The Pension Insurance Market in Israel - Introduction
    1. Basic terms
    2. Principles of subsidised pension funds
    3. Things to bear in mind when choosing a pension fund
    4. Actuarial Committee for actuarial assumptions for pension funds
    5. Data on the development of the new pension funds in Israel

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The Pension Insurance Market in Israel

In recent years, the pension insurance market in Israel has taken on great significance in the minds of consumers. The general public is showing a need for pension insurance, which is long-term savings combined with insurance, rather than long-term savings alone, without insurance of any kind.

One of the basic conditions for enhancing the market is the consumer's knowledge and understanding of the range of existing types of insurance and their suitability for his personal needs.

Only rarely does the consumer define his needs for the short, medium and long term. Usually he relies on inexpert advice and decides on a kind of insurance without shopping around. In making a decision about pension insurance, the insured should ideally check the extent of risk, and consider his personal and family situation as well as his preferences.

The pension insurance should take into account the overall needs of the person during his life, and in particular after his retirement.

We emphasize that in many cases it is the employer or the workers committee that does the pension planning, often by means of collective agreements. But even with a collective agreement , it should be left to the employee to decide whether to deviate from such an arrangement because of his personal situation.

The first chapter will discuss the function of the pension funds in the pension insurance markets, will define terms and explain how the various types of pension fund work. This will provide the insured with tools for the correct planning of his pension insurance through the pension funds.

1. Basic Terms in Pensions

Wage profile - Denotes the rate of rise in the employee's wages from one year to the next, throughout the years of his employment. The wage profile is personal, and depends on the employee's field of occupation, his qualifications, education and other factors.

Mortality rate - The mortality rate reflects the ratio of deaths to the total population in a given period.

Premiums - The payment made by the insured for insurance cover, which means: payment for risks of disability, death etc. The calculation of premiums is affected by several assumptions: risk of death, risk of disability, interest rates and load for covering the insurer's expenses.

Member - Whoever pays premiums to a pension fund and is a member of the fund. There are three types of members in a pension fund: Active member: one who makes regular payments to a pension fund; Frozen member: an active member who has ceased to make regular payment to the fund; Pensioner member: one who receives an old-age pension or disability allowance from the fund.

Actuarial balance sheet - As with an accounting balance sheet, a pension fund also presents assets and liabilities. The liabilities side of an actuarial balance sheet - the rights of members - is calculated in light of assumptions as to the capitalization interest, the life expectancy of members and their successors, the level of benefit payments, the yield on assets, the scale of accumulation of rights, the management expenses of the funds, ages of joining the fund, leaving members, etc.

Actuarial balance - Pension fund have cumulative obligations, which are the pension rights of members according to the premiums paid into the fund. In this way, two main components are created in the balance sheet of the fund, as in any balance sheet: assets versus liabilities. The assets are therefore used to cover the liabilities. If the assets exceed the liabilities in value then the fund has an actuarial surplus. If the liabilities exceed the assets in value then the fund has an actuarial deficit. Actuarial balance equalizes the value of the assets with the size of the liabilities by reducing or increasing the liabilities. Actuarial deficits or surpluses can be caused by volatility in the percentages of yield achieved by the funds on its free investments, or alternatively, can be caused by incompatibility between the initial actuarial assumptions and the actual data (for example, the actual number of disabled persons exceeds their number as foreseen in actuarial assumptions).

Reserves - Funds which are not for current use but are designated for a specific purpose, such as payment of pensions in the future, special risks, etc.

Fund investments - In order to meet its obligations, the fund invests the money it receives in the form of contributions from members. The new pension funds invest 70% of this money in designated bonds, which guarantee an effective annual yield of 5.05%. The other 30% are invested in the free market, subject to the investment rules of the Income Tax Regulations.

Contributions / Provisions - The payments made by the employer and the worker according to the worker's wages. The accepted mix for contributions is 5.5% from the worker and 12% from the employer (which includes 6% for severance pay).

