PROVIDENT FUNDS PROVIDENT FUNDS

Transcription

1 PROVIDENT FUNDS 1

2 2

3 Table of contents 1. Introduction and general review...3 A) Composition of membership in benefit and severance pay provident funds...6 B) High Centralization in banks Summary of Provident Fund Activity in...7 A. Accrual, Yield and Assets...7 1) Benefit and Severance Pat Provident Funds...8 2) Advanced training funds ) Central severance pay funds Centralization in the provident fund industry Financial Analysis...19 A. Provident Funds in the Public s Portfolio of Financial Assets...19 B. Analysis of Accrual...20 C. Analysis of Assets...21 D. Yield and Management Fees Trends and Analysis Regulation of Provident Funds in and in the 1st quarter of Appendix - Definitions and terms Tables...42 Figures: Figure F-1: Distribution of provident fund assets by types of funds in 1997 and...5 Figure F-2: Contribution of Accrual and Yield to Change in Assets of Benefit and Severance Pay Provident Funds in Figure F-3: Distribution of Provident Fund Assets by Type of Fund in Figure F-4: Contribution of Accrual and Yield to Change in Assets of Advanced Training Funds in Figure F-5: Contribution of Accrual and Yield to Change in Assets of Central Severance Pay Funds in Figure F-6: Provident Funds in the Public s Portfolio of Financial Assets in Figure F-7: Accrual in Benefit and Severance Pay Provident Funds by Quarters in Figure F-8: Accrual in Advanced Training Funds by Quarters in Figure F-9: Distribution of Investment Groups in all Provident Funds at end of...22 Figure F-10: Monthly Nominal Gross Yields of Provident Funds in...29 Figure F-11: Yields of Provident Funds vs. Tel Aviv Stock Exchange General Share Index in

4 Tables: Table F-1: Accrual, Yield and Assets in Provident Funds between Table F-2: Distribution of Savings Between Employee and Self-Employed Members, Percent of Liquid Accounts in, by Type of Fund...7 Table F-3: Assets, Accrual and Liquidity in Benefit and Severance Pay Provident Funds in, by type of controlling corporation...9 Table F-4: Number of Members/Accounts in Benefit and Severance Pay Provident Funds in Table F-5: Assets, Accrual and Percent of Liquid Accounts in Provident Funds in, by type of controlling body...13 Table F-6: Number of Employee and Self-Employed Members of Advanced Training Funds, Table F-7: Distribution of Provident Fund Assets by Target Population in 2000-, Rate of Assets out of Total Provident Fund Assets...17 Table F-8: Balance of Non-tradable and Tradable Assets and Real Change Rates...24 Table F-9: Distribution of Tradable Government Bonds in Israel Held by Provident Funds Between Table F-10: Rate of Investment in Non-tradable and Tradable Assets by Type of Controlling Body in...28 Table F-11: Real Gross Yields in Provident Funds over the Last Ten Years...29 Table F-12: Nominal Gross Yields by Types of Funds and Management in...31 Table F-13: Share of Management Fees by Type of Fund and Management in...31 Table F-15: Share of Management Fees by Type of Controlling Body in

5 1. Introduction and general review Provident funds 1 are one of the central financial bodies and institutional investors in the Israeli capital market. The funds are financial mediating institutions for long-term savings and medium-term savings. In, the provident funds (benefit and severance pay provident funds, central severance pay provident funds and advanced training funds) earned an average real gross positive yield of 6.6% and their net accrued assets increased by 6% in real terms and aggregated some NIS 172 billion. Like in 2000, in there was also a real increase in the balance of assets in each of the fund types, including the benefit and severance pay provident funds, although the negative yield 2. It is possible that the trend of negative accrual in the benefit and severance pay provident funds indicates the public preference to withdraw its savings from these funds and transfer it to alternative investment channels, mainly to shekel channels. This preference results from the fact that over the last years the yields of the shekel channels have been higher than the yields of the provident funds. The high rate of liquid accounts (that can be withdrawn exempt from tax) in the benefit and severance pay provident funds at the rate of 46%, allows withdrawing the said amounts without paying tax. In, the value of benefit and severance pay provident funds (including central severance pay funds) and of advanced training funds in the public s portfolio of financial assets aggregated 14%. The value of benefit and severance pay provident funds (including central severance pay funds) was about 10.4% of the portfolio of financial assets. This percent expresses the continued decrease in the value of benefit and severance pay provident funds in the public s portfolio of financial assets compared with 2000, which was 10.8%. In contrast to benefit and severance pay provident funds, the value of advanced training funds in the portfolio of financial assets increased from 3.7% in 2000 to about 4.04% in. On the whole, the value of various types of provident funds in the public s portfolio of financial assets declined from 17% in 1997 to 14% at the end of. The negative accrual in benefit and severance pay provident funds in aggregated some NIS 3.9 billion compared with NIS 0.8 billion in 2000 thus we return to the levels of 1998 and See definitions in the Appendix Terms and Definitions 2 Deposits of members less withdrawal of members. Possible explanations for these phenomena may be: 5

