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Israeli Government holds 'safety net'

for older pension funds

By Yoram Gavison, Zvi Zrahiya, and Haim Bior

Haaretz.com, May 21, 2003

Israel - The Finance Ministry will set aside NIS 7 billion as a safety net to guarantee the yield of the veteran pension funds does not fall below a certain minimum, the treasury's budgets director, Ori Yogev, told the Knesset Finance Committee yesterday.

As part of the proposed economic recovery plan, the government intends to send the veteran pension funds, which because of actuary deficits stopped accepting new clients in 1995, to the capital market; currently, the revenues of these older funds are guaranteed by designated government bonds that provided a return of 5.57 percent.

The NIS 7-billion fund is apparently designed to counter the charge that stopping the issue of designated, guaranteed-return bonds and forcing the funds to invest in the capital market compromises pensioners' savings.

The NIS 7 billion will be used to issue designated bonds should the annual yield of the pension funds fall below a threshold, to be defined by a special committee with representatives from the public. Apparently, the figure will be around 4 percent.

The NIS 7 billion will be added to NIS 70 billion that the treasury has already committed to allocate for the old pension funds until 2038, to cover some of their debts, which according to the treasury total NIS 137 billion.

The treasury issues designated, non-negotiable bonds for the veteran pension funds, which guarantee a 5.57-percent annual return. As part of the economic recovery plan now in the pipeline, the government intends to reduce the ratio of the bonds in the funds' portfolio from the current 93 percent to 30 percent, and allow them to invest in regular government bonds and other bonds rated

A or more, namely, ones that are considered low-risk. The treasury pledges to issue designated bonds with a guaranteed return of 4 percent once the ratio falls below 30 percent.

The NIS 7 billion fund will be maintained for 35 years, until all entitled pensioners pass away.

The chance that these funds will be used in the next few years are low, because the bulk of the pension funds' portfolio - 93 percent - is in designated government bonds that provide 5.57 annual interest. It is therefore unlikely that any loss on the remaining 7 percent would push total yield below 4 percent.

The budgets director also said that the commissioner of insurance would appoint managers for the pension funds out of a list of candidates, to be composed by a special committee.

Finance Committee Chairman MK Avraham Hirschson (Likud) threatened yesterday not to put the pension issue to a vote by the committee unless he gets "satisfactory clarifications" as to how the treasury plans to support the funds.

Hirschson was fuming after Yogev read a letter addressed to Hirschson at the meeting, before the latter had even seen it.

"It is standard practice to send a letter before reading it in public and allowing me to at least address it and form an opinion. I am not happy with the way the pension matter is being dealt with, because there are many sudden changes and some of the issues are still being discussed elsewhere [between the treasury and the Histadrut labor federation, which as of now controls the pension funds]," Hirschson said.

"Therefore, unless I get all the details and explanations pertaining the pension funds, I will consider not putting the pension section to a vote as part of the economic plan," the Finance Committee chairman added.

The treasury's former capital market supervisor, Meir Shavit, said at a meeting of labor unions yesterday in Tel Aviv that the treasury's plan to cut the pension payment would prompt many people - especially the younger ones - who are currently saving with the veteran pension funds, to withdraw their money.

"Shavit has been hired by the Histadrut to counsel it in its campaign against the treasury, which wants to take the pension take the troubled funds out of the hands of the Histadrut. The government is now abandoning pensioners to deal with the risk themselves, Hirschson said.

"The government today does not have the necessary capital to go on subsidizing the pension funds with designated bonds, and is substituting its protection by cutting pensioners' rights.

For the first time in years, not only the rights of contributing clients will be cut, but also those of pensioners, whose payments will be slashed by 2 percent, Shavit said.

Histadrut chairman Amir Peretz said the talks with the treasury regarding the pension funds have come to a dead end after the treasury stipulated "impossible conditions" to concede his proposal to set up a committee that would form recommendations on the matter.