Jobnet’s previous two homepage articles dealt with mandatory pensions, providing an overview of the Israeli pension market. The present article assesses the considerations to weigh when choosing a pension plan to match the employee’s needs, and how to go about making the selection. We spoke about these matters with Yaakov Zlotnik, a seasoned retirement consultant.
Today it’s generally assumed more advisable for an employee to save through a pension fund than through senior employees’ insurance or provident funds. Why is this?
The reform in the capital market created a situation in which pension insurance includes three components: old-age payments, disability insurance and survivors’ benefits (in the event the employee passes away).
Provident funds only provide old-age payments, so generally this option is not worthwhile. At the same price you can get more with a pension fund, which includes insurance coverage as well.
Then what justifies the existence of provident funds from the salaried employee’s perspective? [This article focuses on salaried employees, but it should also be kept in mind that provident funds serve as an important pension savings track for self-employed workers.]
They are justifiable as an additional savings layer. If an employee with high income wants to put aside for his pension amounts that exceed the ceiling set for him in the framework of the pension fund, provident funds allow him to put aside this money in order to increase savings for retirement age (whether as capital savings, i.e. a one-time withdrawal, or payment savings, i.e. receiving a monthly payment).
If you have to make a choice it should be between pension funds and senior employees’ insurance, since they also allow you to receive the three components of insurance.
Pension funds provide much better savings terms, especially when it comes to the management fees paid into them out of the balance.
Therefore senior employees’ insurance can also be used as another layer of savings, including supplementing survivors’ insurance and disability insurance. In certain cases senior employees’ insurance policies also know how to provide flexibility that the pension funds cannot provide.
Can you give an example of this flexibility?
For instance, in the event of the pension holder’s death the money that has accrued in the pension fund will go only to his survivors, while with senior employees’ insurance the policyholder can determine who the beneficiaries will be, not necessarily his surviving family members. So in this case it offers flexibility for those who need it.
But as we said, all this is relevant primarily for those who have relatively high income, meaning for those who earn up to NIS 15,000 [$4,100] in monthly gross income [which accounts for 90% of the population] pension funds are the best way to save. Employees who earn more can consider the other insurers regarding contributions beyond this amount, based on their needs.
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How do you choose a pension fund?
We’ll take the case of an employee entering the workforce for the first time. There are a lot of pension funds and he wants to know what the difference is between them. He must assess several variables. The first is of course the financial factor – the fund’s performance over time, i.e. the profits it has yielded and the fluctuations in its results. In today’s world the level of the pension at retirement age is determined according to the total amount the funds have generated during the years of savings.
But that creates a well-known problem: its past performance does not necessarily reflect its future performance, certainly not over a long period of time, and here we’re talking about long-range savings in the most salient sense – savings for old age.
Yes, but still if you assess the pension fund’s performance you’ll find that certain funds keep appearing in the top 20 percentile over the course of several years. On the other hand there are funds that languish for many years. They don’t manage to pick up.
Today it’s easy to assess this. The Finance Ministry website has up-to-date comparative data on the performance of all of the funds.
What does this employee have to evaluate besides financial yields?
Today there’s another important component, which unfortunately many people don’t pay enough attention to: the level of service the fund provides its customers.
What does that mean? Why is this important nowadays?
In the past the employee had no control over his pension, but today he is the master of his own destiny. Not just in choosing the fund, but also the insurance plan right for him within the fund. So today a substantial part of providing decent service is the fund’s willingness and ability to offer the insurance holder a plan that’s right for his needs.
Can you give us an example?
Let’s take two policyholders in their 30s. One is single and the other is married and has four children. Obviously their insurance needs differ. For instance, the single person doesn’t need survivors’ insurance, while a family man definitely does.
A 30-year-old single man came to me for a consultation. In the annual report he received I saw that he’s eligible for survivors’ benefits. Why should he be paying over NIS 100 a month for insurance he has no need for? I suggested he report to the fund that he’s single. That way, as long as he remains single, these costs will go toward his old-age pension, instead of going down the drain.
A pension holder is entitled to expect the fund to help him maximize his insurance and adjust it to his needs. This isn’t a one-time service, because the pension holder’s needs change. The single person, for instance, gets married and has children.
Can you give us another example of good service?
A pension holder wants to find out if he can increase his monthly payment into the pension fund and what that would mean. Many pension holders don’t know they can increase their monthly contributions from 5.5% to 7%. [By increasing his contribution, the employee also receives a tax benefit. See Part I of “Mandatory Pensions.”]
Why would they opt to do that?
Let’s assume a 35-year-old pension holder asks the pension fund for a forecast. He wants to know the amount of the monthly payment he can expect to receive when he reaches retirement. Upon receiving the data he discovers the amount is less than he’d like to live on, so in order to increase that amount he may want to raise the monthly contributions set aside for savings.
