1645645 2400.000 13500000 3435800 78789.77 7897.078 234.234 6867 56764 5666 4554.784 455.345 90787865 896545 456664 6262.65 336 679976 56437 13412.44 Ministry of Finance The Capital, Insurance & Saving Division 88678654 78769 56547887 7767.737 58u68489 54657 14231451 2252.52 6667.747 1213.890 3453.897 12323.686 13349.99 353.8 35665.88 13131.78 4546.99 Pension Savings 139
Ministry of Finance The Capital, Insurance & Saving Division Long Term Savings Ministry of Finance The Capital, Insurance & Saving Division Contents 1. Introduction 143 2. Industry Structure 144 2.1 Key Data on the Israeli Retirement Savings 144 2.2 Data on the Retirement Savings in Israel 148 2.3 Distribution of Assets Between Pension Savings Entities 151 3. Structure 159 3.1 Cash-flow in the Retirement Savings Institutions 159 3.2 Retirement Savings Institution Yields 164 3.3 Survivability Data in Pension Savings Bodies 170 Tables: Table D-1 Number of Retirement Savings Entities By Funds 144 Table D-2 Basic Data on the Retirement Savings in Israel (Millions of NIS) 149 Table D-3 Old Pension Fund Asset Distribution for 2008-2009 (Millions of NIS and %) 152 Table D-4 New Comprehensive Pension Fund Asset Distribution for 2007-2009 (Millions of NIS and %) 153 Table D-5 Provident Fund Asset Distribution (According to Controlling Corporation Category) for 2006-2009 (In millions of NIS and %) 155 Table D-6 Proviident fund asset Distribution (According to fund Category) for 2007-2009 (Millions of NIS and %) 156 Table D-7 Total Insurance Company Asset Distribution for 2007-2009 (Millions of NIS and %) 157 Table D-8 Distribution of Assets in Insurance Company Participating Portfolio for 2007-2009 (Millions of NIS and %) 158 Table D-9 New Comprehensive Pension Fund Revenues for 2008-2009 (Millions of NIS and %) 160 Table D-10 Contributions to Old Pension Funds for 2008-2009 (Millions of NIS and %) 161 Table D-11 Contributions to Life Insurance in Total Portfolios for 2008-2009 (Millions of NIS and %) 162 Table D-12 Distribution of Contributions and Withdrawals in Provident Funds (By Fund Category) for 2008-2009 (Millions of NIS and %) 163 141
Table D-13 Capital Rollover Between Provident Funds (By Fund Category) for 2007-2009 164 (Millions of NIS and %) Table D-14 Nominal Gross Yiels of the Retirement Savings Entities in for 2001-2009 (Percentage) 165 Table D-15 Nominal Gross Yiels of Comprehensive Pension Funds for 2001-2009 (Percentage) 166 Table D-16 Nominal Gross Yield of Insurance Company Participating Portfolios for 2001-2009 (Percentage) 167 Table D-17 Actuarial Surplus or Deficit in the New Pension Funds for 2006-2009 (Percentage) 170 Figures Figure D-1 Breakdown of pension savings assets amongst pension savings institutions in 2009 (Millions of NIS) 148 142
Ministry of Finance The Capital, Insurance & Saving Division 1. Introduction The retirement age income of a resident of the State of Israel is composed of three layers: The first is the oldage pension paid by the National Insurance Institute; The second is the sum that has been accumulated in the various retirement plan instruments pension fund, life insurance and provident fund that involve tax breaks on contributions; the third layer consists of the amounts accumulated as a result of joining other retirement plans. Retirement plans form the main source of income during retirement. These plans are intended to enable members to lead a similar life to what they have been used to prior to retirement and to grant them fixed income for the remainder of their life. At the end of 2007 a compulsory retirement plan agreement for salaried employees was signed between the Economic Organization Coordinating Bureau and the Histadrut National Federation of Labor. The agreement s mandate was expanded on 1 January 2008 through an executive order issued by the Minister of Industry, Trade and Labor and now extends to all salaried employees in Israel. This order on comprehensive pension insurance added 500,000 salaried employees to the pension fund population over the first two years since its implementation and this is particularly noticeable in the number of newly-joined members in retirement plans. As a supplementary measure to the mandated contributions by salaried employees, on December 2009 draft legislation was sent to government ministries for on the planned expansion of this mandate to self-employed individuals. Throughout 2009 lessons and conclusions have been drawn from the financial crisis of 2008. The crisis saw a sharp devaluation of securities in the capital markets and highlighted a number of issues that need to be addressed: The majority of members in retirement plans are unaware of the investment channels involved in these plans. This fact strengthened the need to tailor the plan to meet the individual members preferences through a default plan. The commissioner has therefore published draft regulations regarding the T.M.S Tailored Monetary Savings program, which include a recommendation to mandate licensed financial institutions to accommodate member investment channels according to their preferences throughout the entire accumulation phase. The crisis also highlighted the fact that the public has to choose between hundreds of very similar products. Steps were implemented with the objective of increasing transparency and making the choice of retirement plans easier for the individual. For example, the commissioner has instructed that a managing corporation will not manage more than one provident fund in each category. In addition, guidelines for authorizing investment channels were formulated with the objective of ensuring that the names of the provident funds and investment channels correctly reflect the exposure profile of the fund or channel. Furthermore, because the retirement plans are long-term instruments, whose results should be scrutinized over a long period of time, the commissioner ordered to stop the routine comparative presentation of their shortterm yields in order to enable plan members to compare them in a more practical way that is more correct and informed. 2009 was characterized by many important changes in the retirement savings industry. In this chapter the structure of the Israeli retirement savings market in 2009 will be surveyed along with data and trends. 143