6 1. In it turned out that the Ben Basat Committee recommendations were not implemented therefore the public withdrew savings accrued in the pension funds. 2. After in 1999 the pension funds achieved high yields, in 2000 relatively low yields were achieved. Due to the low rate of increase in the balance of assets accumulated in benefit and severance pay provident funds compared with the high rate of increase in the balance of assets accumulated in advanced training funds, in the downtrend in the value of benefit and severance pay provident funds in the total fund assets continued. 6

7 Figure F-1: Distribution of Provident Fund Assets by Types of Funds in 1997 and in (Rate of fund assets out of total provident fund assets) (Percent) Distribution by types of provident funds in Advanced training funds 28% Central severance pay funds 9% Benefit funds 63% Distribution by types of provident funds in 1997 Advanced training funds 21% Central severance pay funds 9% Benefit funds 70% Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. In the stability in the value of negotiable assets (including trust funds) in the provident funds portfolio of assets was retained, and their value was about 63%. This percentage of investment in the negotiable assets is required in light of the high liquidity level of the members savings 3. The value of shares traded in the funds assets portfolio, which was about 15% of the portfolio s value in 2000, declined to about 14% at the end of. The value of governmental debentures traded in the stock exchange of the provident funds at the end of was 43%. 3 See table F-3. 7

8 The two structural problems in the provident fund industry indicated in previous reports have not yet been solved: A) Composition of membership in benefit and severance pay provident funds Self-employed members whose range of saving is medium, meaning 15 years, where a considerable part of their savings reached maturity, as well as employee members whose savings is designated to retirement age are saving in these funds. This composition of membership makes the management of funds investments difficult. Members with liquid accounts expect higher short-term yields than they could obtain from alternative investments in the capital market, while those saving to retirement expect their savings to be invested in solid channels that deliver a positive long-term yield. B) High Centralization in banks Also in as in past years, banks continue to manage the lion s share of provident funds assets, whether directly or indirectly. About 75% of the assets of funds owned by the banks, and about 15% of the funds assets not owned by the banks are managed by the banks. Overall, the banks run about 90% of the public assets in the provident funds 4. 4 See detailing in the chapter that deals with Centralization in the provident fund industry. 8

9 2. Summary of Provident Fund Activity in A. Accrual, Yield and Assets Table F-1: Accrual, Yield and Assets in Provident Funds between (NIS billion, adjusted to the known CPI in December ) Year Benefit Central Accrual Assets Yield Accrual Assets Yield Advanced training Accrual Assets Yield Accrual Other % % % % % Source: according to monthly reports of the provident funds and processing of the Capital Market, Insurance and Savings Division. Notes to the table above: real gross yield (less the effect of inflation, less management fees). Assets Yield Accrual Total Table F-2: Distribution of Savings Between Employee and Self-Employed Members, Percent of Liquid Accounts in, by Type of Fund (NIS billion, percent) Fund type Total savings of Total savings of self Percent of liquid Total employee members employed members accounts Benefit and severance pay Advanced training Total Source: according to monthly reports of the provident funds and processing of the Capital Market, Insurance and Savings Division. Assets Yield 9

10 1) Benefit and Severance Pay Provident Funds After in 2000 low yields were achieved, the year was characterized by relatively high yields with respect to the previous year, and the real gross yield of benefit and severance pay provident funds reached 6.4%. One can say that the yield accrual was not evenly distributed throughout the year: until the end of November the provident funds have accrued about half of the annual yield, and in December the achieved yield was similar to the one achieved in the 11 preceding months. This was the 8 th consecutive year where there was a negative net accrual in the benefit and severance pay provident funds. The positive yield has compensated for the negative yield. Therefore the balance of assets accumulated in increased in about 1.5% in real terms. Figure F-2: Contribution of Accrual and Yield to Change in Assets of Benefit and Severance Pay Provident Funds in (Percent) Yield contribution Accrual contribution Net contribution Source: according to monthly reports of provident funds and processing of the Capital market, insurance and saving section. Classifying the accrual data in benefit and severance pay provident funds in by the type of ownership reveals that the negative accrual in benefit and severance pay funds, like in 2000, mainly stems from the funds owned by the banks. On the other hand, in funds not owned by the banks, a net positive accrual was observed. These data may be explained by the high liquidity that characterizes the bank funds, due to the fact that the bank funds are older than the private funds in the provident fund industry. 10

