Mandatory Pension – Everyone’s Entitled

As of the beginning of this year every employee is now entitled to pension insurance (after six months on the job), yet many workers – and even some employers – are unaware of the ensuing obligations and rights.
We decided to sort out the matter with the help of Atty. Dorit Tene-Perchik, vice president of strategic development for long-term savings at the new Mivtachim Pension Fund, who had a hand in formulating the mandatory pension agreement at her previous job as chairwoman of the Histadrut’s Department of Pensions, Insurance and the Capital Market.

It used to be that young people regarded pension payments as an archaic salary component that didn’t interest them much. For many it was more important to receive high pay than to worry about a pension that would be paid in another 30-40 years. Lately it seems that attitude has changed somewhat.
Atty. Dorit Tene-Perchik: There definitely has been a change and I believe it can be attributed to the signing of the Mandatory Pension Agreement, which has drawn a lot of attention. The signing of the agreement transformed the job market because Histadrut heads and MKs have been trying to attain it for decades. Still, over the years there have been extensive achievements, i.e. they obtained agreements regarding pension payments for workers in certain industries, such as manufacturing, employment agencies, security guard companies, etc.

 

Collective agreements apply only to employers who belong to the employers’ association that signs the agreement. In order for the agreement to apply to all of the employers in the industry in which the agreement was signed the Labor Minister is authorized to issue an “expansion order,” which makes the agreement apply to all employers. That’s what happened in industries like manufacturing, personnel and security services.
True, and the same thing happened to the Mandatory Pension Agreement nationally. It was signed between the Histadrut and the employers’ associations, and the Labor Minister extended it to all employers in the country who the beneficiary pension arrangement hadn’t applied to. People heard about it and started checking whether they were entitled to this right, thereby increasing awareness about pensions and their importance.

 

How can a rank-and-file worker check what he’s entitled to?
He doesn’t need to inquire. He is entailed, period. The moment the worker is employed for over six months of work, money has to be set aside for some sort of pension savings. If a specific, beneficiary pension agreement doesn’t apply to him then the Mandatory Pension Agreement does.

 

According to the Mandatory Pension Agreement the contribution for the pension program is made up of three equal parts – two from the employer’s pocket and one from the employee’s pocket:
The employer’s contribution for claims
The employer’s contribution for compensations
The employee’s contribution for claims
The Mandatory Pension Agreement and the expansion order explicitly state that these three parts must be given to the employee as a “comprehensive pension” that includes not only an old-age pension, but also disability insurance and survivors’ insurance. This is the default option, if the worker does not specifically ask the employer for something else.

 

Inevitably some employees will forego their pension contributions. They would rather receive the employer’s share as part of their salary, which would also allow them to avoid the part taken from their own pocket.
Therefore it’s important to note that this is not an option. The employee cannot forfeit his right to pension payments.
That’s correct. The worker cannot forego this right, and if the employer collaborates with him by transferring the amount directly to his salary he is violating the law and is liable to by sued for large amounts.
For instance, take an employee who started working for a certain employer in January 2008. After six months, in July 2008, he has to be provided pension insurance. Imagine if, God forbid, in February 2009 the employee is injured and becomes entitled to disability payments. If the employer did not fulfill his duty by setting aside the required amount and putting it in a pension fund, he will have to bear the cost of disability payments for many long years. In effect the employee turns into an insurance company. The court will examine what the worker would have received had the employer set aside money in one of the new, comprehensive pension funds as required by the Mandatory Pension Agreement. For the employer, the financial damage can be enormous.

 

This situation where the employee is injured and becomes disabled is extreme. A more common scenario is where that same worker, say in January 2010, switches to a different job, meaning he worked for the employer for two years without contributions to a pension fund and no insurance-related event happened to the worker during this period. Still, the previous employer cannot breathe a sigh of relief, right?
Most certainly not. That employer not free of potential problems, even though the employee is no longer working for him.
For example, let’s say after four years, when the worker has already found a new job, that employee becomes disabled due to an illness such as asthma. The current place of work did insure him, but according to the pension fund’s regulations in order to be entitled to disability payments because of a prior illness there must by an eligibility period of five years.
In practice the new employer insured him for four years and therefore the pension fund considers him to be insured for only four years, and according to its regulations the worker has not completed the eligibility period and therefore is not entitled to a disability pension. So the question will be asked, why was the employee only insured from the beginning of 2010 and not from the beginning of 2008 by the previous employer? If he was unemployed or self-employed then there really is nothing to be done about it – he doesn’t meet the conditions stipulated by the minimum eligibility period – but in the case of the worker in question, the prior employer’s violation of the law is what prevented him from accumulating the minimum period that would make him eligible for the disability pension. Therefore the prior employer would have to bear the burden of the resulting damage.
This is not a theoretical situation. There already has been such a ruling, which was unrelated to mandatory pensions of course, but set the same principle.