Then why can’t you increase the amount beyond 7%?
Income tax regulations allow the saver to receive tax credit up to this amount. It’s possible to set aside larger amounts if you want, but without the tax benefit.
How does that tie in with the question regarding service?
There’s someone there to conduct all these dialogues with. It’s not self-understood that a pension holder receives this kind of service. There are pension funds where the personnel come to the pension holder at his workplace, advise him regarding how to choose the right plan for him, sit down with him and his wife (pension savings is based on the family, not the individual), and evaluate the level of the pension in light of the family income level and the insurance coverage the family already has [to avoid unnecessary redundancy]. Not every fund is able to provide this level of service.
Another example: When there are regulatory changes the fund has the sense to send a letter out to its members offering them an opportunity to contact the fund to assess how the regulatory changes affect them.
How does a pension holder know in advance which fund gives better service?
He should do a market survey and consult with a pension consultant.
I’m consulting with you. Which are those funds?
I don’t want to mention them by name. It would be unethical because there are funds that I haven’t been exposed to yet and maybe the service they provide is just as good as at other companies. But to give you an answer, I can say that the large funds have taken the issue of service seriously and know how to do it well. The competition is definitely to the pension holders’ benefit.
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Which clients are most likely to hire your services? Private individuals or employers who want you to provide consulting services for their employees?
Both. Private individuals come to me independent of their workplace, and I also provide consulting services for workplaces. Corporate clients generally come to me through a joint initiative between the employers and the employee committees, which want to choose a pension fund and plans suitable for the company’s staff.
As a general rule it’s important to consult with a professional anytime there is a raise or decrease in salary, and when changing jobs.
How can the person hiring your services rest assured that you and other pension consultants don’t have an interest in recommending certain funds? It used to be that such claims were commonplace.
In the past it really wasn’t regulated and there were gray areas. There was no need to have a pension consultant’s license and consultants had working relations with pension funds. Today the rules are clear: a pension consultant has a license and he cannot have any interest with any pension fund or he has to have an equal interest with all of them. I, for example, am not compensated in any way by any pension fund.
How do you choose a company pension plan?
The employers and the workers’ committees determine the parameters they want the pension fund to meet and we assess the funds, conduct negotiations and decide which is best suited to insure them.
But we said that today every employee can choose the fund and the plan that’s right for him, so how can a given workplace offer the entire staff a single pension plan?
Buying a group plan brings the size advantage to the fore, like in every purchasing process. This way the employees have stronger negotiating power when dealing with the pension funds. When an organization brings a large number of insured employees the pension fund will be willing to provide a range of benefits, e.g. lower management fees (which increases the amount of the pension the employee accrues) and/or an especially high level of service. Examples of higher standards of service: once a year a fund representative has to hold an individual meeting with every employee to match the pension terms based on changes in family status. Another example: the pension fund has to hold an annual gathering for the employees to present regulatory changes that took place in the past year and their ramifications for the employees. An example of this kind of regulatory change is Amendment 3 to the Provident Fund Law, which went into effect January 1, 2008.
That means you create group power within which every worker can choose the plan right for him.
Correct. The employees receive information about what they receive from the fund as a result of the agreement signed between them and the pension fund and the employer and committees, and they can request a personalized account.
And what if an employee does not want to be insured by the fund the employer and the committees choose?
He’s entitled to switch to another fund, of course. But that is a real rarity because what reason would a worker have to forfeit the advantages he gains as a part of a large group?
You keep mentioning workers’ committees and management. Are there also other organizations you provide consulting to that don’t have a workers’ committee?
At most of the organizations where I’ve provided my services, I was hired jointly by the committee and the management. As a rule employees have more confidence when the selection of the fund is done in collaboration with the committees, which are their representatives.
There is one organization that I advise that does not have a workers’ committee. At this organization I made a point of being the one who sent the information to the employees as an authorized pension consultant. Of course I noted that it’s possible to meet with me in order to set up personalized accounts, and a number of such meetings did in fact take place.
In my opinion most of the employees don’t even know they can choose a pension plan suited to their own needs. Most of them think it’s a uniform, set framework.
You’re right. That’s a big problem and it’s good that you’re writing about it. Employees putting away [pension] money should be made aware that they have options to choose from.
With all of their good intentions to provide good service the pension funds might have an interest in perpetuating a lack of awareness, because if every employee wants a personalized account it will rob them of a whole lot of energy.
Do all of these options for changes and personalized accounts apply to those who are insured by longstanding pension funds as well?