Relevant legislation - Pension funds operate within the purview of the following legislation:

1. The Income Tax Ordinance (New Version).

2. The provisions of the Law for Supervision of Insurance Business , 5741-1981.

3. The Income Tax Regulations (Rules for Approval of Provident Fund Management), 5724-1964.

4. Directives of the Supervisor of the Capital Market, Insurance and Savings for the Management of Veteran Pension Funds, from 27 March, 1997 ( see Appendix 2).

5. Directives of the Supervisor of the Capital Market, Insurance and Savings for the Establishment and Management of New Pension Funds, from 8 January, 1997 ( see Appendix 3).

6. Circulars of the Supervisor of the Capital Market, Insurance and Savings.

Pension prepayments - The costing of provisions to the fund is made by means of pension percentages. The percentage varies according to the age of the member, his personal situation, the aggregate average interest rate on the fund's investments, and management fees. The product of the wage insured by a pension percentage - the pension factor - is the monthly pension to which the member will be entitled from age 65 onwards. A change in the percentage affects the eventual pension, depending on the age and sex of the pensioner. Thus, an insured who started the insurance at age 30 receives a higher pension percentage than an insured who insured himself from the age of 40. The percentages appearing in the tables are annual factors, and should be divided by 12 to obtain the monthly factor.

The insured monthly wage - The part of the monthly salary for which contributions were made to the fund.

Determining wage - For disability allowance and survivor's pension purposes, a determining wage is used as the basis for calculation of the pension due. The determining wage is usually an average of the insured wages in the twelve months preceding the entitling event.

Insured wage limit - In a subsidised fund, the maximum insured monthly wage will not exceed twice the national average wage. The permitted provision will be calculated each month.

Cumulative pension portion - A pension portion is calculated for each of the months of membership in a fund, equal to the insured monthly wage in any month, multiplied by the monthly pension factor appropriate to the age ands ex of the member. Each pension portion is updated according to the Consumer Price Index. A pension portion is the monthly pension which the member will receive starting from retirement age. An old-age pension at retirement age will be the amount of the updated monthly pension portions accumulated to the member's credit in the pension fund up to the date of his retirement from work.

Cumulative pension portions - Equal to the sum of the updated monthly pension portions accumulated to the member's credit in the fund from the date he joined the fund to a given month.

Future pension portions - Total future pension portions which the member would have accumulated had he not stopped working, based on his determining wage at the time of occurrence of the insurance event. The future pension portion is the product of the determining wage in the future pension factors according to the prepayments table according to the age and sex of the member. The portions are used for calculating the disability allowance and the member's survivor pension.

Pension capitalization - Capitalization of 25% of the pension which will be due to he pensioner to his survivors, for a period of up to five years, to enable the retiree to receive a one-time grant for his needs, on account of the pension.

During the capitalization period (up to five years), the member will receive a monthly pension reduced by the rate of the conversion. At the end of the capitalization period the fund will pay the pensioner who capitalized the whole of the pension to which he would have been entitled, according to the regulations, if not for the capitalization.

System of actuarial assumptions - Assumptions concerning mortality probabilities, disability probabilities, expected interest rate on the fund's investments, etc. Actuarial assumptions are an important and central aspect in the fund's calculations, and serve as a basis for future expectations in respect of the fund's liabilities by which costing is calculated. It is important to bear in mind that there can certainly be a situation in which the actuarial assumptions do not fit reality and need to be changed, together with the pension factors and pension rights.

Entitling event - An event entitling the member to payments from the pension fund, such as:

Old age pension: The date on which the member reached retirement age;

Disability allowance: From the date of the onset of the disability, at a rate determined by the fund's medical committee;

Survivor's pension: On the death of the member.

2. Principles of the Subsidised Pension Funds (from January 1995)

Any person, whether salaried or self-employed, can join a pension fund by virtue of an agreement with a corporation or body or a collective agreement, or can join on a personal basis, unlike the situation in the veteran pension funds, where joining was on the basis of collective agreements.