2. Industry Structure 2.1 Key Data on the Israeli Retirement Savings As of late 2009 the Israeli market comprised 45 pension funds, 13 insurance companies in the life insurance sector and 92 provident fund management institutions that preside over 419 provident funds. Table D-1 Number of Retirement Savings Entities By Funds 2007 2008 2009 Pension Funds 43 45 45 Old Pension Funds 10 9 9 Pension Funds under Special Management 8 9 9 New Comprehensive Pension Funds 13 14 14 New General Funds 11 12 12 Central (Collective) Pension-Paying Provident Funds* 1 1 1 Provident Funds 473 453 419 Pension Provident Funds 226 215 196 Personal Development Funds 131 129 122 Central Severance Pay Funds 99 92 85 Provident funds for other Purpose 17 17 16 Companies operating in the Life Insurance Industry 13 13 13 * Israel Electric Corp. Employees Collective Pension-Paying Provident Fund 1 Source: The Ministry of Finance s Department of Capital, Insurance and Savings Pension Funds 1 The collective pension provident fund is displayed under the pension funds category as payments from the fund are received as a monthly pension and not as a lump sum as in the other provident funds. This data is only included in Chart D-1 and Chart D-2. The other charts display trends in the retirement savings market, however as this fund is intended solely for the Israel Electric Corp. employees, we have chosen not to display its data 144
Ministry of Finance The Capital, Insurance & Saving Division Pension Funds A pension fund is a retirement savings instrument that enables members to receive retirement income annuities (provident fund with annuities). Comprehensive insurance coverage for death and loss of work ability can also be purchased through a pension fund. Pension funds are based on mutual insurance, in other words the insurance risks are not imposed on the insurance company, but rather on the investors themselves. In fact the investors in the fund insure each other (see explanation in the section Actuarial surplus/deficit in new pension funds ). The pension funds can be divided into two categories: Old pension funds and new pension funds. Since 1995 the old pension funds are closed to new members and are also divided into two categories: balanced funds and funds under special management. At the cutoff date 10 old balanced pension funds and 8 old pension funds under special management had been in operation. In 2008 the Commissioner of Insurance appointed a licensed management for the National Federation of Labor Ltd. employee pension fund and there were therefore 9 old pension funds under special management in 2008 and 2009 and 9 balanced pension funds. 2 New pension funds were established pursuant to the cabinet decision from 29 March, 1995. The decision determined that from 1 January 1995, all new members will join new pension funds established from that date onwards. New pension funds are also divided into 2 categories: new comprehensive pension funds and new general pension funds. Accordingly, general pension funds were no longer to be exposed to designated government bonds. By contrast, new comprehensive pension funds were to have 30% of their capital invested in bonds with a guaranteed annual yield of 4.86%. As a result of the benefit, contributions to a new comprehensive pension fund were capped at 20.5% of twice the mean income in the economy (approximately NIS3200 per month, as at the end of 2009). Members who seek contribution rates that exceed this limit can do so by means of new general pension funds that cannot be exposed to designated bonds. In addition, the new comprehensive pension funds have insurance coverage while a new general pension fund may not have such coverage. As of late 2009 there were 14 new comprehensive pension funds and 12 general pension funds. Provident Funds Provident funds are divided into 5 categories as detailed below: Proceeds Provident Fund A lump-sum payment retirement savings plan that was available until 2008. These funds were closed to new contributions as a result of the 3rd amendment to the Provident Funds Law. The amendment determined that as of 2008 all contributions to retirement plans are for retirement-age annuity payment. 2 For further detail see the *** chapter 145
Therefore contributions made before the end of 2007 are withdrawable as a lump sum, however those made to a provident fund from 1 January 2008 are designated for annuity and as such are contributed to a savings plan that is still in the accumulation phase. Savings Provident Fund A retirement savings plan consisting of only a savings component ( pure savings without insurance coverage and without annuities). Because funds of this category have no annuities, once a member reaches the retirement age or upon deciding to withdraw the accumulated savings, they must transfer the fund to a paying provident fund that is in the annuity-paying (annuitization) phase i.e. a pension fund or insurance fund. Individual Severance Pay Provident Fund Funds in which the employer contributes severance pay directly into an individual account on the name of the employee to cover severance pay liabilities. Personal Development Funds Personal Development funds are divided into 2 categories: funds for salaried employees, a fund whereby the employee and the employer make monthly contributions that are deducted from the employee s salary (at the very least the employee s share must be at a 1:3 ratio to that of the employer), and funds for self-employed, which are limited to individuals whose income is from their own business or occupation. Personal development funds are 6-year plans, although the money may be withdrawn before the end of this period for professional training purposes. Central Severance Pay Providence Funds funds in to which the employer makes contributions in order to cover severance pay liabilities to his employees in the event of termination. These funds to be closed for new contributions as of 2011 due to the Third Amendment of the Provident Fund Law, which mandates that all employers make contributions to individual retirement accounts. The decision regarding the closure of these funds was made pursuant to the general policy of transferring responsibility for retirement savings from the employer to the