Herzog: Change the Pension System

By Ehud Lahav , The Jerusalem Post

November 30. 2008

Israel

ISAAC HERZOG, Minister of welfare and social services.
Chairman of the ministerial pensions committee.

Isaac Herzog, the minister of welfare and social services, is very much involved in the pension industry in Israel. He heads the special ministerial committee that deals with pensions and is at the forefront of activity to align the industry with the exigencies of the hour. 

"Pensions are one of the more important financial tools in a modern advanced society," says Herzog. "They ensure that those who have reached a certain age and are no longer generating a regular monthly income will have the means to pay for the necessities of life without becoming a burden on society. Since the beginning of the year, every working man and woman is required to have a pension into which he or she and the employer make monthly payments." 

There are two kinds of pension savings: pension funds and provident funds. Pension funds ensure monthly regular payments at retirement age. A provident fund involves a lump sum that can later be invested in a pension plan. 

The assets of the pension funds and the provident funds are invested in the money markets, but today they are taking a beating. The old pension funds are safe because 90% of their assets are invested in government bonds. In the new pension funds, this falls to 30%. And in provident funds, none at all. 

Herzog believes this must change. 

"In 2003, the then-minister of finance Binyamin Netanyahu made reforms in the pension system. I believe that when the pension system was privatized, there should have been strong regulatory guidelines as to how they were invested. Furthermore, the pension fund managers have to submit monthly balance sheet reports to the Treasury. In my opinion, this encourages unwise decisions. The managers understandably want to show good monthly gains, but it creates a situation in which investment decisions for what are long-term investments are based on short-term considerations. And that is totally wrong," he says. 

"Approximately 40% of pension fund assets are invested in company bonds with a high rating. Ordinarily, these are considered solid investments; but for a pension fund, they're not solid enough. This is the time to make changes in the pension system within a comprehensive new economic policy that will address the problems being highlighted by the economic downturn. I have nothing against private pension funds, but the regulatory framework in which they operate should be much stricter," says Herzog. 

Those over 60 who will be receiving a pension in the near future are relatively well protected because the majority are insured within the framework of the old pension funds. Their pensions will in all probability not be affected. 

Such is not the case for those who have long-term savings in provident funds and want to use those savings to finance part or all of their retirement package. The accumulated assets of provident funds have fallen from NIS 275 billion before the crisis started to NIS 225 billion - a fall of more than 18%. 

"According to the new regulations, money invested in provident funds can be used only for pension purposes. The money accumulated must (when the principals reach the mandatory retirement age) be transferred to a company or institution which, in return for the money accumulated, can ensure them a pension. Thus provident funds serve more or less the same purpose as a pension fund and should therefore be protected," says Herzog.

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