In a subsidised fund, the insured salary will not exceed twice the national average wage. Each calendar year the calculation will be made anew on that basis, in nominal values, as explained in Box No. 1

Box No. 1

Instructions for calculating the ceiling of "twice the national average wage" Definitions: 1. "national average wage" - the average wage according to Section 2 of the National Insurance Law in the matter of retirement age and insurance payments, as may be from time to time. 2. "the maximum amount for a given month" - twice the national average wage in a given month. 3. "monthly salary" - the entire salary of the worker as reported to the income tax authority. 4. "determining monthly salary" - that part of the monthly salary for which contributions were made to a pension fund. 5. "insured monthly salary" - that part of the determining monthly salary which was permitted for provision to a pension fund. How the ceiling calculation is made: 1. Each month, a calculation will be made of the difference between the maximum amount for a given month and the determining monthly salary. If the determining monthly salary is higher than the maximum amount, the difference will be calculated between the total maximum amounts for each of the months from the beginning of the calendar year to the month preceding the current month and the total insured monthly salaries for the same period ("the differential"). 2. If the differential is positive, an additional contribution will be permitted, over and above the maximum amount, up to the amount of the differential. 3. If the differential is negative or there is no differential, no additional contribution will be permitted. 4. The calculation will be maed anew every calendar year. 5. All of the above calculations will be made in nominal values. These instructions are applicable from 1 January, 1995.

A subsidised fund is not allowed to accept one-time deposits. The commitment will be for continuous savings for a pension. For salaried workers - by a regular monthly deduction from the salary, and for the self-employed - at least once every quarter.

The company which manages a pension fund can deduct only management fees from the pension fund under its management, and these will be collected from the contributions and the balance of the frozen rights.

The management fees will not exceed 8% of the current contributions. The management company can collect an additional one quarter of one percent as management fees from the value of the accrued rights of members whose rights are frozen, starting from the end of one year after they have ceased transferring payments to the fund.

In a yielding fund (see definition below) which chooses not to maintain an actuarial reserve of 0.75% (see below), the management fee ceiling will be 7.25% (rather than 8%).

From the monthly management fee charged to the fund, a sum equal to 1.25% of the contributions will be transferred to a special reserve for covering expenses entailed in the payment of allowances to entitled persons in the future.

In addition, a sum equal to 0.75% of the contributions will be transferred to an actuarial reserve, which will be managed in the pension fund under a separate account, outside the capital of the pension fund.

A full and detailed actuarial balance sheet will be drawn up for the pension fund every year, as at the date of the financial report. The report will record the cumulative actuarial surplus or deficit. The balance sheet will be made in accordance with assumptions made by the fund's actuary. An actuarial deficit can be covered from the special risks reserve, by reducing accrued rights or future rights. The actuarial surplus can be sued to increase the rights of members.

The risks which are covered in the comprehensive pension plan will be all of these:

a. Old age risks - Guarantee of a pension for life after the insured's retirement. Retirement will be at the accepted retirement age in Israel (today: 65 for men and 60-65 for women). Early retirement at 60 will be permitted, provided that the pension entitlement is according to actuarial calculation.

b. Risk of death - survivor's pension

The survivor's pension will be paid in the event of the death of an active member or a pensioner member. If the pension fund offered one comprehensive pension plan, the pension to the spouse will be at least 50% of the expected entitlement for the insured's old-age pension, and the allowance for orphans (one or more) will be at least 25% of the same expected entitlement. Total pensions and allowances that will be paid to each of the survivors will not exceed 100% of the insured salary.

If the pension fund offered additional (one or more) comprehensive pension plans, then in these plans the pension for the spouse will be at least 30% of the expected pension entitlement of the insured and the allowance for orphans (one or more) will be at least 15% of that expected entitlement. In the additional plans also, the total of all the pensions and allowances paid to each of the survivors will not exceed 100% of the insured salary.

In the case of a fund member who at retirement age has no spouse and no children under the age of 21, the fund can permit him to cease being insured for risk of death, against an increase in the old-age pension.

c. Disability risks - In case of loss of earning capacity before retirement, a partial allowance will be given to the insured. The allowance in each of the plans described above will be at least 40% of the expected old-age pension, and will not exceed 75% of the insured salary.

A fund management company can operate two kinds of fund - "rights" and "yield" - where each of the funds can be subsidised or not subsidised. In fact, there is no material difference between the types of fund: in both cases the payments to entitled persons will be made as a monthly allowance.

