Some introduction: Until the mid 90′s, Israeli pension plans were defined benefits plans, where one would pay into the pension plan based on his or her salary, and would receive an annuity (monthly amount received) upon retirement as well as a certain level of insurance. The amount of the monthly annuity was based on the amount of years paid into the pension and the last salary received by the employee (or in some cases, your average salary). Back then it was easy to choose a pension; one would compare the benefits of the plans and pick the one he or she felt best suited his or her needs.
In the mid 90′s the investment companies complained to the Israeli government about having to take responsibility for their own work and successfully lobbied for a defined contributions system, a system where the annuity one gets upon retirement is based on how much money is in the fund. Okay, now in English. The money I deposit into my pension fund is invested for me. When I begin to retire, the pension fund manager looks at how much is in my fund and based on that (and a few other factors) decides how much I get as an annuity (if you’re wondering, you can get some as a lump sum, but that just affects the amount you’ll get for an annuity afterwards.)
There are six types of Pension Plans
(1) – קרן פנסיה מקיפה חדשה – also called זכאיות
קרנות חדשות are the most common type of pension fund and will be the major focus of this series. קרנות חדשות are defined contributions plans that also include some level of life and disability insurance, earning them the label as a comprehensive (מקיפה) retirement plan.
These funds are entitled (זכאי) to invest up to in government subsidized bonds that pay a dividend of 4.86%. In the past, these bonds made up 30% of pension portfolios, but a recent reform ruled to allot them in accordance with age (which is logical since older investers need more stability), so that retirees will get 60%, people over 50 will get 30% and younger people can split what is left, but until 2027 will not be less than 25% and until 2038 will not be less than 15%
Due to the government subsidy included in the fund, workers may only invest up to 20.5% times twice the average wage into these funds each month. Any additional money set aside for retirement must be invested in one of the following funds.
(2) – קרן פנסיה כללית
קרנות כלליות pension funds have the option of life and disability insurance (but it is not mandatory like the חדשות) and are not entitled to government subsidized bonds. These are typically used by two (2) upper middle class and wealthy individuals who make more than twice the average wage and therefore cannot put all of their money into חדשות and (3) people who want to put their money in a fund by themselves from money they earn other than the regular money put into ther pension (ie from commissions, from previous years’s salaries).
(3) – ביטוח מנהלים
ביטוח מנהלים, manager’s insurance, is an alternative arrangement where money is put aside for a salaried worker’s pension in a direct contract with an insurance company. Practically, this means that there is more room for variety when it comes to insurance and the money can be invested in a different way than the other קרנות פנסיה.
To understand the primary appeal ביטוח מנהלים, one must understand its most important feature in the past, a fixed מקדם המרה. The מקדם המרה is the number by which the pension is divided in order to figure out an annuity. For example, if my pension has one million shekels and I have a מקדם המרה or 200, I’ll get an annuity of ₪ 5,000 a month. If it is 250, I’d get a pension of ₪ 4,000 a month. In a regular קרן פנסיה, the מקדם is set upon one’s entering retirement and is based on the life expectancy of the worker, his or her spouse and the interest rate. ביטוח מנהלים offered a fixed מקדם המרה where one did not have to worry about the rise in life expectancy. Unfortunately, in order to do this, many insurance agents used predatory marketing to convince people to pay five or six times the fee they would pay for a similar קרן פנסיה in order to avoid a rise in life expectancy that has been deemed unrealistic by mainstream science. Thank God, the government passed a law banning the sale of ביטוח מנהלים with a fixed מקדם המרה as of 2013, while also slashing the ridiculous amount that ביטוח מנהלים was charging in fees (see the upcoming post about fees). Practically this turned ביטוח מנהלים into an alternative to קרנות פנסיה with only slightly higher fees, although significantly more variety when it comes to insurance.
(4) –קופת גמל
This is a bit confusing, because technically all of the above, as well as kranot hishtalmut, are kinds of kuppot gemel. Nonetheless, there is the opotion of a classic kuppat gemel, which functions like a קרן פנסיה כללית, with some more options. The maximum fee for this kind of fund is 2%, but can often be bargained down to lower than the fee on a קרן פנסיה כללית, which is 1.05% (see upcoming post regarding fees)
(5) – קרן פנסיה ותיקות
These are the old defined benefits pensions from before 1995. Either you’re already signed up for this or you’re never going to be. Like the current חדשות and כלליות, some had insurance and others did not. Also, about half of the ותיקות were on the verge of bankruptcy and had to be bailed out by the government in 2003. Those companies that were bailed out were done so with the agreement that they must pay less to their clients than had been promised during all the years that the clients paid into the fund. If you have an elderly Israeli relative complaining about the government screwing him out of his pension, this is what he’s talking about.
(6) – קרן פנסיה תקציבית
These are similar to ותיקות, only these are only for government and university employees. I’d tell you about all the perks they had, but it would probably make you cry with jealousy. Suffice it to say, people with these made out like bandits.
My primary series will only deal with the first four types of pension plans, as these are the only ones from which one can choose from today.