interests to 461,000 euros, while “the outcome of the overall management (YTD surplus as of December 13, 2013) is 27.7 million, 466,000 euros less than projections in the 2013 estimated budget.”11 An examination of the securities portfolio on September 30, 2013, highlights all the Italian government bonds, which the analysts considered risky, such as the 70 million in multiyear Treasury bonds. In practice, the reserves have been parked in the Italian public debt.12
This practice may help strengthen the Church’s hand when it lobbies Italian politicians. The Vatican’s relations with foreign governments—first in Italy but also in Africa and South America—have always relied on various means of persuasion. These include the pressures I documented in my previous book, His Holiness, on the Italian President of the Republic to reconsider the laws on the family and on assisted procreation. But they also involve the acquisition of shares of the public debt or other major financial investments, always in government bonds.
On January 22, 2014, Erik Stattin, a Harvard MBA, EMEA partner, and head of the pension and insurance issues of Oliver Wyman Rome, called a meeting of Vatican representatives and other Commission members, including Messemer. Monsignors Vallejo Balda and Luigi Mistò, Chair of the Health Insurance Fund and Secretary of APSA, together with Cardinal Calcagno, listened to the report. The only one to nod his agreement was Messemer. The meeting was decisive:
All of the participants agree in maintaining that on the basis of the actuarial audit conducted by Oliver Wyman, the Vatican pension fund presents a very significant funding gap. This gap is so large that it has the potential to jeopardize the future pensions of Vatican employees. The same audit shows, however, that in the short term the fund is able to finance its activities, which makes it possible to proceed with a restructuring to prevent the collapse of the fund. In any event it is necessary to implement with the maximum urgency drastic measures to prevent the deficit from growing larger.
These measures should include:
• A strengthening of the fund’s assets through an injection of capital by the Vatican administrations;
• A redefinition of future pensions. A benchmark of the current Italian pension system should assure a treatment of Vatican employees that is equivalent to what is currently used for employees of the Italian public administrations.
The reform of the pension system should also provide for “the Vatican contributing to solidify the capital in the pension fund. [Finally, there is a need] to adjust the existing benefits for employees to a reasonable economic level.” While the “asset management for the pension fund will be managed by the Vatican Asset Management center, VAM, and the Vatican will guarantee a specific interest rate on assets.”13
Vatican Asset Management (VAM) represents a very particular proposal, to create a single structure that, for the first time in Vatican history, will be called on to manage all the movable and unmovable assets of the Holy See, including, therefore, the pension fund.14
Not all of Francis’s trusted men were in favor of this plan. In fact, a few months later, in the spring and summer of 2014, the VAM would be the cause of a deep split within the COSEA Commission. For too many months the war had been fought behind the scenes, with skirmishes, dirty tricks, and sabotage. On one side were the supporters of Francis. On another were those who tolerated him. And on yet another were those who criticized him and tried to stop him. And from this latter group came a series of intimidations, attacks, and conspiracies to make the Argentine Pope lose his incredible challenge. At stake was the future of the Church, and not just the Vatican. Now, the conflict would pose an even greater challenge.