employee. Today severance pay deductions are registered in the employer s account for all employees as a whole. After the closure of the funds the severance pay contributions will be rolled over provident funds that are either in annuity phase or in the contribution phase provident funds and will be registered separately for each employee. Funds for other purposes Funds for a range of purposes such as coverage for sick pay, leave, convalescence provident funds etc. At the end of 2009 the number of provident fund management companies numbered 92. The companies presided over 419 provident funds, 196 of which were pension provident funds and individual severance pay provident funds intended for long-term savings, 85 central severance pay provident funds, and 122 personal development provident funds, in addition to 16 funds designated for other purposes (such as sick pay, vacation allowance, convalescence pay) and which are generally not for retirement savings and the majority of them, such as maternity leave funds, are closed to new members. Overall, the provident funds involved a total of 796 investment channels. 146
Ministry of Finance The Capital, Insurance & Saving Division The chart shows that the industry s current pension funds and insurance funds have remained virtually unchanged over the past several years. On the other hand, the number of provident funds decreases every year and with it, the number of investment channels from 866 channels in 2008 to 796 in 2009. The decrease in the number of provident funds and investment channels results from our department s policy to reduce the number of funds in the market with the objective of making it easier for the public to compare funds and make an informed decision on the choice of fund. In addition, the provident funds involve a significant number of investment channels, many of which are identical, and thus the individual is faced with hundreds of plans whose difference is hard to discern. The Control of Financial Services (Provident Funds) Law of 2005 was amended in July 2009. The amendment mandates that all managing companies manage only one provident fund in each category. In other words, the managing companies that today manage more than one fund in the same category will have to reduce their number. It appears that this law is one of the reasons for the drop in the number of provident funds in 2009. Life Insurance Life insurance policies are divided into two main categories: combined insurance-savings policies senior employees insurance which is intended for salaried employees, self-employed and individual insurance policies; Non-combined insurance policies containing a savings component that covering death and loss of work ability. Senior Employees Insurance is a savings plan that may serve as a provident fund and is designed for monthly payments of retirement income to salaried employees upon reaching retirement age as defined in the Retirement Age Law of 2004. In addition, senior employees insurance policyholders benefit from life insurance ( death risk ) and can also add coverage for loss of work ability. The policy is designed for salaried employees and therefore includes both employee and employer contributions. Like the Senior Employees Insurance, Insurance for Self-Employed is also a savings plan that may serve as a provident fund for the payment of a monthly retirement income to self-employed individuals. In contrast to Senior Employees Insurance and Insurance for Self-Employed, Individualized Policies that combine savings plans and insurance for the event of death and loss of workability may not serve as provident funds and do not grant tax breaks for policyholders. There were 13 insurance companies active in the life insurance industry in Israel at the end of 2009, with nine involving policies for a savings plan or without one ( pure risk ). Two companies (AIG and Shirbit) offered policies without a savings component and two additional companies (Dikla and Clal Health) are licensed to offer in life insurance but in fact offer health insurance. The life insurance policies are further divided into guaranteed-yield policies, which have not been offered since 1992 and which the policyholder is guaranteed a certain yield, and participation policies in which the policyholder s yield is dependent on the earnings in the insurance company s capital market investments. Eight of the nine insurance companies that preside over savings plans manage guaranteed-yield policies (Bituach Yashir, founded after 1992, does not have a guaranteed-yield policy). 147
2.2 Data on the Retirement Savings in Israel Diagram D-1 presents the breakdown of assets in the pension savings market in 2009. The diagram includes all the pension funds (old, new and general), all the life insurance portfolios (participating and guaranteed-yield) and the provident funds (pension provident funds and individual severance pay provident funds, contribution phase provident funds, central severance pay provident funds and provident funds for some other purpose) except for personal development funds. Provident Funds 25%- 181,701 Life insurance 25%-182,256 Figure D-1 Breakdown of pension savings assets amongst pension savings institutions in 2009 (Millions of NIS) Pension Funds 50% - 357,451 3 The data includes future aid that had been promised to the old pension funds under special management. 4 The data includes the general pension funds. 148
