Treasury unveils measures aimed at protecting pension savings

Fund manager bonuses to depend on meeting long-term goals.

Yadin Antebi 88 248 (photo credit: Ariel Jerozolimski)
Yadin Antebi 88 248
(photo credit: Ariel Jerozolimski)
The Finance Ministry will raise the capital requirements and other obligations for insurers offering pension saving vehicles to the general public, while the distribution of bonuses to fund managers will be made dependent on achieving long-term goals, in an effort to apply the first lessons of the global financial crisis. "In light of the failures which arose from the global financial crisis, we met with capital market players, banks, institutional bodies, academics, consumer groups, and unions over the past three months in an effort to formulate pension savings measures needed to provide better protection for the public's pension savings," Yadin Antebi, the Finance Ministry's supervisor of capital markets, savings and insurance, said at a press conference in Tel Aviv on Tuesday. "It is clear that some of the failures would have been unveiled even without the crisis. It is our responsibility to use this crisis as an opportunity to make the necessary changes and adjustments in the pension savings sector for the good of the saver," he said. The pension savings reforms planned for implementation in 2009 are divided into two parts: savers' rights, and obligations by pension fund managers. As part of the measures, the Finance Ministry will raise the capital requirement for insurers by 30 percent over the next four years. Since not all pension fund managers will be able to meet higher capital demands, Antebi expects merger and acquisition activity among fund managers. "We will not allow institutional investors to distribute dividends [to those who have invested their pensions with them] until 2010, to help them weather the global financial crisis," Antebi said. In addition, the Finance Ministry will act to narrow the number of provident and pension funds and other long-term investment vehicles, while at the same time subjecting them to enhanced transparency requirements including the provision of information on risk strategy before making investments. "The abundance of choice of savings funds and plans has not contributed to the consumers' needs," Antebi said. Instead he announced that the country's pension savings system will switch to the Chilean model, which means that pension plans will be tailored according to age, risk requirements, family status, etc. For example, when a saver approaches retirement age, savings will be changed to safer investment vehicles such as government bonds. "The problem today is that almost all savings plans are general plans which do not take into account the specific needs of the saver, which changes with age," Antebi said. He added that he will create a team to formulate a set of recommendations for different investment product plans, for savers over the age of 60 and for those reaching retirement age at 67, to minimize volatility in their investment portfolios and secure their monthly retirement payments as far as possible. Furthermore, the Finance Ministry will publish the performances of provident funds over the past 12 months, instead of monthly updates of yields as was the case until now. "Monthly yield updates were used as a tool by institutional bodies to attract consumers. They are not relevant to savers invested in long-term vehicles," said Antebi. "The idea here is to emphasize the importance of the long-term outlook." Furthermore, fund managers will be obligated to provide greater disclosure on management fees as part of a quarterly report to savers. "Competition over management fees has not yet taken off. There is still much room for shopping of products," he said. "The crisis has brought up many issues including problems in terms of the customer services provided by institutional bodies. We will determine a set of standards for proper customer services. For example, fund managers will need to answer requests by clients within a certain time framework and send timely updates in writing on transactions and on changes to their client's investment portfolios." Antebi harshly criticized the bonus model structure for fund managers. "The global financial crisis has shown that one of the major failures was that money managers took taken higher risks on themselves because the bonus structure for managers was based on short-terms successes," he said. "As part of the new measures, fund managers will be entitled to a bonus if they meet long-term goals. Bonuses will be distributed for attained goals over a period of three years." In an effort to mitigate the effect of the crisis in the corporate bond market, pension fund managers will be required to gather a set table of information on the company's performance and financial status before investing in corporate bonds. In addition the Treasury will obligate fund managers purchasing bonds to act to ensure debt repayments and if needed seek cooperation of other institutional bodies or banks. For this purpose institutional investors will be allowed to raise their holdings in companies to more than 20% to assist them in reaching settlements on debt repayments.