This week, it was reported that the reform in management fees in the pensions market had changed its format. Minister of Finance Yuval Steinitz, Commissioner of Capital Markets, Insurance and Savings Oded Sarig, and MK Haim Katz bowed to intervention by Prime Minister Benjamin Netanyahu, and agreed to reduce maximum management fees for provident funds and executive insurance to 1.05% of the accumulated amount and 4% of regular deposits.
The depth of the cut surprised the managements of the financial institutions, who criticized it with unusual ferocity. Speaking to "Globes", the heads of the Pension Management Forum share the same stance, and warn that such a sharp cut in revenue is mistaken, and will even harm the market.
"As far as the coup on management fees is concerned, I believe that these management fees will henceforth dictate the level of service, the technological level, and the sections of the population that will be served, or not served. Overall, the level of service will decline, and along with it the professional quality," warns Menachem Kali, chairman of the Forum, who adds that "the decision is hasty, and will have a serious price."
Kali's colleague Itzik Oz fears that "reducing management fees will lead to a decline in the quality of service and professionalism offered to the customer," while Eyal Goren says that he is "vey concerned that in 2012, in a civilized, Western country, decisions on such an important matter are made by horse trading; there will be a price for the result of such an embarrassing move."
The intervention from above on management fees concerned, among other things, insurance agents.
Kali: "The share of the distributors is the minor share, and the Commissioner of Insurance presented the same result, when he showed that their share is about 20% of the management fees, and even less. In my view, this is not a high rate for any industry, particularly for products like insurance that have to be pushed."
Goren: "Before we drain the Hula Valley again, it would be advisable to think through beforehand what will happen, and to lay the foundations and set the rules in advance for how we want this industry to look in the future. The discussion on costs by itself is bare of substance, and the substance of service is something we have to talk about."
Oz: "The pension savers' guide to the twelve years of reforms since 2000 has been us, the insurance agents. What's more, we have seen management fees falling in recent years, and the people who brought this about are the pension scheme managers and the agents. In the crisis of 2008, we saw that the agents were those who kept the public, which was panicking, level headed, and prevented their clients from making mistakes.
"We all live with management fees that yield a very modest profit in relation to the activity, and you have to remember that we work with insurance companies that are far from perfect in the way they operate. The pension scheme managers filled a vacuum in the market, and basically had to set up a kind of mini-insurance company, and that costs money. If the insurance companies were more efficient, we would save a large part of our activity, and that would be passed on to the client."
Kali: "Some of the producers exported their problems to us to save expense, in their desire to cut costs."
The Ministry of Finance pins great hopes on the pension clearer when it comes to making the market more efficient and more competitive, particularly at the level of the individual.
Oz: "We are in favor of the information clearing house, while the collection clearing is not practical. At the moment, they are talking about the clearer being financed by the institutions, and that will lead to higher management fees."
Kali: "Today, we provide the employers with clearing services free of charge, while the Ministry of Finance is pushing towards clearance at an additional charge."
Goren: "In my view, the Ministry of Finance misunderstands the market, because it is always the case that when you buy as a group you get the product or the service more cheaply than when you come separately, so that independent service for every person who will be master of his own affairs will lead to higher costs."
The alternative at the banks is still not providing advisory services on a large scale. Why is that?
"Today, they are not really an alternative, which is proof that they understand the massive costs of advice and service."
Apropos the clearance and the banks, the Ministry of Finance intends to allow employees freedom of choice of insurance agent at their workplace. That will hurt you.
Kali: The Forum's view is that the problem is first and foremost that of the employers, who will bear the high costs of administering employees, for no return. Besides, employees at large workplaces will lose the benefits of a collective arrangement."
Will the Ministry of Finance's plan for boosting competition in the pensions market will lead to a strengthening of the provident funds as a competitive alternative, or should capital saving perhaps be put back onto the playing field?
Oz: "As long as there is no capital product, provident funds will not return to center stage. In my view, provident funds should be brought back not for the classic pensions segment, but for the segment of the public for whom pension contributions are not made on the whole salary.
"That is a classic product for capital saving, for the independent contributions by the employee as voluntary savings, where there is no employer contribution. In addition, that is exactly the product that is suitable for marketing by the banks, a product from the individual's budget about which he decides, and that the bank can talk about."
Goren: "The rise in life expectancy obliges the public to put more aside for pensions saving, beyond what they put aside today, and one of the classic products for that is the provident product. It's something more concrete for the customer than a group pension."
Published by Globes [online], Israel business news - www.globes-online.com - on February 23, 2012
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