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As part of the structural reforms that are to be presented tomorrow, the Finance Ministry will no longer guarantee yields on the pension funds (both veteran and new funds), with the eventual aim of ending the issue of special government bonds for the funds. Such a change will force the funds to achieve their best yields through playing the capital market. Consequently, poor performing funds will have to lower their payments to their insured members.

The veteran funds - those that have been closed to new members since 1995, following the accumulation of vast actuarial deficits - currently manage around NIS 120 billion - 93 percent of which is invested in the specially-designated bonds, paying a guaranteed CPI-linked 5.6 percent. These bonds will be gradually phased out.

As each issue expires (they are usually 18 year bonds), the funds will instead direct their funds to the market. They will have to meet a treasury-set target for their yields, and should the achieved yields fall below this minimum level, pensions paid from the fund will be cut, or retirement age will have to be raised.

The government will not cover all the funds' deficits, and will also insist that both members and employers will have to increase their contributions to help cover the shortfall. The veteran funds are estimated to have accumulated a total actuarial deficit in the region of NIS 140 billion.

Strategy B

The cancelation of these special, guaranteed bonds for the pension funds is, in some ways, a different tack to the oft-quoted parts of the economic plan.

While the treasury has been asserting that the state budget must be cut, and cut again by billions, many argue that this backfires. As wages are cut and people are laid off from the public sector, so tax revenues will drop even further - the major reason why the budget had to be cut in the first place.

The reform of the pension sector tackles this from both sides. Firstly, the issue of these bonds with the guaranteed 5.57 percent annual yield costs the government NIS 1.2-1.4 billion every year. Gradually phasing out these bonds will free some of this subsidy, thereby cutting government expenditure.

Secondly, the pension funds, with over NIS 100 billion under their management, will have to invest these sums on the stock exchange, in traded companies, in infrastructure and construction firms, in start-ups and technology ventures. This will boost the enterprise sector, and also alleviate some of the onus that has fallen almost exclusively on the banks.

Businesses should benefit; trade on the market will grow; and the government should net a few more millions in revenue.