Pension reform

The reform is expected to help the weakest workers who do not have the backing of unions or of huge organizations that have tremendous bargaining power vis-a-vis the large pension providers

Moshe Kahlon
Credit should be given where credit is due. Finance Minister Moshe Kahlon has launched a pension reform that will enable tens of thousands of workers to retire with more money.
The reform is expected to help the weakest workers who do not have the backing of unions or of huge and powerful organizations such as the IDF and the Israel Electric Corporation that have tremendous bargaining power vis-a-vis the large pension providers.
The reform is even expected to lower pension fees across the board for all workers by increasing competition.
As a result, less of workers’ hard-earned money will be skimmed off their life savings in the form of management fees and other charges. More money will be left for retirement.
The centerpiece of the reform is the creation of two “default” pension funds committed to charging lower management fees. These default funds will automatically become the pension providers for workers who do not have a pension fund. Those who are presently paying too much will be permitted to join as well.
Two investment houses – Meitav Dash and Halman-Aldubi – won a government tender to provide pensions for a competitively low management fee. After two years, another tender will be held and two different investment houses will be given the opportunity to provide default pensions.
Meitav Dash will charge a management fee of 1.31 percent on the monthly payment and another 0.01% annually on the total savings. Halman-Aldubi will charge management fees of 1.49% on the monthly payment, and 0.001% annually on the total savings.
For the sake of comparison, the industry average in 2015 was 3.17% and 0.28%, respectively.
The management fees offered by Meitav Dash and Halman-Al-dubi are by no means the lowest in the industry.
Employees of large organizations such as the IEC and IDF get rates significantly lower because they have tremendous leveraging power. Harel Insurance, for instance, provides IDF employees with pensions for the ridiculously low management fee of 0.0018% with no annual charge for the total amount of money managed. That works out to just NIS 18,000 for every billion shekels. IEC employees pay just 0.07%.
The default pension reform pushed by Kahlon will create a whole new interest group – workers who do not belong to one of the large unions or organizations. Presently, many of the labor market’s lowest paid salaried employees end up paying the highest management fees on their pensions, because they have no bargaining power vis-a-vis the pension providers and lack basic understanding of how pensions work. The default funds will provide pensions at relatively low cost for these workers while remaining under the regulatory eye of the Treasury.
The reform’s impact on the retirement payments that workers will receive when they retire is expected to be dramatic. According to figures provided by the Treasury for a worker with a median salary of NIS 6,700 a month, who pays the maximum level of management fees – 6% on monthly deposits and 0.5% a year – the reform is expected to increase the monthly pension payment after retirement by 18%. In shekel terms, this is an addition of NIS 900 a month, assuming a 4% annual return on pension fund investments.
The only ones opposed to the reform are, of course, the pension providers who are rightly concerned that the default funds will cut into their business and reduce the number of uninformed workers who can be charged exorbitant fees.
We are normally in favor of allowing free market forces to determine prices. But even the most capitalist-minded admit that in cases of market failure regulatory bodies must step in. Presently, big interest groups such as the IDF and the IEC, which already pay higher than average salaries and better retirement benefits, are able to exploit their size to receive from pension providers ridiculously low rates while the average worker is forced to part with his or her hard-earned savings.
This state of affairs has to stop and thankfully Finance Minister Kahlon stepped in to protect the average worker from the ravages of the pension market. If pension providers are angry it is a sign Kahlon is doing something right.
Perhaps they should consider raising the management fees they charge IDF and IEC employees?