The taxpayers go on paying for the old pensions. The Ministry of Finance will have to increase government aid to these funds, following a NIS 26 billion rise in their deficit, sources inform "Globes." The growth in the deficit resulted from a drop in the interest rate used for calculations during the second quarter of the year. The higher deficit increased the estimate for government aid to the old pension funds to NIS 148 billion over the next 34 years.
During the second quarter, the Finance Ministry decided to lower the risk-free long-term interest rate, which increased the actuarial deficit of the old pension funds. Furthermore, this measure caused a NIS 1 billion aggregate deficit in the Histadrut HaOvdim Leumit and Atudot funds, which had previously been balanced without any state aid. The state will now have to cover these deficits.
Most of the deficit in the old pension funds, about NIS 152 billion, is in the three largest funds: the old Mivtachim Fund, the Central Pension Fund, and the Makefet Fund, whose aggregate deficit has grown by NIS 22 billion since the beginning of the year. Most of the increase was in the second quarter: the old Mivtachim Fund, the largest of the old pension funds, finished the second quarter with a NIS 83 billion deficit, following a rise of NIS 13.3 billion in its deficit this year; the Central Pension Fund's deficit is up NIS 5.7 billion to NIS 45.5 billion this year, and the Makefet Fund's deficit rose NIS 4 billion to NIS 24.7 billion this year.
Pension cut - a matter of time?
When a pension fund has a deficit, it means that it will be unable to meet its obligations to the savers. For the members of the old pension funds, however, this concept has no real meaning, because the state has never set a ceiling on the aid it is willing to give them.
When the old pension funds were nationalized in 2003, it was decided that they would maintain actuarial balance, among other things by means of designated bonds, and their deficit would be covered by government aid. It was also decided that in the future, if an old pension fund with a deficit from the nationalization period proved unable to cover its future obligations, the state would continue to bear the costs of covering the deficit.
The situation of the new pension funds is different, because their members finance the actuarial balance. If the assets of a new pension fund do not cover its future liabilities, it must reduce its rights, i.e. the savers' pensions are cut.
It works like this: when someone retires, the companies managing the pension funds and the executive insurance policies are forced by the Finance Ministry to hold back the amounts accumulated by the pensioners for risk-free assets (government bonds) in order to minimize the damage of market fluctuations. In order to determine the monthly amount received by a pensioner, the amount saved at the time of retirement is taken, and according to Finance Ministry instructions, it is assumed that it will yield a 4% annual return each year - this is the interest rate used for calculations. The monthly pension amount in a funded pension is calculated using mortality tables that estimate the number of months the saver is expected to live when he reaches pension age (the conversion coefficient). In general, the savings accumulated over his years of work are divided by the conversion coefficient, and the monthly pension is paid accordingly. A longer life expectancy means that the conversion coefficient is higher, and the monthly pension drops. While the conversion coefficient in the 1980s and 1990s was 140-150, today it stands at 200-210, or even higher, and the monthly pension of most savers becomes lower over the years (except for some of the old pension funds having a constant conversion coefficient). This problem does not exist for unfunded pensions, because their monthly pensions are based on the saver's last salary check, and are not dependent on any conversion coefficient. Due to the low interest rate environment, which makes the assumption of a 4% return unrealistic, the Finance Ministry planned to lower the interest rate for calculating pensions to 2.5-3%. Such a measure, however, which will cause an estimated 10% pension cut, was rejected or suspended, following severe public criticism.
This possibility has not been taken off the agenda, however, as indicated in a speech by Supervisor of the Capital Markets, Insurance, and Savings Dorit Salinger at last June's "Globes" capital market conference, when she said, "The interest rate used to calculate pensions is unrealistic." A pension cut appears to be only a matter of time.
What is certain is that despite the statements by Minister of Finance Yair Lapid, Israel consistently cross-subsidizes pension savings. On the one hand, it ignores the fact that the pensions of most savers in the new funds are shrinking, while on the other hand, it continues to pour billions of shekels each year into the old pension funds in order to pay for the excessive rights of their members, without mentioning, of course, those who are getting rich on unfunded pensions.
Published by Globes [online], Israel business news - www.globes-online.com - on September 18, 2014
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