11 Table F-3: Assets, Accrual and Liquidity in Benefit and Severance Pay Provident Funds in, by type of controlling corporation (NIS billion, Percent) Type of controlling body Total assets Accrual Percent of liquid accounts Bank corporation Private company Insurance company Pension fund Without (controlling body) Enterprise 6.6 Sectorial 4.2 The entire population Total Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. Due to the negative accrual in benefit and severance pay provident funds in and due to the low increase in real terms in the balance of assets with respect to the positive yield in the advanced training funds and real increase in the assets of advanced training funds, the decline in the value of total provident fund assets continued. Overall, between the share of benefit and severance pay provident funds in total provident fund assets decreased by 7 percentage points, from 70% in 1997 to only 63% in. Figure F-3: Distribution of Provident Fund Assets by Type of Fund in (Percent) Central severance pay Advanced training Benefit and severance pay Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. 11

12 Members accounts In there was a sharp decrease at a rate of about 2% in the number of members accounts in benefit and severance pay provident funds (except for central severance pay funds). The decrease results both from the decline at the rate of about 3% in the number of employee members accounts and from a decline at the rate of 1% in the number of self-employed members accounts. Table F-4: Number of Members/Accounts in Benefit and Severance Pay Provident Funds in (Thousands) Type of member Pct. change Number of employee member accounts 1,775 1,758 1,469 1,563 1, Number of self-employed member accounts 3,836 3,715 3,049 3,278 3, Total 5,611 5,473 4,518 4,841 4, Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. 12

13 2) Advanced training funds In, net accrued assets in advanced training funds grew by 14% and came to NIS 48 billion. In contrast to the accrual in advanced study funds in 2000 and the accrual in 1999, the contribution of accrual to the increase in the balance of assets was smaller than the yield contribution. The contribution of accrual reached a total of 6%, and the yield contribution aggregated 7%. Advanced study funds recorded along the entire year, except for February, positive accrual. This results from the fact that the depositions of employee members is done along the entire year in monthly continuous payments and they are the lion s share of savings in advanced study funds. The savings of employee members at the end of are about 91%, whereas the savings of self-employed members are about 9%. Since they are the only ones to have recorded positive accrual in, like in 1999 and 2000, the value of advanced study funds out of the total fund assets increased from 26.1% in 2000 to 28% in. Figure F-4: Contribution of Accrual and Yield to Change in Assets of Advanced Training Funds in (Percent) 20 Yield contribution Accrual contribution Net contribution Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. The positive accrual in advanced training funds results from four reasons: 1. Saving in advanced training funds is a unique saving vehicle, that has no other saving alternatives that credit the same tax benefits that depositors in advanced training funds get. On the other hand, there are alternatives for saving in benefit provident funds that also impart tax benefit, like directors insurance and pension funds. 2. Employees tend to exhaust the tax benefits provided by advanced training funds in 13

14 order to enjoy the resulting employee benefits since the ratio of employer s depositing vs. employee s depositing is three to one. 3. Advanced Training funds do not suffer from some of the structural problems that are found in benefit and severance pay provident funds and mainly in funds owned by the banks (that control 48% of the assets of advanced training funds). The saving period for employees and self-employed in the advanced training funds is similar, meaning 6 years. 4. The liquidity percent in advanced training funds is lower than the liquidity percent in benefit provident funds. Table F-5: Assets, Accrual and Percent of Liquid Accounts in Provident Funds in, by type of controlling body (NIS billion, Percent) Type of controlling body Total assets Accrual Percent of liquid account l Bank corporation Private company Insurance company Pension fund Without (controlling body) 0.4 Enterprise Sectorial 8.0 Entire population Total Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. Advanced training funds for employees and self-employed usually record positive net accrual also due to the reasons mentioned above and due to the fact that the provisions of self employed to advanced training funds were made deductible only starting from 1996, and as of the end of, money deposited in advanced training funds of self employed members cannot be yet withdrawn as tax exempt (only starting from February 2002 will it be possible to withdraw money from advanced training funds for self-employed). At the same time, additional self-employed members join the circle of savors in advanced training funds. The net positive accrual in is smaller than the net positive accrual in This data is vis-à-vis with the moderate incline in the number of members accounts, which grew in a total of 8.1%. The increase in the number of members accounts also stems from the increase in the number of employee members accounts at the rate of 7% and from the increase in the number of self-employed members accounts at the rate of 13.6%. 14

