New pension safety-net replaces designated gov't bonds

• Author: Eti Aflalo
• Published date: 02 October 2022
• Publication title: Globes (Rishon LeZion, Israel)

Up to now, the state has issued to the pension funds designated bonds giving a guaranteed return of 4.86% and linked to the CPI. These bonds were issued monthly, and 30% of the funds' assets were invested in them. This is the safety net that the state gave to savers, and it ensured that monthly pension payments would be stable

The cost of subsidizing this benefit, however, has grown. The main reason is the fact that the pension funds have become the exclusive savings instrument, and have grown rapidly, while the cost of raising public debt through instruments other than the designated bonds has fallen.

Under the reform now underway, the pension fund cash that was earmarked for the special bonds will be invested in the capital market. At the same time, the safety-net mechanism will be replaced by a new one guaranteeing pension savers an index-linked return of 5.15% on 30% of their pension savings.

How will it work? The funds will allocate 30% of their assets to be managed as determined by the Ministry of Finance, and the return will be measured. If, after five years, the annual return does not reach 5.15%, the fund will receive a top-up to this amount from the state. This mechanism will considerably reduce the state's commitment, in comparison with the designated bonds mechanism. A state-managed fund will be set up into which returns exceeding 5.15% achieved by the pension funds will be paid.

An accounting will take place on a rolling monthly basis. That is, on money invested in the capital market in October 2022, there will be an accounting in October 2027. On money invested in November 2022, an accounting will take place in November 2027, and so forth. At each accounting date, either top-up money will be...