Bond reform intended for pension savings and its impact on capital market

The bill stipulates that the Israel will stop issuing designated bonds at a rate of 30% of the old and new pension assets, and 100% of the pension savings will be invested in the capital market.

Illustrative photo of Israeli money (photo credit: MARC ISRAEL SELLEM)
Illustrative photo of Israeli money
(photo credit: MARC ISRAEL SELLEM)

The Finance Committee recently began discussing the Economic Efficiency Bill for 2021-2022, focusing on "ensuring stability in pension fund returns."

Currently, 70% of the savings in pension funds are invested in the capital market and 30% of them are invested in non-marketable State of Israel designated bonds, which guarantee a handsome realistic return of 4.86% per year.

The bill stipulates that the State of Israel will stop issuing designated bonds at a rate of 30% of the old and new pension assets, and 100% of the pension savings will be invested in the capital market.

Daniel Georgi, director of the Israeli securities desk at Mercantile Bank (Credit: PR Photo Approval)
Daniel Georgi, director of the Israeli securities desk at Mercantile Bank (Credit: PR Photo Approval)

The impact of the proposed change is dramatic for the state, since the excess cost to the state is expected to be about NIS 8.9 billion in 2022, and will rise to NIS 20 billion according to the Finance Ministry’s forecasts in a decade.

To date, the state has issued more than NIS 230 billion in designated "Arad" bonds, issued for 15 years. As long as the Finance Ministry’s proposal is accepted, the money from these bonds will most likely be invested in the capital market. In addition, the bonds that have already been issued will remain in effect until they expire, without changes. 

It is important to note that the proposed process will apply only to the bonds that have matured, therefore the conversion of funds invested in bonds intended for the capital market will gradually continue over multiple years according to the above and subject to the passing of the law. 

The capital market may receive a tailwind starting in July 2022 when the new deposits for pension funds will be invested 100% in the capital market (as opposed to 70% before the change) according to the investment allocations of the investment managers in the pension bodies.

 Also, the capital market may enjoy a positive flow whenever designated debt funds reach maturity. Even if it is a long-term process, it is still a very significant amount of money that is supposed to increase demand and be a positive factor for the capital market.

Daniel Georgi is the director of the Israeli securities desk at Mercantile Bank.