15 Table F-6: Number of Employee and Self-Employed Members of Advanced Training Funds, (Thousands) Type of member Pct. Change Number of employee members 1,075 1,060 1,165 1,345 1, accounts Number of self-employed members accounts Total 1,209 1,228 1,411 1,631 1, Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. 3) Central severance pay funds Severance pay funds held NIS 16 billion in assets at the end of as against NIS 15 billion at the end of 2000, a real increase of 5.1%. Between the central severance pay funds recorded steady positive accrual. This year the trend that characterized the last three years of negative accrual in these funds continued. Yet this year, due to the deterioration in the labor market, there has been an increase in its scope and it has reached a level of NIS 290 million against NIS 20 million in 1999 and NIS 90 million in Since the depositing to these funds results from the need of employers to cover reserves for severance pay for their employees, the accrual in the course of year in these funds is usually negative and results from the withdrawal of money designated to pay severance pay to retiring workers, and most of the deposits of employer members are done in the last quarter of the year. The year, like previous years, was characterized by the fact that the contribution of yield is higher than the contribution of accrual. 15

16 Figure F-5: Contribution of Accrual and Yield to Change in Assets of Central Severance Pay Funds in (Percent) Yield contribution Accrual contribution Net contribution Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. 4. Centralization in the provident fund industry The problems due to the centralization in the provident fund industry are as follows: 1. Lack of competition in the provident fund industry. 2. Potential for conflict of interest between the provident funds and the bodies that control the corporations that run provident funds. 3. Damage to the efficiency of capital markets due to the limited number of investors. Table F-7 shows the distribution of provident fund assets by target population and investment management at the end of 16

17 Ownership Table F-7: Distribution of Provident Fund Assets by Target Population in 2000-, Rate of Assets out of Total Provident Fund Assets Type of populaiton1 Rate of assets out of total provident fund assets (Percent) 2000 Owned by the bank Entire population Owned by the bank Sector employees Owned by the bank Enterprise employees Total owned by the bank Fund not owned by the bank - investment management Entire population agreement with the bank Fund not owned by the bank - investment management Sector employees agreement with the bank Fund not owned by the bank - investment management Enterprise employees agreement with the bank Total investment management agreement with the bank Total direct and indirect management by banks Self management Sector employees Self management Enterprise employees Total self management Owned by private bodies, insurance companies and Entire population pension funds Owned by private bodies, insurance companies and Sector employees pension funds Total private bodies, insurance companies and pension funds ownership Total Source: according to monthly reports of provident funds and processing of the Capital Market, Insurance and Savings Division. Notes to table: Type of population: Entire population a fund opened to the entire public. Sector employees a fund only opened to employees in a certain sector (civil servants, doctors, judges etc.) Enterprise employees a fund only opened to a certain enterprise (El Al, Military Industry etc.) The data of 2000 were reclassified. 17

18 The Herphindle Hirschman Index (H.H.I) measures the centralization in a certain industry 5. The index ranges between 1 (full centralization, the entire industry is controlled by a single body) and 1/N (maximum dispersion, optimal condition) as N is the number of active bodies in the industry. For illustration, if there are 10 bodies in a certain industry, the index of maximum dispersion would be 0.1. Over the last three years (1999 to ) the index in the provident fund was about This indicates high centralization in the provident fund industry, which consists of 90 bodies, and if it had reached maximum dispersion the index would be 0.01, meaning the condition today is 13 times worse than the optimal condition. This fact is consistent with the fact that the three large bodies (Bank Hapoalim, Bank Leumi and Bank Discount) hold 58% of the assets of provident fund industry, and the 6 large bodies (including Binleumi, Bank Hamizrachi and Bank Yahav) hold 70% of the industry. 18

19 5. Financial Analysis A. Provident Funds in the Public s Portfolio of Financial Assets Figure F-6: Provident Funds in the Public s Portfolio of Financial Assets in (Percent) Public Commercial banks Life insurance Pension funds Advanced training Provident funds Source: Bank of Israel, Monetary Department Direct public direct investment by the public in shares, bonds, mutual funds and cash Commercial banks including savings plans, shekel deposits, nominal deposits, or foreign currency linked, current. Provident funds: for benefits and severance pay, including central severance pay funds, excluding advanced training funds. In, the share of benefit and severance pay provident funds 6 in the public s portfolio of financial assets decreased to only 10%. This decrease is the direct continuation of a steady and continual decrease that began in 1994 in their value in the public s portfolio of financial assets. Between the total decrease in the share of benefit and severance pay provident funds in the public s portfolio of financial assets was 3.4 percentage points, a 49% proportional change from 13.8% of the portfolio in 1997 to only 9.4% in The value of advanced training funds increased from 3.7% in 2000 to 4% of the portfolio s value in. This may be explained by the real increase of the advanced training funds that aggregated 12.4%. Overall between no downtrend in their value was observed and it remained steady. 6 Excluding advanced training funds. 19

