Changes in the Insurance and Pension Industry in the early 2000's
The purpose of this article is to present an introduction of the pension and insurance market to explain the nature of the reforms that occurred before "Amendment 3" ("תיקון 3"). This article serves as background for a subsequent article, which goes into further detail and presents some analysis of most of the reforms that were implemented.
Where We Were Until Year 2000
During this period, decisions regarding the investment of pension funds in different retirement plans were made solely by the employer, leaving the employee with no control over his/her own insurance/pension portfolio. The employer determined the amounts to invest (according to tax laws, tax-deductible expenses, collective contracts, etc.) and which financial group(s) would manage the funds.
The most common pension products available at the time were Keren Pensia (קרן פנסיה) and Bituach Menahalim (ביטוח מנהלים), the latter existing in two possible tracks: the "capital" path, where the pensioner receives a one-time lump sum, and the "annuity" path, where he/she receives his/her pension in the form of an annuity. Most of the Bituach Menahalim policies were named "preferred" policies ("עדיף") – annuities.
Among others, Kupot Gemel (קופות גמל) pension plans for self-employed customers allowed the redemption of funds within 15 years, tax-free.
In addition, the law permitted – at retirement – the withdrawal of all the Tagmulim funds[1] (whether invested in a Bituach Menahalim annuity plan or in a Keren Pensia) in the form of a one-time lump sum.
Prior to the year 2000, Bituach Menahalim annuity policies were sold, based on old mortality tables (released in 1955, after World War II), according to which the insurance company was obligated to pay the annuity pension amount according to the guaranteed factor[2] (henceforth – "guaranteed factor"), which did not take into account the significant improvement in life expectancy since the publication of the table.
Despite the predictable losses due to the issue of the guaranteed factor, the insurance companies were not concerned since the large majority of policy holders preferred to withdraw all their retirement funds in a one-time lump sum, rather than receive the annuity (as the law permitted).
The "Market Agreement" Law (חוק ההסדרים במשק)
In the year 2000, a new legislation required that all funds invested in annuity plans (Bituach Menahalim annuity plan or Keren Pensia) must be paid in the form of an annuity – eliminating the possibility of withdrawing those retirement funds as a one-time lump sum at the time of retirement. This legislation was called the "Market Agreement" Law.[3]
In light of this legislation, many existing policy holders (as well as new policy holders) decided to divert a significant portion of their retirement funds to "capital" investment plans (which, until this legislation was established, would have been a redundant transaction).
Insurance companies, in response to this change, created capital policies or, alternatively, a "Capital Addendum"[4] within the existing annuity policies.
Elimination of the "Guaranteed Factor" on 30/05/2001
As a result of the establishment the Market Agreement Law, which requires that pension be paid out in the form of annuity (and not as a lump sum), insurance companies were now exposed to losses due to annuity payments whose value were higher than the funds accumulated by the insured.
In order to avoid the potential deficit, which exposes the policy holders, the Israeli Ministry of Finance issued a regulation, requiring that insurance companies put aside reserves to cover policies that used the "guaranteed factor", according to updated dynamic mortality tables.[5]
This regulation significantly increased insurance company expenses, which caused a sweeping decision to stop selling new policies based on the guaranteed factor. From 01/06/2001 and until today, all Israeli insurance companies sell annuity policies based on updated dynamic mortality tables, which take into account improved future mortality rates.
This change eliminated the advantage that insurance companies had on Keren Pensia previously.
The Bachar Committee ועדת בכר) – 2005)
In April 2004, the Minister of Finance (at the time, Binyamin Netanyahu) requested recommendations from the Finance Ministry to increase the compentitiveness of the Israeli capital market. By September of that year, the committee, under the leadership of Dr. Yossi Bachar, Director General of the Ministry of Finance and head of the committee, published a resolution.
As a result of these conclusions, at the beginning of 2005 a number of laws were enacted, including the right of the employee to choose the investment plan and the organization that manages it (Keren Pensia, Insurance company or Kupat Gemel) for his/her social benefits. In addition, it is important to note that the law does not specify whether the employer or employee has the right to choose the insurance agency.
At the end of 2005, an additional regulation was released, eliminating the right of self-employed policy holders to withdraw from new capital funds after 15 years but permitting withdrawal of these funds at a minimum age of 60 after holding the pension policy for at least 5 years.
