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STATE OF ISRAEL MINISTRY OF FINANCE PRIVATE PENSIONS IN ISRAEL

STATE OF ISRAEL MINISTRY OF FINANCE PRIVATE PENSIONS IN ISRAEL. Overview. Overview. Multiple employer plans; Competition for new members; Comprehensive benefits. Recent Major Reforms. Normal Retirement Ages; Insolvent Defined Benefit Plans; Plans Established After 1994;

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STATE OF ISRAEL MINISTRY OF FINANCE PRIVATE PENSIONS IN ISRAEL

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  1. STATE OF ISRAEL MINISTRY OF FINANCE PRIVATE PENSIONS IN ISRAEL

  2. Overview

  3. Overview • Multiple employer plans; • Competition for new members; • Comprehensive benefits.

  4. Recent Major Reforms • Normal Retirement Ages; • Insolvent Defined Benefit Plans; • Plans Established After 1994; • Investment Liberalization.

  5. Normal Retirement Ages • Starting 2004; • Increase by 4 months per year; • Females: 60 64 • Males: 65 67 • Private and public pensions, both funded and unfunded.

  6. Insolvent Plans: Scope • 400 thousand active members and beneficiaries in 8 plans; • Deficit of 25 billion dollars; • Approx. 25% to be funded by employers, members and beneficiaries; • Approx. 75% to be funded by government.

  7. Insolvent Plans: Employers, Members and Beneficiaries • One plan document, equal treatment for all; • Contributions: 17.5% 20.5% of salary; • Restricted increases in pensionable salary; • Lower future benefit accruals; • Fewer cost of living adjustments; • 1.75% charge on benefit payments.

  8. Insolvent Plans: Government Funding • Subsidized interest on non-negotiable bonds; • Fixed annual contributions over 35 years instead of pay-as-you-go; • Partial coverage of asset risks.

  9. Insolvent Plans: Funding Rules • Cumulative actuarial gains and losses: • Up to a limit: carried forward from year to year; • Excess: absorbed by retroactive benefit adjustments.

  10. Insolvent Plans: Accounting Rules • Dynamic risk-free discount rates; • Fair value of liabilities and assets.

  11. Plans Established After 1994 • 400 thousand active members and beneficiaries in 18 plans; • 2004 conversion from DB to hybrid plans; • Assets allocated between members and beneficiaries; • Members: individual account balances; • Beneficiaries: monthly pensions payable from the plan.

  12. Plans Est. After 1994: Member Contributions • Transparent components: • Retirement savings; • Pre-retirement death and disability (vary by age and sex); • Expense.

  13. Plans Est. After 1994: Member Account Balances • Monthly update for investment return; • Annual update for demographic experience; • Conversion to pension benefit at retirement, death or disability; • Dynamic conversion factors.

  14. Plans Est. After 1994: Beneficiaries • Segregated assets; • Dynamic discount rates; • Gains/Losses from assets or “mismatch”: • Less than 1% of liabilities: carried forward; • Excess: may be phased-in over 5 years; • Other gains/losses absorbed by benefit adjustments.

  15. Plans Est. After 1994: Pension Immunization Example • Naïve investment strategy; • Real interest rates: 4% 2%; • Beneficiary Assets: 14%; • Beneficiary Liabilities: 16%; • Loss: 2%; • Buffer: 1%; • Excess: 1%, phased-in over 5 years.

  16. Investment Liberalization • Plans est. before 1995: easing of portfolio limits; • Plans est. after 1994: virtually all investments permitted.

  17. Thank You

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