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The state sold off its controlling stake in the National Federation of Labor in Israel pension fund last week in what was considered the most interesting recent offer in the capital market here. Every leading institutional investor was interested, and three eventually placed bids, offering between NIS 70 million and NIS 107 million. They were keen despite the limitation that the winner would undertake on management fees, which are capped at just 7% of the fund's monthly deposits plus 0.1% of its accumulated assets.

The National Federation of Labor in Israel is an old fund. It no longer accepts new members, so it won't need to spend anything on attracting new clients, saving it a big expense. Still, the fact that three leading institutional investors headed by the large investment house Psagot were willing to pay up to NIS 107 million for a fund whose maximum management fees will be 33% to 50% lower than usual in the pension and provident-fund industry gives pause for thought.

Customary management-fee rates in the provident-fund and life-insurance industry range between 1.2% and 1.6% of accumulated assets. New pension funds charge a management fee of up to 1.1% of assets (a 6% management fee on deposits plus 0.5% of accumulated assets). The average management fee currently charged in the industry is 50% to 100% higher than before the banks were forced to sell their controlling stakes in provident funds (an average of 0.6% to 0.8% was the typical rate before the funds were sold).

All signs show that there is no competition among investment houses in Israel in management fees. In fact, the concern is that the fees will continue to rise until they reach the legal maximum of 2% of assets. The market value of the National Federation of Labor in Israel pension fund, which was set by institutional investors last week, indicates that these rates are nothing short of scandalous.

And that isn't the only indication. Older, nationalized pension funds charge just 0.13%. While it's true that these funds have no marketing or distribution expenses, they do have the same costs when it comes to management of investments. They also have heavy operating costs due to the need to pay pension stipends that are hard for their members to calculate.

Moreover, corporate provident funds, which manage the pension savings of employees at large companies like Israel Aeronautics Industries, El Al and the Israel Electric Corp., are able to make do with management fees of 0.3% to 0.4%. This means that a pension investment portfolio with no marketing or distribution expenses can be managed for no more than between 0.2% and 0.4%. Add to that another 0.1% in distribution expenses, plus another 0.2% for profit to the fund's manager, and you get 0.5% to 0.7%.

So how on earth did the average management fee in the provident-fund industry climb another 0.75% (1.2% to 1.6%)?

The answer is insurance agents who bring in clients. In exchange, agents receive a sales fee of at least 0.5% to 0.6%. Nearly half of all management fees paid today by pension savers do not go toward investment management, improvings services or assuring quality and reliable calculation of a member's pension stipend. Nearly half of management fees go into the pockets of insurance agents as a steady, lucrative revenue stream.