Q&A / The Israeli guide to the Chilean model
What is a pension plan adjusted for age?
Young savers and older ones have different needs. Older people have saved more money and want to protect what they have and make sure that a sudden crash won't wipe out their savings just before they retire. That's why older savers want to reduce their risk.
But younger people who have saved very little will want high returns. They have lots of years ahead of them and a sudden collapse is not so scary. They have plenty of time to recover, so they're willing to take on much higher risk. This is exactly why the treasury is making its new proposal, which has been tried successfully in Chile.
How many age groups will there be?
At least five. The commissioner of capital markets will require two specific age groups: those who have already retired and those who are over 60 and not yet retired. The other groups have not been set by the commissioner, but there must be at least three others, which will cover ages 20 through 60. The distribution will be decided by each fund manager.
How do the investment portfolios look according to age?
This is still unclear. Every fund manager will decide separately. The only requirements are on the division by age group, with risk declining over the years. It's possible that one fund manager will offer the over-60s a portfolio with no stocks, with another having 40% in stocks. Both could be approved providing they have appropriate risk profiles that decrease with age. This means there could be significant differences between funds, both in the age brackets and the risk levels. This is the essence of a free market, and everyone can choose what they consider most appropriate.
Is there a requirement to join the new program?
No. It's just the default choice, but you could choose a different investment strategy.
When will the new program start?
Once the regulations are approved in the Knesset, probably within a few months. Until January 2013, only new savers will join the new programs, and those already retired will be transferred to the new portfolios. By January 2015, the over-60 group will join and in 2016 the remaining three age groups will go into effect.
What about severance pay?
This is not included, even if it is paid into the same funds. This money will be managed separately in a general portfolio, but anyone can ask for it to be included in the age-appropriate plan.