20 B. Analysis of Accrual In figure F-7, the curve representing deposits to benefit and severance pay provident funds shows a consistent long-term trend at about NIS 2 billion, with a consists increase in deposits in the 4th quarter each year (particularly in December). This curve is consistently lower than the withdrawal curve. Unlike the consistent depositing curve, there is no consistent trend in withdrawals from provident funds. The curve representing them is characterized by a large degree of change and volatility. Therefore, net accrual (deposits less withdrawals) in benefit and several pay provident funds is affected more by withdrawals than by deposits. Figure F-8 clearly shows that the curve describing the net accrual looks like the mirror image of the curve describing the withdrawals. Figure F-7: Accrual in Benefit and Severance Pay Provident Funds by Quarters in (NIS billion) Deposits Withdrawals Net accrual Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. Unlike the curve representing the deposits to benefit and severance pay provident funds, the curve representing deposits to advanced training funds shows a steady long-term uptrend. Here too, deposits rise steeply in the 4 th quarter of every year; this is evidently mainly due to the increase in deposits by self- employed members. The withdrawal curve is also characterized by a long-term uptrend and severe volatility. Unlike benefits and severance pay funds, however, this curve is generally lower than the contributions curve. 20

21 Figure F-8: Accrual in Advanced Training Funds by Quarters in (NIS billions) Deposits Withdrawals Net accrual Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. C. Analysis of Assets According to the Investment Regulations, the funds invest their assets in three main groups, each of which is made of several investment channels. The investments are restricted at two levels: by group and by investment channel. The first group is invested in channels that have the lowest business risk (issuer risk) among the groups. The second group is comprised of tradable channels, although these are riskier than investment in the first group, they are likely to provide a higher yield. The third group is defined as the unrestricted investment group in which the fund may choose various investment channels, at its own discretion. The investment channels in this group do not appear in the previous groups. In addition to the group limit, several restrictions assure an appropriate dispersion of funds investments the single-issuer limit and a limit on investment in any single security at a stipulated proportion of its issued par value. Further detailing of the investment channels in each group and of the investment restrictions in them may be seen in the annual reports of previous years. 21

22 Figure F-9: Distribution of Investment Groups in all Provident Funds at end of (Percent) Group 2 16% Group 3 12% Group 1 72% Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. The analysis of investment group distribution shows that the percent of invested assets in group no. 1 increased from 61% at the end of 1999 to 68% at the end of 2000 to 72% at the end of. This increase indicates an increasing investment trend in assets defined as solid on account of investment in groups 2 and 3. The management of funds assets is designated to provide optimal yield while balancing the risk resulting from the various investments and the achieved yield. The management of investment portfolio is done while adjustment to memebers needs. It has to adjust, for instance, to the liabilities and maturity dates of savings, the memebrs preferences (extent of aversion to risk) etc. Since the fund management is committed to a future flow (that is more or less predetermined), most of the fund assets are debt certificates. If the fund fails to reconcile the expected cash flow with the flow of liabilities, its portfolio will be exposed to risk that may have severe implications for its management and performance, especially at times of large-scale redemptions. The composition of assets is affected by several factors, including: A. Current investment rules, as stipulated by the Ministry of Finance in the Provident Fund Management Regulations; B. Developments in domestic and foreign stock markets; C. Changes in the real monetary interest rate, the inflation rate and the shekel-dollar exchange rate D. Net accrual E. Liquidity ratio set as the ratio between assets that may be redeemed tax- exempt and the 22

23 fund assets. Table F-8: Balance of Non-tradable and Tradable Assets and Real Change Rates (Current prices, NIS millions and Percent) Asset 2000 Balance Share in total assets Balance Share in total assets Percent change of the share in funds assets Real percent change in assets Non-tradable assets Earmarked bonds Deposits with Accountant General Indexed deposits Cash and cash-equivalent Loans and mortgage portfolios Real estate Corporate bonds Non-tradable shares Domestic funds Foreign funds Other Total non-tradable assets Tradable assets Tradable government bonds Tradable corporate bonds Convertible bonds Tradable shares Shares abroad Option warrants Tradable derivatives Total tradable assets Grand total Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. Notes to table: 1) Including shekel and foreign currency deposits, up to 3-months. 2) Including risk capital funds, investment funds and various debtors. 3) Including short-term loans. 23