[A new pension fund member cannot join the longstanding pension funds, which are now closed and only involved in giving payments to those who are eligible. The reform in the capital market created the new funds and worsened the savings terms for the old pension funds. Nevertheless in many cases the savings terms at the longstanding funds is still considered better than the terms people insured through the new funds are entitled to. The various benefits members of the old funds were entitled to was one of the main reasons for the enormous actuarial deficit created in them. This deficit is what set the reform into motion.]
Since the terms are better than with the new funds, those who are insured under these plans should enjoy what they have and keep quiet?
Not exactly, because with those funds as well there are absurd situations that are not found at the new funds. I’ll give you two examples: At a new pension fund, even when the pension holder reaches retirement age, he’s asked which payment plan he wants to receive based on his circumstances, i.e. whether he’s married or not. At the veteran fund there is no such option.
Another example: At the new fund the pension holder is able to choose a track so that if he passes away his heirs will receive the money left in his account. On the other hand, with the old fund if the pension holder leaves work and passes away two months later and doesn’t have a wife [meaning no eligibility for survivors’ payments has been created because there are no survivors (assuming his children, if he has children, are already adults)], all of the money he saved over the years goes down the drain.
But that’s what the regulations for the longstanding funds determined.
They can be changed.
But they’re not being changed.
Because the deficit created by the longstanding funds has to be funded, and this is one of the ways to accomplish that.
You said that, not me.
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What else is important in choosing a pension fund, besides financial strength and financial performances and the level of service you discussed earlier?
We also talked about management fees, and we could also add in the fund regulations and the demographic balance [i.e. the composition of members] of the fund.
Are there significant differences in the demographic balance at the new funds?
Some of the new funds are a continuation of the veteran funds, so there are differences that emerged over the years that trickled down to them, too. For example, it used to be that many blue-collar workers were insured at Mivtachim, and today as well many of them are at the New Mivtachim. On the other hand Makefet belonged to the Clerks’ Union and therefore it had a relatively larger number of white-collar workers. It’s the same at the New Makefet fund.
How important is the demographic balance as a factor in choosing a pension fund?
Generally speaking it’s a component that has an effect on the fund’s total strength. After all, the new funds are also mutual funds. That means if in a given year fund members had more incidents of death and handicaps than anticipated it affects the financial performances, which in turn affects all of the members. During that year everyone’s earnings will be reduced. If 20 members were killed during the Lebanon War and the fund pays for every incident of death, including war, then the rights of the other members will be reduced.
But it doesn’t work in only one direction. If there’s an actuarial surplus it gets distributed to the other members.
And does all this have a real effect on the fund’s stability?
I agree that the demographic structure doesn’t have to be a central factor in choosing a pension fund. It’s an additional element. That means if there are two fund that are alike in every other aspect this parameter could be used to decide which to choose.
So you’re declaring the New Makefet is the best pension fund. It’s large and stable, it has good service and it has the “right” combination of white-collar workers.
I disagree, because on the other hand you could claim the standards of service at the New Makefet are less than at the New Mivtachim. [The latter is the only pension fund with branches around the country, which can affect the level of service it provides members since many of them want to speak with a service representative fact-to-face.] So in any case the pension holder has to decide what his priorities are. The consultant’s task is to help him weigh all of the parameters in accordance with his needs before reaching a decision.
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How much does it cost for a private individual to use your services?
Pension consultants charge NIS 700-800 + VAT for a one-time meeting.
How many pension consultants are currently working in Israel.
I don’t know. Many of them work at banks.
If there are consultants at the banks and customers can use the service for free, why would someone come to you for private consulting?
It does cost money at the banks. The banks receive from the fund the employee signs up for 0.25% of his accrued savings.
But they receive money from the fund, not from the pension holder.
Who do you think the fund takes the money from? The consultant has him sign a form to receive ongoing pension consulting and based on this the bank receives his fee.
I don’t provide ongoing pension consulting, but only at points in time that are relevant for the pension holder.
The fund charges 0.5% for management fees anyway, and gives the bank half of that amount. That means in any case the pension holder is paying management fees; if he goes to you rather than to the bank’s consultant he has another cost – your fee.
I bargain with the pension fund over the level of management fees the worker pays. My ability to negotiate with the fund makes it possible to transfer those management fees [the 0.25% charge paid to the bank if the pension consultant is a bank clerk] to the pension holder.
From what you’re saying it sounds like if you succeed in helping the pension holder cut the management fees in half the employee saves a substantial amount, which is already enough to justify paying your fee. This kind of arrangement isn’t available through the bank.
That’s right. And another important thing is that another reform is scheduled to take effect soon, which will allow monetary transfers from capital plans to payment plans. This is a complex issue that requires thought and advance consulting before reaching a decision.