Amendment 3 (תיקון 3) and Other Amendments – 2008
Amendment 3 to the Law of Supervision of Financial Services (חוק הפיקוח על שירותים פיננסיים) that was released on 22/01/2008 set a new widespread standard in the world of insurance and pensions.
In general, from that year, this amendment established, among other things, the existence of only two pension plan types: "Non-Paying Annuity Kupat Gemel"[6] (henceforth – Non-Paying Gemel Fund) and "Paying Annuity Kupat Gemel"[7] (henceforth – Paying Gemel Fund). Products like "Annuity Bituach Menahalim"[8] and "Comprehensive/General Keren Pensia"[9] were converted to Paying Gemel Funds, yet these did not undergo any significant changes. Alternatively, products such as "Capital Bituach Menahalim"[10] and "Kupat Gemel"[11] were converted to Non-Paying Gemel Funds, and the changes made to these products were very significant and had widespread impact: withdrawal of Tagmulim funds from these products is forbidden, unless they are first transferred to a Paying Gemel Fund.
Further, every individual that has reached retirement age has the option to withdraw retirement funds[12] (from a Paying Annuity Kupat Gemel) in excess to a 3,850 ₪ monthly annuity as a one-time lump sum (capital withdrawal[13]). For example, an individual who has reached retirement age and who has accumulated retirement funds equivalent to a 5,000 ₪ pension annuity has the option to withdraw the portion of those funds that secure the "excess" 1,150 ₪ of annuity. It must be noted that funds deposited before 01/01/2008 can be withdrawn according to the previous regulations.
At the time of the publication of this article, there still exist many issues that the legislature has yet to address. We will cover this topic in the next article.
An additional regulation that was implemented at the beginning of 2008 is a collective agreement requiring all employers that do not provide their workers with Hesder Metiv[14] to set aside for their employees yearly increasing funds for their employee pensions[15] (henceforth – Pensiat Chova Law).
The Pensiat Chova law applies to a portion of the employee's monthly salary and falls under Paragraph 14 of the law of severance or terminated employees.
This law nonetheless contains problems and contradictions that have yet to be resolved.
Summary
It is clear that since the beginning of the century, we have been exposed to many widespread changes. The source of these changes is based on several principles by which the Ministry of Finance operates, such as:
Reduce citizens' dependence on the state.
Increase the retirement savings of the citizen in preparation for retirement, and consequently maintain his/her quality of life.
Assign the responsibility of the savings to the citizen, and not to the state.
Educate the public about the need to accumulate retirement savings.
[1] Money set aside by the employer for any benefits agreed upon for the employee.
[2] "פקטור מובטח"
[3] "Market Agreement" is not the official name of the law. It is translated here to provide a better understanding for the Anglo reader. The official name is the Hebrew version: "חוק ההסדרים במשק." This applies to other Hebrew terms in this article that have no official English translation.
[4] "נספח הוני"
[5] Updated dynamic mortality tables are tables that are used to determine life expectancy based on updated statistics and are based on the assumption that there is an improvement in life expectancy for future generations. For example, the life expectancy of a 30 year-old male in 2009 would be longer than the life expectancy of a 30 year-old male in 2008.
[6] Unofficial translation from the Hebrew: "קופת גמל לקצבה שאינה משלמת".
[7] Unofficial translation from the Hebrew: "קופת גמל לקצבה משלמת".
[8] Unofficial translation from the Hebrew: "ביטוח מנהלים קצבתי".
[9] Unofficial translation from the Hebrew: "קרן פנסיה מקיפה/כללית".
[10] Unofficial translation from the Hebrew: "ביטוח מנהלים הוני".
[11] Unofficial translation from the Hebrew: "קופות גמל".
[12] Reference here is only to Tagmulim funds. Severance funds (under the terms of "רצף מעסיקים") can always be withdrawn as a one-time lump sum.
[13] משיכה הונית
[14] Hesder Metiv ("הסדר מטיב") is a form of social benefit where the employer and employee each set aside 5.00% for Tagmulim out of the minimum between the employee's salary and the national average salary. This is not a complete explanation of the terms of the Hesder Metiv, but gives the reader direction for the purpose of further understanding.
[15] The law applies to all employers that don't provide a Hesder Metiv.
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