Pinhasi: Pension funds are long term, so the crisis shouldn't affect most savers.
By JOHN BENZAQUENDan Pinhasi 88 248(photo credit: Courtesy)
Israel is undergoing a financial crisis. The stock market is losing ground; consequently, the pension savings of the public are falling in value. But is there real cause for concern? Should Israelis be worried about the stability of their pensions?
Dan Pinhasi, general manager of Meitavit Atudot Pension and Clal Provident Funds, thinks not.
"Pension savings, whether as pension funds or provident funds, are long-term savings. As such, a crisis such as the one we are experiencing should not affect the pension savings of the majority of savers. It is true that the fall in the value of stocks and bonds has had a bearing on the pension assets, but this is temporary. Stocks and bonds fall and then rise. If at present stock markets are experiencing a bullish period, history has shown that after a time, stocks do rise. Those making monthly payments into a new pension fund have nothing to worry about. I realize that savers are apprehensive because their pension savings are falling in value now, but they must understand that they will rise in the future," says Pinhasi.
Most of Israel's wage earners are affected right now because Israel has a pension system in which every wage earner is assured of a pension in old age. The system is based on the amount of money that has been paid into a pension fund during the year. This money increases all the time because of accumulated interest and because it has been well invested. As a result, old-age pensions are based on the money that has been accumulated over the years.
"The Israeli pension fund industry operates under a system in which the different pension funds must be actuarially balanced at all times," explains Pinhasi. "They operate under a regulatory system that ensures their solidity. The majority of those with a pension fund make regular monthly payments; when they reach the mandatory pension age of 67 for men and 64 for women, they receive regular monthly pension payments. These payments are calculated according to the amount of money that was paid in over the years. This way, the sooner in life one starts making regular monthly payments, the bigger the pension one gets," he says.
These funds are administered by companies that specialize in long-term investments. One of these is Meitavit Atudot Pension Funds and Clal Gemel. It is part of the Clal Finance Ltd. Group of companies which, outside the banking system, is Israel's largest financial institution. It provides a broad array of financial services ranging from portfolio management to brokerage and underwriting services.
Meitavit Atudot Pension Funds manages NIS 8 billion. In 2009 it is slated to grow by an additional NIS 1.7 billion, and each succeeding year its rate of growth increases. Clal Gemel manages approximately NIS 27 billion. The expected annual growth of this provident fund amounts to approximately NIS 1.5 billion.
With so much money involved, the apprehensions are understandable.
So what to do?
With regard to the pension funds, patience is the order of the day. In theory, anyone taking out a pension at these times will get less than he expected, but this situation is temporary.
"Monthly pension payments are adjusted periodically according to the assets of the pension funds. That means that even if at the beginning the monthly payments are below one's expectations, they will increase later," says Pinhasi.
With provident funds it is different.
Today, provident funds are essentially pension savings. Since the beginning of this year, it has become mandatory that employees with pension funds transfer all the accumulated funds to a company that specializes in paying out monthly payments. There is a problem for those savers who have to withdraw their money now.
There are two kinds of provident funds. The old type of funds received tax benefits, provided the money was not withdrawn for a period of not less than 15 years. The new provident funds are blocked until the age of retirement.
Those with provident funds that are liquid can withdraw their funds for deposits made until the end of 2007.
But if they do, they will lose money. For those who do not have an urgent need for the money, it is recommended that they wait.
The pension industry in Israel is very sophisticated and is geared to supply the needs of all. For new olim who made aliya over age 45 at a relatively advanced age or those with small or large businesses who did not make monthly payments into a pension fund, there is a general pension fund (keren pensia clalit).
It allows them to make a lump payment, which entitles them to a pension at retirement age.
They can then open a regular pension fund and make reasonable monthly payments.
At age 67 they will receive a pension made up of what they are entitled to receive from the general pension fund and from the regular pension fund.
Here is an example. A 50-year-old male with a wife and grown children who pays in a lump sum of NIS 500,000 (approximately $125,000) will receive a monthly pension of $1,000 (NIS 4,000) at age 67. If, in addition, he and his employer made monthly payments of NIS 1,700, he will get an additional monthly pension of NIS 2,200 ($550). If he pays in a lump sum of, say, NIS 600,000, then at 67 he could receive a monthly pension of NIS 3,000.
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