24 Performance of the Provident Fund Assets Portfolio In, the share of tradable assets in the provident assets investment portfolio increased. The value of tradable assets as of was about 63% of its assets. The investment in nontradable assets (like indexed deposits and non-tradable corporate bonds) was for provident funds of the Ogen type for yield due to the revaluation method of these assets by which an investment in these assets is presented based on adjusted cost rather than on their fair value according to changes in the interest rates in the market. The increase in the value of tradable assets has already started in 1986, when the issue of earmarked bonds for the funds (the value of tradable assets was then only 18% of the assets portfolio and most of it, about 73% of the funds assets, were invested in earmarked bonds) was discontinued. The balance of earmarked bonds in the funds assets portfolio has been decreasing steadily since 1986 and is expected to fall to zero by the end of In the investment in earmarked bonds declined by 80% in real terms. This trend was manifested in a decline of about 0.4 percentage points in their share in the funds assets portfolio from 0.54% of assets in 2000 to only 0.1% of assets in. In 2000 and in several negative indices were published. Possibly due to the low inflation rate and the expectations to a low inflation rate in the future, fund managers preferred lowering the rate of investment in index-linked deposits while increasing the rate of investment in nonlinked bonds at fixed and variable interest (see Table F-9). The world-wide economic slowdown and the expectations to its continuance have led to a depreciation of rates and decline in trade scopes in world stock exchanges. These factors and the security situation in our region in have lead to negative yields in the shares investment channel and to a steep increase in the yields of bonds. It is possible that this is the explanation of the increase in the investment in tradable corporate bonds that were preferred over share investment. In the investment in the participating units in foreign funds abroad increased by 0.16 percentage points in their value in the provident funds assets portfolio from 0.02% of assets in 2000 to 0.16% of assets in. This change reflects the increasing tendency of fund managers to turn to the securities market abroad due to the developments in the Israel stock market in general and in the technology stocks in particular and due to the increased risk involved in investing in them. Turning to trust funds abroad contributes to the risk dispersion in the investment portfolio and prevents the need for specific stock analysis (that requires enormous investment). Yet although the relative increase in this type of investment, this still does not reflect a large-scale investment since the total investment in this channel is about 0.2% of the fund assets. 24

25 Table F-9: Distribution of Tradable Government Bonds in Israel Held by Provident Funds Between Type of government bond Value in percent 2000 Index-linked bond Foreign currency linked bond Unlinked bonds at fixed interest Unlinked bonds at variable interest Short-term loan Total Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. Bond index Type of bond Increase of Index Rate Index-linked government bonds 13.8% Foreign currency linked government bonds 11.2% Unlinked government bonds 8.5% Short-term loans 6.7% In, the stock market was characterized by nominal depreciation of rates at the rate of 6.6%. Up to the end of the 3 rd quarter the general Stock Index has been declining at the rate of 22.3% since the beginning of the year. Yet starting from the 3 rd quarter until the end of year the General Stock Index has shown an increase at the rate of 20.2%. The steep increase in the last quarter of this year, mainly in December (where the Index increased at the rate of 12%), mainly stemmed from the fact that the Governor of the Bank of Israel has drastically reduced the interest (2 percentage points), a reduction that has caused the public to invest in shares. In the uptrend in using derivative assets, a trend that started in previous years, continued, continued. This fact is manifested in as the rate of investment in these assets increased by 70%, from a rate of investment of 0.22% in 2000 to a rate of 0.35% in. These data indicate that the fund managers have diversified the investment portfolio, and that there has been an increase in the strategy of protecting the share portfolio. A comparative review of the distribution of assets between the various types of funds, according to Table F-10, shows that the investment of funds owned by insurance companies 25

26 and private funds in tradable assets is considerably higher than the investment of other types of funds in these assets. The investment in indexed deposits in the private funds is about 6.3% compared to the investment of bank funds in these deposits at the rate of 13.4% (and even higher if calculating the rate of investment of about 3.5% in the Accountant General s deposits.). In funds owned by the pension funds, the investment in indexed deposits is even higher and reaches 14% and in other funds it reaches a rate of 19.3%. In contrast, the investment of private funds in shekel channels (in case and cash-equivalent that are defined as non-tradable assets) is about 12% as of whereas the investment of bank funds in these channels is 7.7%. Unlike the investment in shekel assets and index-linked assets, the bank funds and private funds invest at similar rates in tradable shares, meaning 15%. The distribution of investments that is different in index-linked assets than in shekel assets (particularly in light of the high real interest over the previous years) may suggest a partial explanation for the differences along the years in the gross yields between private funds and bank funds. Another explanation is related to the fact that the scope of assets in the private funds is considerably smaller than the scope of assets in the bank funds, therefore the private funds have greater flexibility in managing the assets portfolio. 26