Ministry of Finance The Capital, Insurance & Saving Division Table D-2 Basic Data on the Retirement Savings in Israel (Millions of NIS) Assets at end of Year Contributions Withdrawals 2008 2009 Change 2008 2009 Change 2008 2009 Pension Funds 307,013 357,451 16.4% 14,336 15,773 10 0% 12,118 12,554 New pension funds 48,378 70,135 45.0% 9,240 10,912 18.1% 1,233 1,480 Provident Funds 147 295 181,701 23.4% 6.248 5,322-14.8% 15,494 8,925 Life Insurance 144,794 182,256 25.9% 19,341 19,784 2.3% 5,392 8,128 Participating Portfolio 87,685 119,716 36.5% 13,380 13,686 2.3% 3,563 4,426 TOTAL 599.102 721,408 20.4% 39,925 40,879 2.4% 33,004 29,607 * The figures include the central pension provident fund for Israel Electric Corp. employees Source: Department of capital market, insurance and savings It can be observed from chart D-2 that during 2009 there was a 20.4% increase in the total assets of the retirement savings market, and that at the end of 2009 these assets totaled approximately NIS 721B. This increase in the retirement savings assets stems from net member contributions and particularly from the yields generated by the funds assets as detailed below. Contributions to retirement savings plans increased by only 2.4% in 2009 and stood at NIS 40.8B. This stands in contrast to an increase of 3.4% in 2008 and an increase of 6.4% in 2007. Taking into consideration that 2008 saw the introduction of compulsory pension and an expansion order was issued, a higher rate of increase in contributions could have been expected in 2008 and 2009. It is possible that in light of the fact that the rate of contribution was lower during the initial years of its implementation than that set out in the Compulsory Pension Order, namely 2.5% in 2008 and 5% in 2009, the compulsory retirement contributions by salaried employees are expressed mainly in the high number of those newly-joined each year (see Chart D-18) and not in the contributions themselves. The chart shows that the main increase in retirement savings contributions results from an increase of approximately 18% in contributions to the new pension funds, while in the provident funds category a drop was noted. Withdrawals from the retirement savings market decreased by 10.3% in 2009. The decline is clearly discernable in provident funds and apparently results from the large withdrawal volume in 2008, partly because of the financial crisis that struck that year. 149
A possible explanation for the differentiation in contribution- and withdrawal-based retirement plans is the fact that many self-employed individuals save in provident funds. By contrast, the majority of those saving in pension funds and life insurance funds are salaried employees. Self-employed have a practical option of ending contributions while salaried employees have their contributions to the funds deducted by their employer and have no such option of stopping them. In addition, a provident fund is a product without insurance coverage and thus ending contributions does not effect on the members insurance coverage. Pension Funds 2009 witnessed a 16.4% increase in the total assets of the pension funds with a decrease of 6.1% in total assets was noted in 2008. The pension funds total assets stood at NIS357B at the end of 2009. A significant increase of 45% can be observed in the total number of assets owned by the new pension funds compared to an increase of only 16.4% in all pension funds. The high rate of increase in contributions to the new pension funds stems from the fact that these funds were only established 14 years ago and the extent of their managed assets is still relatively small. It can be further noted that there was a marked increase in the total assets during 2009, especially in light of the increase in assets during 2008 which stood at just 3.5%. The sharp increase in 2009 can be explained by the high yields obtained on the managed assets that year (see Chart D-15). 2009 saw an increase of 10% in contributions to pension funds. It should be pointed out that since 1995 no new members were admitted to the old pension funds and in the face of the decrease in contributions to these funds (see Chart D-10), the entire increase in total contributions to the pension funds was due to contributions to the new funds. Withdrawals from the pension funds are of 2 categories: annuities and capital withdrawal. Withdrawals from pension funds totaled NIS12.5B in 2009, a similar sum to that in 2008. Approximately 88% of the withdrawals were from the old pension funds, funds whose members are older than those of the new funds, and therefore are characterized by a higher proportion of members receiving annuities. The new pension funds are characterized by younger account holders and therefore a lower number of annuity recipients less than 1% of the total active members (see Chart D-18). The rate of withdrawal from the pension funds has been steady over the years as the money in the funds is not solvent, and is intended for annuities. In addition, premature withdrawal triggers a high tax penalty. Provident Funds During 2009 there was an increase of 23.4% in assets held by provident funds compared to 2008 and by the year s end the funds assets totaled approximately NIS 181B. The increase in the provident funds total assets stems from the sharp gains made in the financial markets during 2009, among other factors. These gains are expressed in the positive yields that in turn led to an increase in provident fund asset value. Contributions to provident funds decreased by 14.8% in 2009 in comparison to the preceding year. 150
Ministry of Finance The Capital, Insurance & Saving Division 2009 witnessed a sharp reduction of 42.4% in withdrawals compared to 2008, the year in which the financial crisis struck and triggered significant withdrawals from the provident funds. Life Insurance The life insurance portfolio assets expanded by 25.9% between 2008 and 2009 and totaled approximately NIS182 billion by the end of that year. The increase in the portfolio assets stemmed from their performance of the capital markets in 2009. In the participating portfolio, which has a higher exposure to capital market volatility, there was an expansion of assets by 36.5% and the net value of assets totaled NIS120 billion at the end of 2009. The assets of participating portfolios comprise approximately 65% of the entire life insurance portfolio. Contributions to the total life insurance portfolio increased by 2.3% during 2009 and totaled NIS19.8 billion. Contributions to participating portfolios increased by the same rate and totaled NIS13.7 billion by the end of 2009. Contributions to the participating portfolio constituted approximately 70% of the total life insurance contributions (see chart D-11). Withdrawals from life insurance programs increased by approximately 50% in 2009 and stood at NIS8.1 billion. Withdrawals from participating programs increased by 24.2% and totaled NIS4.4 billion. 