1. "Rights Fund" - A fund which guarantees the member defined rights in respect of any cumulative period according to an graded accumulation scale, as percentages of the salary insured in the fund, and in which the rights will not change except for actuarial balance purposes.

2. "Yield Fund" - A fund which guarantees the member rights which are derived from the funds accumulated in his personal account, and which vary currently or periodically according to the development of the financial accrual.

Box No. 2

The Difference between a Rights Fund and a Yield Fund Both a rights fund and a yield fund operate on the basis of actuarial balance. The difference between them is in how they operate. A yield fund balances every year, members' accounts are managed with the financial accrual. Any change in the yield is immediately reflected in the financial accrual of members. Upon the occurrence of an entitling event, the member's pension is calculated at full actuarial balance and based on the accrual. On the other hand, a rights fund can divide fluctuations in yield over time, since such funds are not obligated to actuarial balance every year. Thus, there could be a situation where the rights fund does not balance, since the change in yield was temporary and over time the fund is balanced with the existing assumptions. In a yield fund, money is managed on the basis of monetary accrual, where the fund does not "guarantee" the amount of the pension as the rights fund does. The assumptions used when calculating the pension in a yield fund will be the same as those for the rights fund. In a yield fund, the changes in yield on accrual are reflected each year; the rights fund is not required to balance each year, on the assumption that the changes will offset each other over time. In both cases the pension obtained is the same. The difference is thus reflected in the fact that the rights fund can offset changes over time, while the yield fund cannot do so. However, if the changes are permanent, the rights fund is required to make a change in the rights for balancing the fund.

Below are the types of allowances and payments that a pension fund can guarantee its members:

1. Pension for a member who reaches entitlement age for an old-age pension.

2. Partial capitalization of the old-age pension.

3. Pension for the widow of a person entitled to a pension.

4. Pension for the orphan of a person entitled to a pension.

5. Pension for the widow of a member who died before reaching entitlement age for an old-age pension.

6. Pension for the orphans of a member who died before reaching entitlement age for an old-age pension.

7. Pension for the parents of the spouse of a member who died before reaching entitlement age for an old-age pension.

8. Temporary or regular pension for a member with full disability.

9. Temporary or regular pension for a member with partial disability.

10. Pension for the survivors of a member who received a disability pension.

Below are some pension plans which the fund can allow its members so as to adapt them to the needs of the various members of the fund:

1. Pension plans:

Members of the new pension funds are entitled to an designated bond insured in a comprehensive pension. The risks covered by the comprehensive pension plan are old age, survivors and disability.

The rates of the risks covered in the comprehensive pension can be changed, within limits set in directives of the Supervisor of New Pension Funds. For example, a member who wishes higher insurance cover for old age, can reduce the insurance cover for survivors or disability and receive a higher old age pension.

Alternatively, a member who wishes higher insurance cover for disability can obtain it at the expense of a lower survivors' pension.

A comprehensive pension plan encompasses all of the above components, and cannot be offered with cover for only some of the risks. A pension plan for some of the risks can be acquired in funds which are not entitled to designated bonds, provided that old age is one of the components of the plan.

Below are examples of some of the plans in the new pension plans:

a. Retirement at age 60.

This plan is designed for members who wish to take early retirement at age 60.

b. Retirement at 65.

c. Enhanced pension plan.

This plan is designed for members who wish to receive a higher old age pension at the expense of a smaller disability allowance or alternatively, at the expense of a smaller survivors' pension.

d. Higher disability allowance plan, with standard survivors' pension and reduced old age pension.

This plan is designed for members who wish to have disability insurance which is higher than the cover in the regular plan.

e. Higher old age pension plan with standard disability allowance and reduced survivors' pension.

This plan is designed for members who wish to have a larger old age pension at the expense of a standard survivors' pension.

f. Larger survivors' pension plan with standard disability allowance and reduced old age pension, or alternatively, smaller disability allowance and standard old age pension.