27 Table F-10: Rate of Investment in Non-tradable and Tradable Assets by Type of Controlling Body in (Percent) Asset Private bodies Bank corporations Insurance companies Pension funds Without (controlling body) Non-tradable assets Earmarked bonds Accountant General deposit Indexed deposits Loans and mortgage portfolios Real estate Corporate bonds Cash and cash-equivalent Non-tradable bonds Trust funds in Israel Trust funds abroad Other Total nontradable assets Tradable assets Tradable gov. bonds Tradable corporate bonds Convertible bonds Tradable shares Shares abroad Option warrants Tradable derivatives Total tradable asses Grand total Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. 27

28 D. Yield and Management Fees Trends and Analysis Figure F-10: Monthly Nominal Gross Yields of Provident Funds in (Percent) Benefit & severance pay Advanced training Central severance pay -2.5 January February March April May June July August September October November December Table F-11: Real Gross Yields in Provident Funds over the Last Ten Years (Percent) Year Average Yield in percent Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. Figure F-11: Ysdlei of Provident Funds vs. Tel Aviv Stock Exchange General Share Index in (Percent, adjusted to December 2000) January February March April May June July Provident fund yields General stocks Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. August September October November December 28

29 Analysis of yields in In 1999 and in 2000 there was a correlation between provident funds yields and share prices on the Tel Aviv Stock Exchange. The stock exchange in was characterized by high volatility of the stock index. Our examination showed a 72% correlation between the General Share Index and provident funds yields (although the value of shares traded in Israel and in the provident fund portfolio is only 14%). There was a mixed trend of yields in the provident funds in the three first quarters whereas in the last quarter a yield of 7% was achieved (which is about 70% of the annual yield) simultaneously with an increase of 20% in the stock rats in the stock exchange in these months. This year, as in previous years, we itemize the provident funds yields during the activity year before and after the subtraction of management fees. Also for the first time, we present a full, detailed report on the funds charges for current management. Table F-12: Nominal Gross Yields by Types of Funds and Management in (Percent) TYPE OF TYPE OF FUND ADVANCED TOTAL CONTROLLING BENEFIT CENTRAL TRAINING AVERAGE BODY Average Range Average Range Average Range Private Insurance companies Bank corporations Pension funds Without (controlling body) Total Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. 29

30 Table F-13: Share of Management Fees by Type of Fund and Management in (Percent) TYPE OF FUND TYPE OF Benefit Advanced training Central CONTROLLING BODY Average Range Average Range Average Range Total average Private Insurance companies Bank corporations Pension funds Without (controlling body) Total Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. Table F-15: Share of Management Fees by Type of Controlling Body in (Percent) Type of controlling body Annual average Private bodies Insurance companies Bank corporations Pension funds Without (controlling body) Source: Annual reports of Provident Funds and processing of the Capital Market, Insurance and Savings division. Notes to the table: there are no data for It should be mentioned that the average rates of management fees in bank controlled provident funds do not include the data of provident funds for the bank employees that do not charge management fees (the scope of provident funds assets for bank clerks that charge 0% management fees reaches some NIS 7,885 million, which are about 6% of the provident fund assets held by the banks). The average rates of management fees in provident funds held by pension funds do not include the fund s data for sickness benefits of Mivtachim, that charges management fees at the rate of 8% of the benefit fees. 30

