Israel's Minister of Finance Moshe Kahlon and Supervisor of Capital Markets, Insurance, and Savings Dorit Salinger are launching a reform today aimed at bringing down management fees and increasing competition in the pension savings market.
The reform has two elements. The state will choose the cheapest pension fund, and will allow employers to choose a different fund, subject to a competitive procedure.
The reform includes a competitive procedure in which the entity offering the lowest management fees is selected. This entity will be defined as the selected pension fund for a three-year period. During this period, employees who did not select a pension product when they began working at a place of employment will be assigned to this fund, unless their employer obtains a different pension arrangement for them. Employees joining the fund will be entitled to a benefit in management fees for a period of five years from the time they join.
In order to enable new players to enter the market, which is currently controlled by only five funds, the procedure will grant an advantage to entities managing pension funds with a market share of less than 5%. If the employer chooses not to assign his employees to the fund selected by the state in the procedure, he must conduct a competitive procedure to select a pension fund for his employees. The competitive procedure ensures an equal opportunity to win for all the entities in the pension savings market, according to criteria that include low management fees, a high return, and high-quality service. The competitive procedure will allow any fund to win the employer's pension management, enhance transparency, and cut down on possible conflicts of interest.
According the Ministry of Finance's announcement, hundreds of thousands of employees currently pay the highest permitted management fees - 0.5% of the amount accumulated and 6% of the remuneration. Most of these employees are not unionized, and their bargaining power is therefore poor. Charging the maximum management fees detracts from the member's retirement income.
Kahlon said, "Measure by measure, we are taking action to lower management fees and increase competition in the pension market. Many employees are still paying excessively high management fees. With this reform, we will significantly decrease the damage to their pension savings."
Salinger said, "The reform is designed for employees who lack the necessary bargaining power to lower their management fees. The procedure gives an advantage to small pension funds, and helps remove entry barriers to a market currently controlled by only five entities."
Published by Globes [online], Israel business news - www.globes-online.com - on December 29, 2015
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