Amid growing concern that the global economy is headed toward upheaval, the Finance Ministry is seeking to offer better pension security to retirees and people nearing retirement by expanding its guaranteed-bonds program.
Under the plan, the government would stop offering bonds with guaranteed returns to pension funds at large. Instead, these bonds would be made available only to people above a certain age.
Pension funds, life insurance funds and provident funds would all be able to buy the bonds for their members. Currently, only pension funds can buy the government's insured bonds.
In addition, the government would make the bonds available directly to savers.
The plan, which has the full support of all Finance Ministry departments, is being advanced by the insurance commissioner, the accountant general and the budgets department. The precise details haven't been hashed out yet.
Currently the government offers guaranteed bonds to both older pension funds and newer ones. The older funds buy bonds with guaranteed real returns of 5.6% (meaning after inflation ), while the newer ones buy bonds with returns of 4.8%.
In both cases, the bonds make up 30% of the funds' assets, meaning the government is ensuring about one-third of the public's pension money.
Since the returns are both guaranteed and quite high, this is considered the government's most significant benefit to pension savers. In total the government issues about NIS 7 billion in guaranteed bonds every year. Some NIS 135 billion in bonds are in circulation.
However, the insurance commissioner found that guaranteed bonds aren't necessarily the best deal for young savers who may still have 30 to 40 years left before they retire. Over the past 10 years, the capital market offered higher returns than the government bonds, even though that period included one of the worst financial crises in decades. Since younger people have decades to go before they need their pension money, a few bad years ultimately won't hurt their savings, since over the long run the market can be expected to correct itself.
The situation is different for people nearing retirement, who need to be able to withdraw their money in the short term. In general, investment theory holds that short-term investments should be in assets that offer lower risk (and therefore lower returns ), and guaranteed bonds would be just such an asset.
In keeping with this theory, the Finance Ministry is advancing the so-called "Chilean" model, which calls for shifting pension savings into less risky assets the closer the person is to retirement.
However, instead of forcing pension funds to rebalance their portfolios, the new policy would go into effect only for money saved from this point onward.
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