2.3 Distribution of Assets Between Pension Savings Entities The charts below display the assets in the retirement savings managing institutions. The assets in the three pension savings products represent the savers accumulated savings in each savings plan. The pension funds assets reflect the funds total assets intended for financing retirement liabilities towards members, as accumulated since the date of creation. These assets also are to serve the insurance coverage liabilities of the fund for loss work ability and death. Charts D-3 and D-4 represent the total assets of each pension fund, its market share of the total assets of funds in that category (old or new) and the rate of change in total assets compared to the previous year. For provident funds, the assets reflect the total capital accrued by the provident funds members towards savings. Charts D-5 and D-6 show the distribution of the provident funds assets by managing company category and according to the type of fund for 2006-2009, and the change for each year. For life insurance the assets reflect the total assets accrued for the members. As in provident funds, these assets comprise savings only, as it is the insurance company that is obligated to deliver on insurance liabilities. Charts D-7 and D-8 display the total assets of each life insurance company and its market share in the overall life insurance and participating portfolios. In each of the 3 fields the assets are used as an indicator for size that can show the market share of each entity in its field. 151
Pension Funds Breakdown of Assets in the Old Pension Funds As the old pension funds are now closed to new membership, there has been no significant change in the market share of each fund since 2009 and no such change is expected. Chart D-3 displays the old pension funds assets distribution for the years 2008-2009. The total assets of the old funds stood at approximately NIS267 B in 2009. These assets include the government aid granted in 2003 to the old pension funds under a special arrangement in order to enable them to meet their commitments towards the insured members. The old pension funds manage the majority of total assets in the pension fund market because these funds began operating during the 1940 s and, until the beginning of 1995, were the only pension funds on the market. Over time, they accumulated many assets. Even though the funds have been closed to new membership since January 1995, most of them still show a growth in assets each year. Name of Fund Table D-3 Old Pension Fund* Asset Distribution for 2008-2009 (Millions of NIS and %) 2008 2009 Assets Assets 2008-2009 Mivtachim 114,261 48.2% 129,044 48.3% 12.9% Central Pension Fund 40,097 16.9% 44,932 16.8% 12.1% Makefet 35,363 14.9% 40,136 15.0% 13.5% Nativ 11,482 4.8% 12,080 4.5% 5.2% Gilad Rivchit 5,849 2.5% 6,759 2.5% 15.6% National Federation of Labor 4,927 2.1% 6,472 2.4% 31.4% Egged 4,974 2.1% 5,238 2.0% 5.3% Atudot 3,902 1.6% 4,904 1.8% 25.7% Construction sector 4,575 1.9% 4,630 1.7% 1.6% Jewish Agency 3,129 1.3% 3,344 1.3% 6.9% Hadassah 2,319 1.0% 2,611 1.0% 12.6% Agriculture industry 2,021 0.9% 2,054 0.8% 1.6% Dan 1,388 0.6% 1,555 0.6% 12.0% Yozma 1,020 0.4% 1,217 0.5% 19.3% Amit 580 0.2% 754 0.3% 30.0% Magen 522 0.2% 574 0.2% 10.0% Atidit 412 0.2% 536 0.2% 30.1% Israel Bar Association 281 0.1% 353 0.1% 25.6% TOTAL 237,102 l00% 267,193 l00% 13% * The figures include the future aid promised to the old pension funds under special management Source: Department of Capital, Insurance and Savings 152
Ministry of Finance The Capital, Insurance & Saving Division New Pension Fund Asset Distribution Chart D-4 presents the distribution of assets of the new pension funds for 2007-2009. At the end of 2009, the new pension funds total assets stood at approximately NIS70.1 billion. There was a 45% increase in total managed assets in 2009 compared to only 3.5% in 2008. The disparity between 2008 and 2009 is mainly a result of the positive yields obtained on the assets in 2009 and the negative yields in 2008. The increase in new pension fund assets also stems from a rise of 10% in contributions to the funds (see Chart D-2), however the main source of their growth is the spike in yields in the new comprehensive pension funds. Table D-4 New Comprehensive Pension Fund Asset Distribution for 2007-2009 (Millions of NIS and %) 2007 2008 2009 % Change in Assets Name of Fund Assets Assets Assets 2007-2008 2008-2009 New Mivtachim 20,049 42.9% 19,675 40.7% 27,508 39.2% -1.9% 39.8% Personal Makefet 11,843 25.3% 12,861 26.6% 18,197 25.9% 8.6% 41.5% Meitavit Atudot 7,233 15.5% 7,651 15.8% 11,748 16.8% 5.8% 53.5% Harel (previously Adi) 2,971 6.4% 3,396 7.0% 5,569 7.9% 14.3% 64.0% Gila d Rivchit 1,656 3.5% 1,616 3.3% 2,273 3.2% -2.4% 40.7% Phoenix (previously Amit) 1,305 2.8% 1,461 3.0% 2,424 3.5% 12.0% 65.9% Yovelim 551 1.2% 458 0.9% 510 0.7% -16.9% 11.4% Ayalon Pisga 427 0.9% 424 0.9% 615 0.9% -0.7% 45.0% Maggen Zahav 276 0.6% 350 0.7% 581 0.8% 26.8% 66.0% Harel Manof 208 0.4% 244 0.5% 372 0.5% 17.3% 52.5% Excellence Nassua Pension 161 0.3% 157 0.3% 185 0.3% -2.5% 17.8% Helman Aldobi 53 0.1% 52 0.1% 86 0.1% -1.9% 65.4% Meitav 21-32 0.1% 58 0.1% 52.4% 81.3% Altschuler Shacham Pension - - 1 0% 6 0.0% 100.0% 500.0% TOTAL 46,754 100% 48,377 100% 70,132 100% 3.5% 45.0% Source: Department of Capital, Insurance and Savings 153
The total market share of the three largest funds has barely changed even though there has been a change in each of their individual market shares. The Harel insurance company, which owns the Harel pension fund, also owns the Gil ad Rivchit and Harel Manof funds. Therefore, these three funds can be regarded as one with a market share of 11.6% of the new pension funds market. The Harel and Gilad Rivchit funds were merged at the beginning of 2010. Provident Funds Provident Funds Asset Distribution (by managing company) Chart D-5 displays the distribution of assets of the provident funds according to the managing company. It can be observed that there was no significant change in the distribution of managing companies of provident funds in 2009 and that 2009 saw a low proportion of 3.9% in the banking corporations market share compared to 56.3% in 2006. This large change in the banking corporation market share can be explained by the implementation of the Bachar Reform which mandated that banking corporations sell the provident funds under their management. Despite this, banking