 

What did the ruling determine?
A worker at a moving company made a deal with his employer to forego setting aside pension money and to increase his salary. The employee had been entitled to a pension based on a pension agreement that applied to workers in the industry. The employer, who employed the worker for just 3-4 months, agreed to his request. Prior to this the employee had worked for 10 years for his previous employer, who provided him with pension insurance.
Years later the employee passed away and the survivors were not entitled to survivors’ payments because the last employer, who had only employed him for a few months, did not put money into a pension as required. Based on its regulations the pension fund determined that the employee had not completed the required period needed to receive pension payments and refused to pay the claim. The deceased employee’s survivors sued the employer and the court ruled it must pay this monthly expense. The employer’s claim that the failure to pay into the pension fund was done with the employee’s consent didn’t stand up in court. The employee could not forfeit the survivors’ rights.

 

How long does this risk to the employer remain? Is there a statute of limitations?
There’s a seven-year statute of limitations during which an employee can file a claim against the employer retroactively. But that doesn’t mean employers can rest assured even if seven years have passed since the day the worker they didn’t insure left their employ. It seems the labor court tends to carry out its views in this matter in favor of the employee. The court takes into account that this is a substantial and vital matter for the employee and his family members. It weighs the extensive damage caused to the worker against a procedural claim like a statute of limitations.

 

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Since this constitutes a substantial added burden for the employer, the new pension agreement hasn’t been imposed all at once, but gradually.
Of course. Even as employee representatives who signed the agreement we understood that the cost of labor cannot be raised by 12% all at once [today places where pension funds are contributed this is the current rate]. Therefore it was done in phases over the course of five years, at increments of 2.5%.

[According to the Mandatory Pension Agreement in 2008 the total of all contributions is 2.5%. That means if one’s gross pay is NIS 4,000 the total amount contributed is NIS 100 (2.5% of 4,000). The employer pays NIS 66.67 and the employee NIS 33.33.
Every year the rate increases by 2.5%. That means next year, in 2009, it will be 5% and in 2013 it will stop rising at 15%, meaning an employee who earns NIS 4,000 will have NIS 600 set aside each month for his pension, with the employer paying NIS 400 and the employee paying NIS 200.]

 

What is the maximum earning level above which there is no need to put money into pension savings?
The ceiling has been set at the average wage, which fluctuates periodically. Today it’s around NIS 7,700.
[In other words pension insurance according to the Mandatory Pension Agreement covers earnings up to the average income level. Earnings beyond that level do not require contributions.]

 

It’s worthwhile to stress that the Mandatory Pension Agreement is a default. It applies where there is no other beneficiary pension arrangement that applies to the employee.
Right, and the Mandatory Pension Agreement says the agreement that benefits the employee most applies. That means if until now an inferior agreement applied to him, as of now the Mandatory Pension Agreement, or parts of it, will apply to him. On the other hand if the agreement that applies to him is better than the Mandatory Pension, the current agreement will remain in place. So for example, in the case of an employer who contributes 5% to a provident fund and the employee puts 5% into a compensation fund, to ensure the workers situation does not worsen the employee must now add the compensation component at the same level and regular rates in the Mandatory Pension Agreement.

 

Presumably the existing pensions are preferable, certainly for

the coming five years. But even in 2013 the other agreements will remain preferable. Typically the amount set aside for pension savings is around 17.5%.
Right, but you have to keep in mind that pension agreements are not set only when it comes to collective agreements. There are also individual agreements that set pension contributions and senior staff insurance. They don’t always have the framework familiar to us from the collective agreements.
Also, I believe that even the Mandatory Pension Agreement will reach 17.5% in 2014, but to reach that level will require signing an increase to the current agreement

 

As of the beginning of this year every employee is now entitled to pension insurance (after six months on the job), yet many workers – and even some employers – are unaware of the ensuing obligations and rights.
We decided to sort out the matter with the help of Atty. Dorit Tene-Perchik, vice president of strategic development for long-term savings at the new Mivtachim Pension Fund, who had a hand in formulating the mandatory pension agreement at her previous job as chairwoman of the Histadrut’s Department of Pensions, Insurance and the Capital Market.

