Even under the unlikeliest scenario of extensive debt settlements by the tycoons' highly leverage companies, pensions will see little damage, Supervisor of Capital Markets, Insurance and Savings Prof. Oded Sarig told the Knesset Economic Affairs Committee today.
"The largest exposure of the public's pension savings (pension funds, provident funds, and managers insurance policies) to any particular conglomerate is 3.2% of the pension portfolio," Sarig said. "Even a 50% writeoff - which is heavy - at half of a conglomerate's companies, which is an improbable event because it means the collapse of the entire Israeli economy, would only result in a 0.8% loss of the pensions portfolio."
Sarig's figures for an extreme scenario that is unlikely to happen, underscore the effect that investors in provident funds have been hurt by the results of the Bachar committee reform. The potential loss from a sweeping debt settlement by a tycoon underscores the extent to which the greatest damage to a pension portfolio comes from capital market yields. A 10% fall in the share price of Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) or by one of the big banks has an equal impact on savers. A long-term perspective of pension savings yields clearly shows that the management fees are one of the most influential factors on savings.
As several reports by "Globes" have shown, the Bachar committee reform caused management fees collected on provident funds to soar multifold - specifically by an average of 0.5 percentage points on the cumulative savings per year. This fixed annual amount has done more damage to savings to date than a 0.8% loss under the worst-case scenario.
The Ministry of Finance said today that the Capital Markets Division "constantly monitors the exposure of pension savings, including the portfolio's exposure to large borrower groups. A division review found, for example, that the pension savings portfolio's exposure to the economy's five largest borrower groups is less than 7%. The pension portfolio's low exposure to conglomerates is no coincidence, but the result of investment regulations issued by the Division, which reflects the fiduciary duty of the portfolio managers. As a consequence of this duty, portfolio managers scrupulously diversify investments."
Sarig mentioned Nochi Dankner's IDB Holding Corp. Ltd. (TASE:IDBH) unit Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS) and Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG) subsidiary The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5). "Due to the strict restrictions in the investment regulations for investment institutions, their exposure to companies in the conglomerates in which they are a party is negligible. In other words, there is almost no fear of a conflict of interests in the management of credit granted by investment institutions to affiliated companies."
The Bank of Israel's Banking Supervision Department recently conducted stress tests for Israeli banks. It found that it was necessary to strengthen the risk management and oversight on the over-concentration of borrowers' groups. The Bank of Israel added, however, that Israel's banking system would stay sound in the event of a severe sovereign debt crisis combined with a global recession and the fall of two borrowers' group in Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on August 14, 2011
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