The directives of the Supervisor for the regulation and management of new pensions funds state as follows:

1. The minimum rate for payment in respect of disability will be 40% of the expected old age pension. In other words, a member who chooses the enhanced pension with survivors' pension can reduce the insurance cover for disability to 40% of the expected old age pension, in accordance with the constitution of the pension fund to which he belongs.
2. The maximum rate of insurance cover for disability will be 75% of the insured wage. In other words, a member who chooses a plan offering a pension with enhanced disability allowance will be able to receive, in case of disability, up to 75% of the insured wage, in accordance with the constitution of the pension fund to which he belongs.
3. The minimum rate for a survivors' pension will be 50% of the expected entitlement to an old age pension in respect of a spouse and 25% of the expected entitlement to an old age pension in respect of each orphan. In other words, a member interested in this plan can elect to reduce the rate of the survivors' pension to the minimum permitted, and receive a higher old age pension, in accordance with the constitution of the pension fund to which he belongs.


In all retirement plans, the member will be insured in a comprehensive pension plan: old age, disability, survivors.

2. Plans for ensuring pension payments for a limited period:

In case of the death of a pensioner before he has been paid 60/120/180 full monthly pensions, the fund will pay the entitled survivors proportionally incremented pension amounts so that the total of all payments to all the survivors will equal the amount the pensioner received prior to his death, until completion of the 60/120/180 payments. Once those payments have been made, the survivors' pension will be fixed according to the plan retirement which the pensioner had chosen.

Calculation of an old age pension:

"Rights" fund - An accumulation scale will be set on an actuarial basis and so that at any time, the accrued rights in respect of old age can be calculated, irrespective of future parameters (except for CPI increments).

Calculation of the old age pension will be according to the sum of the products of the annual monthly rate of rights (as per the scale) in the insured wage of that period, where each such product is linked to the CPI from the relevant period to the date of retirement. Alternatively, another, more moderate scale can be set, and the product of the rate of rights multiplied by the insured wage can also be reassessed in addition to linkage, at the rate of insured yield as determined by the fund, all provided that the scale ensures balance of the fund when taking into account the other parameters.

"Yield" fund - The old age pension (and accordingly also the survivors' pension) will be calculated according to translation of the pension accrual as per actuarial factors. The fund will be obligated to show the member at any time, the table of rights to which he can expect to be entitled according to the assumptions upon which the fund operates.

Where a pension has been fixed for an entitled person, it will not change as a result of changes in the rate of yield in a period of less than six months.

Frozen rights - Members whose rights are frozen and in respect of which management fees are deducted, will be entitled to rights as defined in the fund's constitution, subject to the adjustment required in the accrued rights owing to deduction of the management fees.

The fund will reimburse those who "break" or withdraw money from a pension fund according to the redemption values fixed in the Income Tax Regulations, as shown in Box 3.

Box No. 3



Formula for Redemption Values The withdrawal of money from a pension fund, not by way of pension, shall be made according to a redemption values formula which is based on calculation of total payments transferred for the member to the fund, less management fees and the cost of the life risks against which the member is insured, plus linkage differentials or linkage differentials and interest as shown below, all in respect of the period from the date he joined the fund to the date of withdrawing money from it: (1) If not more than five years have elapsed from the date he became a member of the fund - CPI-linkage differentials only. (2) If more than five years but not more than fifteen years have elapsed from the date he became a member of the fund -CPI-linkage differentials and linked interest at 1.5% p.a. (3) If more than fifteen years have elapsed from the date he became a member of the fund -CPI-linkage differentials and linked interest at 2% p.a.





The balance between redemption value and the accrued rights as calculated in the actuarial balance, will be transferred to the reserve for special risks referred to above, and in a yield fund - this balance will remain in the accrued capital of the fund in favour of the remaining members.

3. Things to Bear in Mind When Choosing a Pension Fund

As part of the reform of the capital market in general and of pension funds in particular, the pension funds market was opened up to competition. Today, the Capital Market Division encourages the trend in which an insured will be permitted to join whichever of the new pension fund he prefers. In the future, rules will be promulgated for the transition of members from one fund to another, so as to encourage and enable competition, which is the foundation stone in any business sector which seeks to succeed and to exist in its own right, where the competition primarily serves the consumer.

Below are some points which should be borne in mind in choosing the most suitable pension fund:

Price - The first, clearest and simplest indicator when making a comparison of pension funds, is the amount the insured will receive upon the occurrence of the entitling event.