People who saved for retirement used to be able to withdraw all their money as soon as their pension fund matured. This was an option for those with a pension fund or senior employee’s insurance. Today this option is no longer available.
Correct. That’s the change created by Amendment 3 to the pension fund law, which was made based on an agreement between the Finance Ministry and the Histadrut along with the Coordinating Bureau for Financial Organizations, and represented a step toward completing the Mandatory Pension Agreement. The idea is for pension savings to serve first and foremost the aim of the pension – a monthly payment (as opposed to a lump sum) for an employee who has reached retirement age, and lasting until the end of his lifetime. The amount is equivalent to half of the average wage nationally. The directive applies to money the employee began to accrue starting in the year 2008. Legislators want the saver to reach a position where that would be the minimum amount he would receive when the time comes to start receiving old-age payments. Today this is relevant to all of the pension plans, including both pension funds and senior employee funds.

If the employee saves enough money to reach the target pension with some money left over, he can withdraw the surplus funds as a lump sum.

[Note: Amendment 3 applies only to sums contributed since the beginning of 2008. For instance, if money was placed in a pension fund starting in 2000 and the pension fund matures in 2015, the money deposited up until 2007 will mature in 2015, whereas the money deposited from 2008 to 2015 will wait until the employee reaches retirement age, and then it will become part of the amount saved toward the target pension.]

 

We’ve already mentioned that the employer’s contribution toward pension savings includes severance pay. An employee who left a job is entitled to withdraw this portion as a one-time amount, even if it reduces his savings toward the target pension.
That’s right, because really that’s the primary aim of the severance pay – to help the worker during his transition from one job to the next. When he’s not employed, there’s no reason for him to wait until age 67 [the current retirement age in Israel is 66⅔] in order to benefit from his pension savings. He needs the money now because he has no other source of income, and in light of his employment situation, it may well be that at the age at which he was dismissed he won’t be able to find another job. Therefore the employee can withdraw the portion of the benefits set aside for him.

 

In any case – even if the employee quits?
In the event of dismissal it’s unambiguous. If the employee quits it’s possible if the matter was agreed on between him and his employer. But it’s important to note that even if the employee quits and isn’t entitled to withdraw severance pay, the employer cannot get back the funds he gave based on the Mandatory Pension Agreement, but rather they remain waiting for the worker in the pension fund until he reaches retirement.

 

This creates a setup in which no matter what, the severance pay goes to the employee and never returns to the employer.
Yes, the employer gets a benefit and pays for it: the compensation money deposited into the pension fund (the 5% compensation) will replace severance pay. The benefit to the employer is that he knows there’s no need for him to calculate the total compensation the worker is entitled to when he leaves – a situation that can cause the employer to pay the employee additional sums of money in addition to the amount already contributed. The price the employer has to pay is that the amount contributed for “compensation payments” will invariably go to the employee, even if he never gets dismissed.

 

An employee can decide he wants only old-age-pension insurance.
Today, following Amendment 3, that’s his prerogative. The pension fund guarantees three situations: old age, disability and survivors’ benefits. The Mandatory Pension Agreement regulates and requires that insurance be provided in these three circumstances. In other words as long as the employee did not opt explicitly, in writing, for another insurance framework, the employer must insure the worker with a new, comprehensive pension fund that provides pension benefits for old age, disability and survivors.
However, the employee can also decide he wants only pension insurance that provides him a pension upon retirement. In such a case he can, for instance, choose a pension fund. But if the employee did not choose any alternative pension plan, the default option is a new, comprehensive pension fund.

 

That means if the employee wants to be insured through a provident fund, senior employees’ insurance or a specific pension fund, he must state this explicitly.
Right, otherwise the employer can choose to insure him through one of the new pension funds, thereby fulfilling his obligation.

 

Why is a new pension fund the default option? Why not allow the worker to choose senior employees’ insurance? [A provident fund (kupat gemel) only enables one to receive retirement payments, while a senior employees’ fund (bituach menahelim) or a pension fund (keren pensia) entitles the employee to retirement, disability and survivors’ payments.]
First of all, according to the law, every employee is allowed to choose which savings track he wants, and the employer must honor his wishes. So if the employee insists he wants senior employees’ insurance or a provident fund (which generally does not include disability or survivors’ benefits), his request must be honored.
To answer your question regarding the default option, indeed as long as the worker does not choose otherwise, the employer is obligated to insure him through a new, comprehensive pension. The reason is simple. In most cases, certainly in the case of low salaries and young ages, insurance through the pension fund is more worthwhile for the employee for a variety of reasons. For instance, pension fund money gets invested in 30% government designated bonds; at the pension fund the benefactor pays lower management fees, the costs of the disability and survivors’ insurance are lower, etc.
For these reasons, after the Mandatory Pension Agreement was signed the Histadrut took another step to benefit these workers, who are generally unorganized and don’t have much influence. The pension department held a tender and selected six pension funds that agreed to provide recipients even better terms, i.e. especially low management fees.

