The Ministry of Finance is changing the way in which the designated bonds provided to those whose pension savings are with the new, defined contribution pension funds (since 1995) are distributed. These funds are the fastest growing saving instrument in the market, according to the report of the team set up to examine ways of raising certainty in pension savings, released today by the Ministry of Finance. The team was headed by Ministry of Finance director general Shai Babad.
The ministry intends to change the distribution method such that the designated bonds will mainly provide security for pensioners, at the expense of young people, all of whose pension savings will be diverted to the capital market. The Ministry of Finance hopes that this change will happen by the end of the first quarter of 2016.
Under the report's recommendations, the amount of designated bonds allocated to pensioners will grow, while young savers up to age 50 will, over time, lose the investment in designated bonds entirely. Up to now, the allocation has been 30% at all ages, without discrimination between savers.
As with other regulations advanced by the Ministry of Finance in recent years, this time too it aims to circumvent the Knesset Finance Committee. As far as the Ministry of Finance is concerned, the recommendations will come into force as soon as Minister of Finance Moshe Kahlon signs the necessary regulations, which will not require Knesset approval, although the legality of this is still being examined.
The team examined several options: changing the designated bond distribution according to age (the option chosen), according to salary, and a combined solution. The team's recommendation is that 60% of the assets set against the commitments to pensioners will be invested in designated bonds. Savers with the new defined contribution pension funds aged between 50 and the retirement age will maintain the current position and benefit from designated bonds amounting to 30% of the assets accumulated for them. Savers aged up to 50 in these funds will lose the protection of the designated bonds completely.
Kahlon said, today, "This move is good news for pension savers. The reform will guard pensioners against possible shocks on the markets, will provide certainty and stability for their pensions, and will boost pension saving for retirement."
The designated bonds are a safety net for pension savers, providing a guaranteed return of 4.86%, index-linked. To a large extent, this element of the pension investment portfolio protects against volatility and steep falls in the capital market. Today, the designated bonds amount to a substantial subsidy from the government to savers, and new savers can only obtain them in the new (post 1995) defined contribution pension plans. There is currently a huge gap between the interest on these bonds and the nominal interest rates on the state's merchantable debt, but in good years on the capital market, the designated bonds bring down the pension funds' overall return.
Histadrut (General Federation of Labor in Israel) chairman Avi Nissenkorn, who has held meeting with Kahlon on the matter, welcomed the Ministry of Finance recommendations, saying, "Once again it is demonstrated that joint action can lead to results that narrow gaps and protect weak sections of the population, and that concern for pensioners is at the top of our priorities."
In the provident funds market, it was hoped that the allocation of designated bonds would be changed such that they would also be issued to provident funds, but the Ministry of Finance states clearly that "the team found that there was no cause to deviate from current policy, and that designated bonds should continue to be allocated only to the new defined-contribution pension funds." This matter is currently the subject of a petition to the High Court of Justice by investment houses that mainly run provident funds, on the grounds that the new defined contribution pension funds is almost completely dominated by the five major insurance groups in Israel, and that the policy on designated bonds constitutes illegal discrimination.
Published by Globes [online], Israel business news - www.globes-online.com - on January 4, 2016
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