Taking Stock / X marks the spot (where your money is buried )
Making provisions for your old age doesn't mean you'll actually have a pension. You stand warned.
Two weeks ago, the Finance Ministry announced a sweeping reform of the Israeli pension system. The main points included abolishing tax credits on pension savings, instead of which the state would pay money directly into the pension accounts of workers. Most of the money would go to lower-paid workers, none to the highest-paid ones.
The direction of the reform sounds promising. Hundreds of thousands of meanly-paid Israelis have no pension scheme at all, while the biggest earners get generous tax breaks on their pension savings.
Lovely. But wait a second. Where exactly are our pension provisions going?
Let us remind ourselves of the blindingly obvious - that the government began the process of extracting itself from the capital market 25 years ago. The upshot is that almost all the money deposited into pension accounts, amounting to billions of shekels each month, goes to investments in the open market. The money goes into bonds, shares, bank deposits, property, options, warrants, private investment funds, hedge funds - every type of financial asset in the market.
The ones who decide where the money goes are known as institutional investors - pension funds, provident funds, insurance companies and training funds. These institutional investors' managers are given billions more each month and decide where to put it.
But while the Finance Ministry launches yet another reform of Israel's pension system, it would do well to think about the way that money is managed and allocated.
Making provisions for our old age does not ensure we'll have a pension. We have to make sure the money is handled properly. And this is where things get sad. Hundreds of millions of shekels put into pension vehicles, sums growing each year at an astronomical pace, get invested each year bereft of true supervision and controls. Ultimately no more than 100 people or so handle the allocation of these vast resources. Of course, there are management boards, investments committees, external directors representing the public and auditors. But given the present structure of the capital market and the fog shrouding vast swathes of it, there is a not-small probability that money gets allocated based on the wrong reasons.
Mutual funds invest money in liquid assets, financial instruments traded on the market. These financial assets get priced by the market every day. Yet insurance companies and pension funds invest vast sums, billions each year, in non-traded illiquid assets, based on evaluations and opinions issued by a small clique of people. Savers are blissfully unaware of the grid of ties and interests linking this group. They don't know the true value of the financial assets they buy, and they are ignorant of the personal records of the people managing their money.
The economic concentration committee was supposed to take the first steps in fixing the distorted structure of the market, where the same people managing our retirement savings are the same people who borrow the money set aside for our pensions. Indeed, the initial proposals tabled by the committee are in the right direction, but they're far from being satisfactory. If the committee's recommendations aren't fixed, and soon, the capital market will remain riddled with profound conflicts of interest.
Who's that guy? He has your future in his hand
Eliminating concentration is just one area in which regulation needs change. Another is disclosure. The public needs to know in real time where its money is going. It needs to know who makes the decisions and what vetting is done before its money is invested. The public needs to know that its money isn't simply being handed from one member of the club to another.
The public has been beginning to grasp the price exacted by the structural ills of Israel's economy, in the form of product prices. But the public is far from realizing just what this behind-the-wings structure of the capital market is costing it. Pensions and investments are complicated issues and the public has a tendency to wake up to bitter truths too late.
For years, Israel's pensions industry was artificially boosted by the low level of interest rates and handsome corporate profitability - racked up by cartels and monopolies. But the generous profits they shared out as dividends mirrored the absence of competition they faced, as well as the consumers' lack of choice.
But interest rates aren't going to drop any more, and the Israeli regulator has finally digested the need to eliminate the economic concentration and to force competition. Meanwhile, clouds are gathering over the international markets. The financial world faces tough times.
One righteous company
Nevertheless, the capital markets supervisory division at the Finance Ministry, headed by Oded Sarig, seems relaxed. Instead of spearheading a drive to immediately sever finance companies (the institutional investors ) from non-finance companies, instead of wedging powerful new figures into the closed world of the investment managers, instead of directing a spotlight at the investment decision-makers for the greater edification of the public, Sarig and his men are pushing reforms that will give the same old clique billions upon billions more to manage. All those billions will enter the present, risky structure.
Paradoxically, the only place in the capital market in which structural conflicts of interest are faint is Amitim - the government body that manages pension schemes that had once been managed by the Histadrut labor federation. Amitim doesn't belong to some debt-ridden pyramidal holding company of some tycoon. Amitim has no debts that it needs to service by charging management fees. Amitim does not reward its money managers based on short-term performance. Against the pyramidal conglomerates that manage most of the pension savings in Israel, government-controlled Amitim suddenly looks like a pretty promising model.
One can only hope that the Finance Ministry learned its lessons from privatizing the banks and waives turning Amitim into just another privatized company sold in slices to over-leveraged titans of business.
Six years ago, the Finance Ministry began a process of structural reforms in the capital market. It did well at severing the provident and mutual funds from the banks, through the avenue known as the Bachar Reform (headed by the then director-general of the Finance Ministry, Joseph Bachar ). That process was completed two years before the great global financial crisis began. It spared the Israeli banking system from mass bankruptcy, and the Israeli economy from the throes of crisis. It made the market more competitive.
Without the Bachar Reform, the trillion shekels now held and managed by eight big business groups would have been in the hands of three or four business groups.
The reform started the process of reducing concentration and eliminating conflicts of interest in the capital market. But it stopped in the middle.
Now, spurred by the social protest, the economic concentration committee and the Trajtenberg Committee, it is time to finish the job. Asset management companies must be completely independent. They need business models that don't reward risk at the savers' expense.
Finance Minister Yuval Steinitz is preoccupied trying to find a new director-general for his ministry. Once chosen, the new individual in charge should seize the opportunity to institute true change in the structure of the Israeli institutional industry. With every day that passes, Israel's pension system grows bigger and has more of an effect on the economy. If the economy's vascular system isn't healthy and clean, the body can't build muscle. It can't compete. It can't grow.