 

If today in many ways pension funds are a better way to save than senior employees’ insurance, how do insurance companies continue to sell senior employee’s insurance?
Today the relative advantage of senior employees’ insurance, which offers a track that allows you to withdraw accumulated funds as a lump sum, has become obscured as a result of the Amendment 3 to the pension fund law, which requires minimal payment withdrawals in any case. To present any advantage over the pension funds, today most senior employees’ insurance funds provide a payment guarantee for retirement age at a predetermined amount. There are employees who, despite the costs of senior employees’ insurance, prefer, because of their age for example, senior employees’ insurance with a payment guarantee. A pension fund can’t offer this kind of guarantee.

 

This type of guarantee involves a risk that the insurance company has to factor into the premium.
That’s correct. The recipient winds up paying the insurance company quite a bit for this because there’s a risk involved in setting a payment amount so many years in advance.
But in my opinion the capital market will not enable them to sell a product like this for long because of the risk factor. It’s a big, long-term commitment for an insurance company to undertake. And it’s a dangerous commitment because it only matures 30 or 40 years down the road. It might still be made possible through certain limitations, e.g. to people over the age of 50, which would shorten the length of the commitment to fewer years. All in all, there’s no insurance product like it in the world.

 

But this seems to be a relatively peripheral benefit that points to the fact insurance companies are making a particularly creative efforts to save a product called senior employees’ insurance.
It seems that despite these efforts there’s a constant trickle of insurance holders toward pension funds. The insurance companies must have seen what was taking place and all of them rushed to purchase a pension fund, thereby exchanging one source of income for another.
I assume it was also convenient for the capital market commissioner, because by approving this kind of step he also helped maintain the stability of the insurance companies since there are insurance companies for which the senior employees’ insurance has constituted a substantial portion of their earnings.
Indeed. Senior employees’ insurance still commands a large segment, but in recent years there has been a trickle of people switching to pension funds, particularly among low-wage savers or the first level of savings among high-wage workers.
Regarding the conflict of interests, you’re definitely right. The new pension funds are owned by insurance companies that also sell senior employees’ insurance. In meetings leading up to the signing of the Mandatory Pension Agreement we really did see a clash of interests between senior employees’ insurance and pension funds, because the Histadrut’s demand was that the default option in terms of the employer’s obligation be a new, comprehensive pension fund and not senior employees’ insurance. That was a significant factor, because when there’s a default option it applies to a large mass of savers.

 

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It’s worthwhile for the employer to ensure that all of his employees are insured through a pension fund because it creates less work for him in the monthly process of transferring the payments. It also places him in a better position for bargaining with the pension fund. Therefore he can pressure the employee to choose the pension fund most convenient for him, the employer.
That’s true in principle, but in terms of numbers today it’s not such a big nuisance for the employer to transfer funds to more than one insurer. I hope that when you say “a better bargaining position” you mean bargaining to try to improve the terms for the employees insured through a pension fund, which is a very worthy and legitimate thing.
It’s important to make clear that today the employer is not allowed to accept any benefit from the pension fund or the insurance company.
In practice I don’t see many attempts by the employers to pressure employees. It’s not worth it for the employer to get involved in that. First of all he’s not allowed to get any benefit from the insurance company and therefore employers are very careful not to influence employees to choose a certain kind of insurance.
If the matter is in the employer’s hands, as long as the employee does not choose otherwise or the default option is set by the workers’ organization, the employer provides the employee whichever pension fund is convenient for him, the employer, to work with. but if the employee asks to be insured through a different framework the employer cannot stand in his way, but must transfer him without any problem.

 

It should be noted that service providers permanently employed in household work, such as gardeners, housekeepers or nursemaids, are entitled to pension contributions. The problem is that pension funds are not eager to deal with them. The trouble isn’t worth the profit. What should somebody who employs these services do in order to avoid violating the law?
He should try hard and if he persists he might be able to find a fund that will be willing to insure this kind of worker. The [pension] funds’ opposition is not singular and unyielding. In my opinion, every case should be considered independently. In any event, if this sort of employer doesn’t succeed with the pension funds he can always contribute funds to a provident fund. With the provident funds this problem doesn’t exist. They take anyone.

 

And what if this service provider is uninterested in pension insurance (since it would mean contributing his share, thereby reducing his income)?
The employer is required to contribute these sums and deduct the worker’s share from his salary, just as he deducts income taxes – otherwise he’s violating the law. If there’s no choice and the worker refuses to cooperate but the employer still wants to use his services, the employer must also contribute the worker’s share. It’s like the obligation to pay into the National Insurance Institute. And the amounts of money involved are not prohibitive.

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