corporations will continue to control a small market share, as they are permitted to continue owning central severance pay provident funds in which employers save severance pay for their employees. The Bachar Reform was a reform of the Israeli capital market carried out on the basis of the conclusions of the Bachar Committee headed by the former Director General of the Ministry of Finance Dr. Yossi Bachar. The Reform was authorized by the Knesset in August 2005 in a series of laws intended to reduce the centralization in the capital market manifested by the banking system. The key tenets of the reform involve ending ownership of banking institutions on provident funds and mutual funds, increasing competition in the retirement savings market, generating outgrowth in the non-bank credit lines and in the economy s means of finance and regulating pension consultants activity. The reform was proposed following a state of conflict of interests which existed in the Israeli banking landscape: on the one hand they were the body providing counsel to customers regarding recommended investment options and on the other hand they themselves owned some of the investment plans. The assumption was that a bank s investment advisor cannot properly serve the customer requesting advice on the best investment option while serving the bank (the counsel s employer) which seeks investment in its own plans. The reform mandated that banks sell the provident funds and mutual funds under their ownership within a period of 4 years. The buyers were insurance companies and other private investment institutions. 154
Ministry of Finance The Capital, Insurance & Saving Division Table D-5 Provident Fund Asset Distribution (According to Controlling Corporation Category) for 2006-2009 (In millions of NIS and %) Type of Management Assets 2006 2007 2008 2009 Assets Assets Assets Change Between 2007-2008 Years (%) 2008-2009 Banking Corporations 143,873 56.3% 48,020 17.2% 11,940 5.4% 10,888 3.9% -75.1% -8.8% Insurance Groups 25,385 9.9% 77,907 28.0% 69,463 31.6% 80,202 28.7% -10.8% 15.5% Private Entities 28,502 11.1% 93,221 33.5% 92,782 42.2% 127,879 45.7% -0.5% 37.8% Pension Funds 440 0.2% 452 0.2% 42 0.0% 50 0.0% -90.7% 19.0% Factories and others Under Licensed Management 56,314 22.0% 57,732 20.7% 45,221 20.5% 59,985 21.4% -21.7% 32.6% 1,134 0.4% 1,056 0.4% 640 0.3% 829 0.3% -39.4% 29.5% TOTAL 255,648 100.0% 278,388 100.0% 220,088 100.0% 279.833 100.0% -20.9% 27.1% Source: Department of Capital, Insurance and Savings Provident Funds Assets Distribution (according to fund category) Chart D-6 displays the provident funds assets distribution according to category of fund. The chart shows the influence of the ups and downs in the financial markets on the state of the funds assets. The growth in assets between 2008 and 2009 was positive. By contrast, a comparative drop compared with 2007 can be discerned. It appears that the main reason for this was the financial crisis of 2008 and the fact that the provident funds contain large sums of solvent money for immediate withdrawal. In pension provident funds and individual severance pay provident funds (provident funds that do not pay an annuity), the increase in the balance of assets can be explained by the high yields attained by the funds and the net negative balance of contributions vs. withdrawals. 155
The growth in assets in the personal development funds can be explained by the high yields attained by the funds and by the fact that contributions surpassed withdrawals. Even though a personal development fund is a short-term (6 years) savings plan that is not for retirement, it awards members with tax breaks. In the central severance pay provident funds the growth in assets can be explained by the high yields attained by the funds. The level of contribution is less than that of withdrawals in these funds due to the closure of the funds to new contributions as of 2011 and to employee termination in 2009. These factors caused many employers to make withdrawals from the funds. Table D-6 Proviident fund asset Distribution (According to fund Category) for 2007-2009 (Millions of NIS and %) Fund Type Pension and Individual Severance Pay Assets 2007 2008 2009 Assets Assets Rate of Change Between Years 2007-2008 2008-2009 166,260 59.7% 129,070 58.6% 159,621 57.0% -1.8% 23.7% Personal Development 89,734 32.2% 72,793 33.1% 98,133 35.1% 2.6% 34.8% Central Severance Pay 21,325 7.7% 17,535 8.0% 21,211 7.6% 4.0% 21.0% Other Purposes 1,069 0.4% 690 0.3% 869 0.3% -18.4% 25.9% TOTAL 278,388 100% 220,088 100.0% 279,834 100% 8.1% 27.1% Source: Department of Capital, Insurance and Savings Life Insurance Programs Total Asset Distribution Charts D-7 and D-8 display the distribution of life insurance assets between the various insurance companies for 2007-2009. Chart D-7 presents the total life insurance portfolio assets distribution and Chart D-8 represents the distribution of participating portfolios only and the change over the years. Chart D-7 shows an increase in the total portfolio assets of the insurance companies by more than 25% in the total assets during 2009. An even greater rate of change can be seen in Chart D-8 which displays the change in assets in the participating portfolio which is characterized by a higher level of exposure to the capital market. The charts show that as of 2009 the five largest companies owned approximately 96% of the total net life insurance assets. 156
Ministry of Finance The Capital, Insurance & Saving Division Table D-7 Total Insurance Company* Asset Distribution for 2007-2009 (Millions of NIS and %) 2007 2008 2009 Change Between Years Company Assets Assets Assets 2007-2008 2008-2009 Migdal* 52,665 35.1% 51,913 35.9% 65,032 35.7% -1.4% 25.3% Clal 35,299 23.5% 34,100 23.6% 41,952 23.0% -3.2% 22.7% Phoenix 23,793 15.9% 21,100 14.6% 26,845 14.7% -11.3% 27.2% Harel 19,950 13.3% 19,880 13.7% 25,568 14.0% -0.4% 28.6% Menorah 13,194 8.8% 11,751 8.1% 15,221 8.4% -10.9% 29.5% Hachsharat Hayishuv 1,876 1.3% 1,833 1.3% 2,379 1.3% -2.3% 29.8% Ayalon 1,447 1.0% 1,458 1.0% 1,910 1.0% 0.8% 31.0% Eliyahu 1,190 0.8% 1,202 0.8% 1,483 0.8% 1.0% 23.4% Dikla 358 0.2% 1,128 0.8% 1,433 0.8% 215.1% 27.0% Bituach Yashir 267 0.2% 324 0.2% 417 0.2% 21.3% 28.7% A.I.G 11 0.0% 15 0.0% 13 0.0% 36.4% -14.2% Shirbit 0 0.0% 4 0.0% 4 0.0% - - TOTAL 150,050 100.0% 144,794 100.0% 182,256 100.0% -3.6% 25.9% * In some of the companies, the figures reported include convalescence insurance. Source: Department of Capital, Insurance and Savings 157