In other words, a comparison should be made between the premiums paid and the insurance cover given in the policy. The examination should be made carefully, having first understood the terms used and not confusing the amounts before and after taxes.

This will give some idea of the management fees collected, since if for the same insurance event the premium is different, then the various companies and funds should be compared to ascertain the reason for the different amounts that will be paid.

We emphasize that this is a primary rule of thumb only, and the conclusions drawn from it are not sufficient to determine which fund is preferable.

Service - Since the management fees collected in pension funds is 8%, one of the most important aspects of competition for customers is the service the fund provides for its members. Service includes professionalism and courtesy in responding to insureds' enquiries, and supplying the member with reliable reports which provide full and up-to-date information on his situation in the fund. Also important are the standard of computerization of the fund, the extent of accessibility to branches, and the professional background of the managers and staff. The pension fund of a business entity must operate in accordance with professional and economic considerations, whence the importance of managerial professionalism - as in any business enterprise.

The Capital Market Division is currently preparing uniform procedures for reporting to members, which will obligate the funds to provide up-to-date information once a year relating to the amounts the member has accrued, showing details of the contributions made by the member and by his employer, and the yield achieved by the free investments of the fund, etc.

Yield - 30% of the funds are invested in the free market. Thus, a fund achieving a high yield on its investments will be able to offer its members higher pension rights.

Adjustment to members' personal needs - As a rule, the comprehensive pension plan should prove satisfactory for most of the needs of insureds in the new pension plans. However, there are differences between members owing to their personal and family situations and their needs. The member should therefore ascertain the extent of flexibility offered by the pension fund in its various plans (survivor-oriented or disability-oriented), and choose the fund most suited to his personal needs.

Advice - Because of the complexity of the subject and the changes which have occurred, professional advice should be sought. We emphasize, however, that the advice is sometimes tainted by conflict of interests and might not always be optimal for the customer. The prospective member should seek out an independent adviser whose primary concern is the customer.

The individual who bears the above points in mind and acts accordingly, will be able to choose the right pension fund for his needs.



4. Actuarial Committee and Actuarial Assumptions

Actuarial assumptions are a vital aspect of pension fund calculations, and it is therefore important that they be correct and in keeping with reality. Pension funds today are still using the 1974 mortality tables of the National Insurance Institute and the Swiss disability tables (EVK-90). These tables are out of date and require revision.

To examine this subject, an Actuarial Committee was set up by the Capital Market Division. The committee consists of outside actuaries, representatives of the pension funds and the Ministry of Finance Actuary. The job of the committee is to formulate up-to-date mortality and disability tables so that the actuarial assumptions used by the funds will correctly reflect the real situation. The committee examined the tables of the Central Bureau for Statistics and of the National Insurance Institute, and used data bases of the pension funds. Submitting its report to the Supervisor of the Capital Market, the principal conclusion of the committee was that the funds are using tables which do not reflect reality and which must be updated.

The updating of actuarial assumptions and the of various tables which are integral to them, are the result of the structure of the new pension funds and their manner of operation. As part of the duty of due diligence (proper disclosure), the insured public must be provided with accurate data.

The insured public must understand that the tables are dynamic and subject to a changing reality. It should be borne in mind, and we emphasize, that updating the tables is the duty of every insurance entity, including the insurance companies.

An agreement with a pension fund differs from an agreement with an insurance company. In a pension fund, the management company is entrusted with members' money. Thus, it has an obligation to report to its members on material changes in the actuarial assumptions. The Actuarial Committee is an attempt to give expression to that duty of due diligence and fiduciary duty of the pension fund managers to their members.

5. Data on the Development of the New Pension Funds

In 1997, the number of members in the new pension funds (including pensioners and frozen members) increased by 39% - from 191,592 members in 1996 to 266,185 in 1997, among them 34 pensioners and 42,778 frozen members.

The total accumulated capital in the new pension funds at the end of 1997 was NIS 1.9 billion, compared with NIS 0.9 billion in 1996, an increase of 11%.

Total receipts from members in 1996-97 amounted to approximately NIS 1.9 billion, and payments to members amounted to NIS 250 million.

These data indicate a positive development in the new funds.




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