31 6. Regulation of Provident Funds in and in the 1 st quarter of 2002 Income Tax Regulations New Investment Rules for Provident Funds and Pension Funds The amendment to the Income Tax Regulations (rules for provident fund approval and management) 1964 deals with the rules of investment and management of provident funds and pension funds. The amendment manifests the desire to move from a direct control method to indirect control method by which the decision taking process regarding investments is fully assigned to the fund management while minimal intervention of the regulator in these processes. Therefore on the one hand most of the existing limitations on the various investment quotas and the main responsibility for the investment management were assigned to the fund. On the other hand, there are certain duties and restrictions laid upon the investment management and regarding the required qualifications of those involved in taking investment decisions. The main principles of the amendment: 1. Any investment is allowed unless explicitly forbidden. 2. Most of the quantitative quotas were cancelled. 3. The stability limitations were extended (the rate of investment in a single issuer out of the fund assets, rate of investment in controlling measures in a corporate, setting guarantees against loans etc.) and were also applied to a group of borrowers. 4. The investment rules were applied not only to a single fund but also to a group of investors. 5. An investment limit was set to non-liquid assets subject to the rate of non-liquid savings of members in the fund. 6. The options of investment in tradable and nontradable derivative assets were extended, subject to the stability limits. 7. Selling short of securities by the fund was allowed. 8. The quantitative limit on investments abroad was cancelled (the limit will continue to be applicable subject to the Currency Control Law 1978 and the Currency Control Permit) and the permissible assets for investment outside Israel were defined. 9. The permissible investments in parties related to the fund were set. 10. The duties of the investment committee, its composition, the qualifications of its members, and rules for its meeting management were defined. 11. Qualification conditions for the employees who run the fund investment were set. 12. The funds duty of participation in general assemblies was fixed. 31

32 13. Rules regarding the compensation and insurance of position holders in the fund were set. 14. The duty to report on the risk dispersion index that weights the mix of investments according to fixed parameters that reflect the credit risks and the capability to liquidate assets was applied. 15. Rules for investing the capital of the company that runs the fund. 16. The new investments rules, rules of revaluation, calculation of yield and profit distribution were applied to all provident funds including other-purpose provident funds. The amendment to regulations was published in the records on and will come into force starting from Anti Money Laundering Order The improvements in financial systems world-wide and the relief in money transfer between international markets, have also made it easier for those who are trying to launder money that comes from crimes. The battle against crime is part of the international battle against terrorism and organized crime. All over the world the laws to prevent money laundering designate an important part for the financial bodies. In Israel the Anti Money Laundering Order 2000 was legislated. On 22/11/01 the Knesset s Legislation and Law Committee approved the Anti Money Laundering Order (duty of identification, reporting and record management of provident funds and the companies that runs provident funds) (hereinafter: the order ). According to the order, duties of identification, reporting and record management for benefit provident funds and advanced training funds with respect to self-employed members accounts in the said funds were set. Section 8 to the Order stipulates that a corporation to which the said duties apply will appoint a person in charge of fulfilling these duties. The person in charge will act to meet the duties laid upon the corporation according to the order, train the workers in meeting the said duties and supervise their fulfillment. The order application will begin on Benefit circulars In and in the 1 st quarter of 2002 eight benefit circulars were published: Benefit circular /1 format of reporting in multi-path central severance pay funds Benefit circular 2002/1 format of reporting in multi-path central severance pay funds 32

33 Three years ago, the Capital Market Division approved the operation of a central severance pay provident fund that is unlimited regarding the number of investment paths. Due to the nature of activity of this fund, that is different than the nature of activity of other provident funds, a benefit circular /1 setting the format of reporting (monthly reports, quarterly reports, annual reports and report to members) of multi-path central severance pay provident fund was published. Benefit circular 2002/1 extends the stated in benefit circular /1 and cancels it. Main principles of the circular The monthly report, earnings report and quarterly report will be reported in an aggregated format. Four risk levels were set, for which four yields will be reported (a yield per each risk level). The yield will be set as a weighted average of the yields of paths existing in a certain risk level. Benefit circular /2 prohibition of transfer and lien of a member s rights in a provident fund clarification Regulation 7(A)(2) to the regulations stipulates that the Income Tax Commissioner will not approve a capital or fund as a provident fund unless its articles of association prohibit transfer of a member s rights or their lien to another (except for liquid funds, under the conditions set in the regulations). In this context, the benefit circular that sets that the lien of members rights in provident funds refers to any transaction which purpose is lien of rights as a guarantee of debiting, regardless of the transaction s name, including: 1. Appointing a creditor as beneficiary, heir or eligible for the money of the member s provident fund. 2. Giving an instruction that enables the creditor to withdraw the money accrued in the member s provident fund, or empowering the creditor to instruct as stated, and instructing to withdraw the provident fund s money, if the creditor is allowed to set the date of realizing the instruction or the way of transferring the withdrawal amounts or their deposit. 3. Giving an irrevocable order regarding the transfer or deposit of money accumulated in favor of the member in the provident fund with as it is withdrawn from the provident fund. 4. Conditioning the validity of the member s actions in the provident fund on the creditor s agreement, including the conditioning of the instructions validity on the appointment of a beneficiary, heir or eligible for the provident fund s money. 33