Table D-8 Distribution of Assets in Insurance Company* Participating Portfolio for 2007-2009 (Millions of NIS and %) Company Assets 2007 2008 2009 Assets Assets Rate of Change Between Years 2007-2008 2008-2009 Migdal 34,158 34.7% 32,146 36.7% 43,166 36.1% -5.9% 34.3% Clal 22,605 22.9% 20,302 23.2% 28,424 23.7% -10.2% 40.0% Phoenix 16,477 18.8% 13,078 14.9% 17,713 14.8% -20.6% 35.4% Harel 12,422 14.2% 11,183 12.8% 15,690 13.1% -10.0% 40.3% Menorah 9,557 10.9% 7,704 8.8% 10,169 8.5% -19.4% 32.0% Hachsharat Hayishuv 1,227 1.4% 1,192 1.4% 1,644 1.4% -2.9% 38.0% Ayalon 1,151 1.3% 1,053 1.2% 1,545 1.3% -8.5% 46.8% Eliyahu 734 0.8% 748 0.9% 1,007 0.8% 1.9% 34.7% Bituach Yashir 226 0.3% 279 0.3% 357 0.3% 23.5% 27.9% TOTAL 98,557 105.3% 87,685 100.0% 119,716 100.0% -11.0% 36.5% * In some of the companies, the figures reported include convalescence insurance. Source: Department of Capital, Insurance and Savings 158
Ministry of Finance The Capital, Insurance & Saving Division 3. Structure 3.1 Cash-flow in the Retirement Savings Institutions The charts below reflect the cash-flows in the retirement savings institutions during the years 2008-2009. Revenues in pension savings bodies stemmed mainly from contributions for policyholders or members. The main payments are annuity payments to those eligible such as old age allowance or disability allowance and also lump-sum payments. New Pension Funds Revenues The new pension funds revenues resulted from 2 main sources contributions by policyholders and the transferring of policyholders savings between funds. Chart D-9 below displays the revenues of the new pension funds for the years 2008 and 2009 and also the relative share of each fund out of the total revenues of the new pension funds. The total revenues during 2009 increased by approximately 18% - from NIS9235 million in 2008 to NIS10935 million in 2009. The rise in pension fund revenues results, among other things, from the compulsory pension agreement, as every new employee joining the workforce is obligated to save for pension, and from the fact that most of those joining a retirement savings plan pursuant to the agreement must join a pension fund, this being the default option in the agreement. The transfer of capital displayed in the chart is calculated as a net cash flow. 5 In other words, the total capital transferred to the fund from other new pension funds is displayed after deducting the capital that the fund transferred to other new funds. Capital transfer can significantly affect the total net revenue of the fund. It should be mentioned that according to the pension portability regulations published in October 2008, a beneficiary can rollover savings not only between the new pension funds, but also from a pension fund to a provident fund or life insurance plan, and vice-versa. The saver s ability to rollover their benefits between the various retirement savings plans enhances their bargaining power. 5 Theoretically the total net transfers should add up to zero but the reports include discrepancies. 159
Name of Fund Table D-9 New Comprehensive Pension Fund Revenues for 2008-2009 (Millions of NIS and %) 2008 2009 Revenues Total Revenues Net Total Contributions Contributions Net Total Total Rollovers Rollovers New Mivtachim 3,203-234 2,969 32.1% 3,609-65 3,544 32.5% Personal Makefet 2,589 109 2,698 29.2% 2,997-23 2,974 27.3% Meitavit Atudot 1,577 71 1,648 17.8% 1,882 18 1,900 17.4% Harel (previously Adi) 815 133 948 10.3% 1,090 141 1,231 11.3% Phoenix (previously Amit) 476 68 544 5.9% 645-12 633 5.8% Gilad Rivchit 235-128 107 1.2% 250-16 234 2.1% Magen Zahav 118-17 101 1.1% 144-2 142 1.3% Ayalon Pisga 78-26 52 0.6% 117-13 104 1.0% Harel Manof 43 24 66 0.7% 68 8 76 0.7% Yovelim 50-14 36 0.4% 50-20 30 0.3% Helman Aldobi 17 3 20 0.2% 18-2 16 0.1% Meitav 14 6 19 0.2% 16-3 13 0.1% Altschuler Shacham 0 5 6 0.1% 2 3 5 0.0% Excellence Nessuah Pension 25-5 20 0.2% 24-22 2 0.0% TOTAL 9.240-4 9,235 100.0% 10,912-9 10,903 100.0% Source: Department of Capital, Insurance and Savings The chart shows that the total revenue in the New Mivtachim Fund in 2009 increased and totaled NIS3609 million. In addition, the trend of 2008 and 2007 continued in 2009, which witnessed negative net transfers to Mivtachim (more money was transferred out of the fund than that which was transferred into the fund) and totaled NIS65 million. In 2009 the Meitavit Atudot and Harel Pension funds continued their trend from 2007 and 2008 attaining positive net transfers i.e. more capital was transferred into the fund than that which was transferred out. Personal Makefet sustained a drop from positive net transfers in 2008 totaling NIS109 million to a level of negative net transfers in 2009 totaling NIS23 million. It can be further observed that the market share in each fund s revenue is different from its asset market share (see chart D-4). For example, the market share of Mivtachim revenue was approximately 32.5% in 2009 while its market share of assets was approximately 40%. An explanation to this variance is the creation of new pension funds by the old funds and the closure of the old funds to new membership. This move caused the new funds 160
