Treasury reform to lower pension-fund fees

Steinitz: "The measures will lower management fees, improve transparency and ensure more-objective pension advice."

December 1, 2010 07:07
3 minute read.
Yuval Steinitz and Stanley Fischer

Steinitz and Stanley Fischer 311. (photo credit: Courtesy)

The Finance Ministry on Tuesday announced a package of measures to lower maximum management fees paid on pension savings and boost competition in the industry.

“Long-term savings are important for every citizen,” Finance Minister Yuval Steinitz said Tuesday at a press conference in Tel Aviv.

“The measures we are introducing are aimed at serving in particular those citizens with low bargaining power and the weak segments of the population. The measures will lower management fees, improve transparency and ensure more-objective pension advice.”

According to the proposed reform, the current maximum annual managementfee ceiling of 2 percent of accumulated savings in provident funds and 0% on pension contributions will be lowered to 1.2% of the asset value, or a maximum ceiling of 5% on contributions. For example, an employee who earns a monthly salary of NIS 8,500 after saving for 15 years is today charged a maximum management fee of NIS 7,150 a year. Following the reform, the annual maximum management fee would be NIS 5,180, a 28% reduction in fees. The change in fees is expected to come into effect in 2012 following the legislative process.

Another measure seeks to increase transparency of savings products and management fees by requiring provident- fund management companies to provide detailed and clear information on conditions to clients. Institutional bodies will be required to report any future changes in management fees in a separate notice including the date of change and previous fee rates to clients or agents and advisers so that they can compare and negotiate accordingly. In addition, pension- fund managers will not be allowed to increase agreed management fees with the client for a period of a minimum of two years.

“We want citizens to be able to read and understand their savings plans and the reports they receive from the companies,” Steinitz said. “If citizens will not be able to understand what they are buying and what they are paying in fees, they will not be able to compare and negotiate terms, and as a result there won’t be competition.”

The reform would also reduce conflicts of interest between sales fees and promotions paid to insurance agents and the level of management fees paid by those saving for retirement.

Today, pension funds often increase their incentives for insurance agents to bring in clients; for example, some offer promotions such as jeep tours in Mongolia. That has an impact on the products they offer, which are not always objective and in the interest of clients. In an effort to reduce the agents’ conflicts of interest, the Finance Ministry will cap the financial gifts that the funds may pay the agents, to a value of NIS 600 a year.

“Agents today are not always offering the best product for the client if they get benefits from a company for selling their product,” Steinitz said.

Also speaking at the press conference, Oded Sarig, the Finance Ministry’s supervisor of capital markets and savings, said the steps are intended to ensure that the average citizen better understands long-term savings products and gets better advice to choose the product that best fits his or her needs.

“The decision over a pension plan is the most important economic decision citizens are taking in their lives,” Finance Minister directorgeneral Haim Shani said at the press conference. “Today, citizens don’t know what they are buying or getting, or from whom they are buying savings plans. We want people to understand that they need to save more.”

Bank Hapoalim chairman Yair Seroussi, speaking at the annual meeting of the Banking Association in Tel Aviv on Tuesday, said the entry of banks into the pension-advisory market was essential.

“Pension advice represents a national challenge,” he said. “Pensions are a critical issue, both at the level of households and at the economic level. Most employees don’t understand their pensions and will be surprised to find out how much lower their pension will be without supplementary long-term savings.”

Seroussi, who is also the chairman of the association, said various studies have shown that 86% of employees don’t know where their savings are invested, 70% don’t know how much they pay in management fees, and more than 50% are not aware of the amount of their pension due upon retirement.

He suggested that banks be allowed to offer providentfund deposits for elderly people.

These deposits would be a long-term savings product that allows mobility between provident funds and benefits from tax breaks on pension savings.

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