An international comparison on implementing structural changes in the long-term savings industry has found that Israel has made more progress than other OECD member states in transferring the responsibility for pensions on to individuals, while simultaneously reducing as much as possible budget commitments to them, according to a new study by Globes Research and PwC Israel.
As a result of this pension revolution, the Israeli government staved off fiscal jeopardy, but exposed savers to risks - market risks that the last financial crisis exposed for all to see, management fees that are too high and whose direction is not clear, and the fact that the public's financial expertise - and not just in Israel - is low.
Amendment 3 of 2008, possibly the most important structural change, reflects the Ministry of Finance's preference for pension savings being withdrawn in the form of a monthly payment, rather than with a single capital withdrawal. The amendment stipulates that a retiree must have enough principle to fund a minimum monthly pension of NIS 4,200, and only then will he or she be allowed to capitalize the balance of the money as a capital withdrawal. In effect, most Israeli employees will not have to deal with this dilemma for the simple reason that to meet the threshold, at least NIS 1 million in cumulative savings are necessary.
Mandating thus annuity type of pension, and other measures, including the November 2010 management fees reform, have contributed to turning the classic pension savings instruments - pension funds, provident funds, and managers' insurance - into "complementary alternatives". When this evolutionary process is completed, new entrants into the workforce will see a string of pension funds, which can be divided into two general groups and one subgroup:
1. The comprehensive pension fund alternative (A): savings for a monthly pension payment, structured collective insurance and a variable conversion coefficient in accordance with life expectancy.
2. The general pension fund alternative (B): savings for a monthly pension payment, personal insurance, a conversion coefficient fixed at the day of retirement in exchange for a higher premium than in alternative 1.
3. Managers' insurance: savings for a monthly pension payment, a conversion coefficient fixed at the day of the policy is signed in exchange for a very high premium.
Published by Globes [online], Israel business news - www.globes-online.com - on January 13, 2011
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