Ministry of Finance The Capital, Insurance & Saving Division to continue the membership agreements of the old funds with the employers. A new fund established by a large old fund such as Mivtachim, benefited during its initial years of operation from the economy of scale and experience of the old fund and thereby accumulated a relatively large number of members and assets. Contributions to the Old Pension Funds Chart D-10 displays the revenues of the old pension funds which result only from member contributions. There are no transfers of capital in the old pension funds as the legislated settlement regulations do not allow the transfer of capital between these funds. The chart shows that the contributions to the old pension funds declined by approximately 2.6% in 2009 and totaled NIS4.8 billion, compared to NIS5 billion the previous year. It can be further seen that in contrast to the new pension funds, the old pension funds market share of revenues (contributions) is similar to their market share of assets (see chart D-3), as these funds are closed to new membership and therefore no significant change in revenue market share can be expected. Table D-10 Contributions to Old Pension Funds for 2008-2009 (Millions of NIS and %) Name of Fund 2008 2009 Contributions Contributions Mivtachim 2,199.9 44.14% 2,149.0 44.27% Central Pension Fund 840.9 16.87% 860.0 17.72% Makefet 703.0 14.10% 684.0 14.09% National Federation of Labour 331.5 6.65% 322.0 6.63% Atudot 317.7 6.37% 267.0 5.50% Nativ 202.1 4.05% 197.0 4.06% Gilad 106.1 2.13% 105.0 2.16% Hadassah 50.9 1.02% 52.0 1.07% Egged 45.0 0.90% 42.0 0.87% Amit 27.9 0.56% 33.0 0.68% Yozma 29.4 0.59% 26.0 0.54% Agriculture 28.0 0.56% 22.0 0.45% Atidit 20.6 0.41% 22.0 0.45% Construction sector 23.2 0.47% 21.0 0.43% Israel Bar Association 20.9 0.42% 21.0 0.43% Dan 14.2 0.29% 14.0 0.29% Jewish Agency 15.1 0.30% 12.0 0.25% Maggen 7.8 0.16% 5.0 0.10% TOTAL 4,984.2 100% 4,854.0 100% Source: Department of Capital, Insurance and Savings 161
Contributions to Life Insurance The contributions to new life insurance policies usually include 3 main components: Contributions to savings the relative share of the contribution accrued for retirement for the holder. Contribution for insurance coverage the relative share of the contribution designated for purchase of insurance coverage for the event of death and loss of work capacity. Management fee component deducted from the contribution. According to Chart D-11, total contributions in all the insurance companies totaled NIS19.8 billion, this compared to NIS19.3 billion in 2008 an increase of 2.3%. Name of Company Table D-11 Contributions to Life Insurance in Total Portfolios for 2008-2009 (Millions of NIS and %) 2008 2009 Change between Contributions Contributions years 2008-2009 Migdal 5,839 30.2% 5,999 30.3% 2.7% Clal 4,139 21.4% 4,218 21.3% 1.9% Phoenix 2,910 15.0% 2,951 14.9% 1.4% Harel 3,221 16.7% 3,087 15.4% -4.2% Menorah 1,637 8.5% 1,625 8.2% -0.7% Dikla 290 1.5% 313 1.6% 7.9% Hachsharat Hayishuv 300 1.6% 352 1.8% 17.3% Ayalon 293 1.5% 299 1.5% 2.0% Eliyahu 252 1.3% 265 1.3% 5.2% Bituach Yashir 154 0.8% 162 0.8% 5.2% Clal Health 248 1.3% 452 2.3% 82.3% A.I.G 50 0.3% 59 0.3% 18.0% Shirbit 2 0.0% 2 0.0% - TOTAL 19,341 100.0% 19,784 100.0% 2.3% Source: Department for Capital, Insurance and Savings 162
Ministry of Finance The Capital, Insurance & Saving Division Provident Fund Contributions and Withdrawals Chart D-12 shows cash-flow trends in each of the provident fund categories. In pension provident funds and individual severance pay provident funds (provident funds that do not pay an annuity) there has been a decline of 18.6% in contributions in 2009. The chart further shows that there was also a decline of 46.1% in withdrawals in 2008. The reason for this is that 2008 was an exceptional year in its extent of withdrawals due to the financial crisis which led many investors to fear for their savings and proceed to withdraw them. Personal development funds saw an increase of 3.5% in contributions. By contrast, withdrawals declined in 2009 by 35.8%. The change apparently stems from the fact that 2008 was an exceptional year in its level of withdrawals due to the financial crisis and investors fears regarding the fate of their savings. In the central severance pay provident funds there was an increase of 4.3% in contributions, apparently because of the fact that these funds are designated for closure in 2011 and will not be able to accept new contributions. In addition, there was a decline of 14% in the extent of withdrawals from these funds. An explanation for this may also be seen in the financial crisis of 2008. As a result of the crisis, it seems that employers were forced to make employees redundant and therefore pay them severance pay. Table D-12 Distribution of Contributions and Withdrawals in Provident Funds (By Fund Category) for 2008-2009 (Millions of NIS and %) Fund Category Pension Provident Fund and Individual Severance Pay Fund Personal Development Fund Central Severance Pay Fund 2008 2009 Rates of Change between Years 2008-2009 Contributions Withdrawals Contributions Withdrawals Contributions Withdrawals 5,380 13,733 4,378 7,408-18.60% -46.10% 12,945 13,654 13,395 8,741 3.50% -35.80% 868 1,722 905 1,481 4.30% -14.00% TOTAL 19,193 29,109 18,678 17,650-2.7% -39 4% 163
Provident Fund Portability Chart D-13 below shows the extent of rollovers relating to provident funds in 2007-2009, both between different funds and between investment channels within a single fund. It seems that there was a decline in the scope of rollovers between 2008 and 2009 and that the extent of rollovers decreased. However, 2008 should be considered an special year because of the financial crisis which led many investors to shift to funds or channels characterized by a low-risk (solid) investment policy. If we compare the data regarding rollovers between 2009 and 2007 an increase of NIS4.2 billion can be discerned in the scope of rollover in provident fund plans. Since September 2008 it has been possible to carry out capital rollovers between all retirement savings plans but the extent of transfers in non provident fund plans (senior employees insurance and pension funds) is, as of today, relatively low. Table D-13 Capital Rollover Between Provident Funds (By Fund Category) for 2007-2009 (Millions of NIS and %) Fund Type Pension Provident Funds and Individual Severance Pay Provident Funds Personal Development Provident Funds Central Severance Pay Provident Fund 2007 2008 2009 Degree of change Total Transfers Total transfers Total Transfers 2007-2008 2008-2009 11,925,737 20,703,345 16,421,159 73.4% -20.7% 7,470,893 10,129,679 9,190,183 35.6% -9.3% 4,013,411 2,379,025 2,061,283-40.7% -13.4% TOTAL 23,410,241 33,212,049 27,672,625 41.9% -16.7% 3.2 Retirement Savings Institution Yields The retirement insurance plans (pension funds, provident funds and senior employees insurance) are longterm investments. As such, their performance should be analyzed according to long-term data and not on the basis of short-term earnings. Furthermore, the yields showed in this section of the report are based on 164