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סנטר נכסים בזק בנלאומי AC נכסים TMH

Mandatory Pension – Everyone’s Entitled (Part II) / By Shuki Stauber

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.]


Atty. Dorit Tene-Perchik, vice president of strategic development
 for long-term savings at the new Mivtachim Pension Fund

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.

*           *            *

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.


For the Hebrew Article  

 
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