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The Israel Securities Authority has ordered the Israel Electric Corporation to immediately reduce its liabilities to its workers' pension fund by about NIS 6 billion. The decision has dramatic implications for the utility, which will now be forced to retroactively amend its financial reports - improving its shareholders equity substantially and reducing its actuarial liabilities, which up until now have posed a heavy financial burden.

The decision could also have an effect on electricity rates in the future. The Securities Authority's decision reflects its adoption of the position taken by IEC's auditors, Deloitte Brightman Almagor, and is in direct opposition to the position taken by IEC's management, which ISA rejected.

The decision was greeted at IEC with complete shock, and the company has declined to comment until it has had a chance to study it.

As a result of the decision, the IEC will be expected to reduce its pension-related liabilities from NIS 23.8 billion to NIS 17.8 billion, after having increased by 70% since 2004. The move is very likely to be met with opposition from the IEC workers union.

Meanwhile, the fate of negotiations on implementation of a reform within the IEC, which is scheduled for next week, remains enshrouded in murk.

The move will also mean retroactively amending the firm's financial reports in a way that could put the company's bond issues in question. An actuarial deficit was one reason the company's bonds rating was lowered from AA+ to AA- in March of this year. At the time, rating company Maalot noted that IEC's resources were in danger of further erosion if it is forced to pay into pension funds in 2009.

The ISA has also rejected the utility's request to delay publication of its second quarter financial report, demanding they be released on schedule. Since the demand cannot be met, IEC is facing a heavy fine - after paying a fine of NIS 200,000 last year for late publishing of its 2008 financials as well.

ISA's decision comes on the heals of IEC's actuarial report, which indicated that the company's pension liabilities appear to have been inappropriately inflated in recent years, and based on arbitrary actuarial assumptions. The electric company calculates its future liabilities to retirees based on an equation that assumes retirees are 'promoted' once every two years.

To date, the company's actuarial reports have been calculated on the assumption that retiree stipends would increase by an inflation-adjusted rate of 2% annually.

The utility's actuarial assumptions were re-reviewed at the ISA's request to the Government Companies Authority. IEC's actuary reviewed the related data and assumptions, concluding last month that there was no basis for the assumption that retiree stipends would increase by 2% annually, since the stipends are limited by a ceiling of the maximum wage level. The repercussions of this conclusion are dramatic, as the utility's actuarial obligations are not limited to the firm's retirees, but in fact include all company employees.

These intermediate conclusions bred a dispute between the IEC and its auditor Deloitte Brightman Almagor over the amendment of the company's reported pension commitments and the nature of the amendment.

Accountant Adir Inbar took the view that the company should assume an erosion of 1.5% to retiree stipends after adjustment to inflation, since the company has no contractual obligation to increase the stipends beyond the maximum ceiling wage.

This conclusion meant the firm's actuarial liabilities are in fact NIS 6 billion less than what had been assumed to date. At the same time, the dispute over how to amend the firm's financial report has also continued to rage.

While Inbar has demanded that the financial reports be amended immediately - and retroactively - IEC has asked to spread the reduced commitment, without retroactively correcting its financial reports. Failing to reach an agreement, the parties turned to the Securities Authority for a final verdict, which was handed down yesterday.