Where the shekel stops /A new race of giants
The five big insurance groups are the new 'tycoons.' As of the end of 2009, the Big Five controlled about NIS 350 billion worth of pension savings, two-thirds of all Israeli money for retirement, not including the 'veteran pension funds.'
The papers accompanied Sammy Ofer to his final resting place with headlines a-la "Death of a tycoon."
Indeed, Sammy Ofer was one of Israel's great tycoons, and his heirs will bear the title in his stead. But perhaps his passing creates an opportunity to revisit what we mean by "tycoon," and whether the ones we know all too well - Idan Ofer, Nochi Dankner, Yitzhak Tshuva and Shari Arison - aren't about to be joined by a group just as great and just as dominant in their field.
In fact, the new "tycoons" have arrived, but they're not people: They are the five big insurance groups. As of the end of 2009, the Big Five controlled about NIS 350 billion worth of pension savings, two-thirds of all Israeli money for retirement (not including the "veteran pension funds" ). Shimon Gonen, one of Israel's biggest pension advisers, estimates that within a decade the Big Five will have between a trillion shekels and NIS 1.4 trillion of the public's money under their management.
Right under our noses, a whole new concentrated group has arisen, more concentrated and even worse than the five big banks. They are more concentrated because of the sheer vastness of the money they control and because they're growing into monsters without comment by regulators or the public. And there are hardly any constraints requiring them to compete.
Why are they worse than the banks? For several reasons. One, they are forced on the public. There is no law against lying or adultery in Israel, but there is a law forcing you to save for your dotage. That law makes the public a captive of the big five insurance companies, which control almost all savings avenues from life insurance to provident funds.
Secondly, this group is linked by an umbilical cord to the known pack of tycoons. Yitzhak Tshuva owns Phoenix; Nochi Dankner owns Clal Insurance. The other three also have close ties to big business, by virtue of the latter buying gigantic insurance policies (covering their assets and operations ). No insurance company would pick a fight with a client of that magnitude.
The merged interests of big business (tycoons ) and the big insurance companies (new tycoons ) is therefore an integral part of the insurance business. Just look at the figures TheMarker published last month, showing how institutional investors invest: 40% of their investment in corporate bonds and stocks goes to the five biggest business groups in Israel.
That amounts to a vast degree of investment concentration, utterly flouting the rule of thumb in investing - to diversify. Israel's institutional investors, almost all of which belong to the big insurance companies, do not object to concentrating the public's investments in the tycoons' business pyramids.
Rising entry barrier
Thirdly, the entry barrier into pension management has risen over time. In fact, no competition to the insurance companies stands much of a chance. The insurance companies have only three rivals in the pension business: Meitav, Psagot and DS Apex, all three relative minnows with dubious chances of survival.
What we wind up with is NIS 2 trillion that the state requires to be set aside - though it hasn't legislated its management - and which remains in the hands of five giants tied tightly to the biggest business groups in Israel. The new giants do not face real competition.
A NIS 2 trillion pension market featuring very low competition, which in turn means very high management fees, mediocre management and a bent towards conflict of interests - this is what dominates our future, unless we wake up and put a stop to it.
What can the state do? It can demand that people managing public pension monies be experts on the topic and do nothing else, which means it can force the conflict-ridden insurance companies to relinquish control of our pension money. The state could go one step further and take the pension-management companies public and float them on the stock exchange, rendering them wholly owned by the public itself.
It can intervene when it comes to management fees, slap price controls, and link management fees to long-term profit (after adjusting for risk ). It can encourage the minnows to compete with the whales.
There is much the state can do: drastic, painful, but necessary steps. Just as the state acted in the 1990s and in 2000 through the Brodet and Bachar committees that instituted sweeping reforms, constraining the power of the banks, it is time to rein in the power of the insurance companies before all our pension savings are in the clutches of the new tycoons.