Free at Last!

Daniel Kahneman, who won a Nobel in Economics for his theory that people are driven by irrational urges when making economic decisions, found himself unwittingly recruited on the insurance companies' behalf yesterday.

"Kahneman already said that rationality doesn't always prevail," we were told by the managers of one of the big insurance companies yesterday. "Insurance buyers have all sorts of considerations, not only economic ones. They are also guided by philosophical and psychological considerations."

It is no coincidence that Kahneman and his theories are being adopted so warmly by Israel's insurance companies. It is convenient for them to assume that their customers aren't rational. That way they'll continue to save for their pensions via insurance schemes, even if it's utterly economically unwise for them.

The insurer was responding to TheMarker report that the treasury means to impose regulations that would enable people to transfer their pension savings from insurance companies to pension funds.

The executive refused to get upset. Insurance companies have NIS 70 billion managed in life insurance schemes, which will now be exposed to pension plans instead.

These plans are a key source of profit for the insurance companies, by virtue of astronomical management fees amounting to 2% or more, plus their terrific profit on the risk element they sold to people.

Yet their coverage is inferior to what pension funds have to offer, according to accepted values, and shortly every bank branch in town will be telling customers as much.

But the executive chose not to get excited. Why? Because he knows customers aren't rational. He knows that psychology can prevail over economic rationality.

How irrational are you?

The cat is out of the bag: you have to be irrational, and riven by deep psychological fears, to keep your life insurance policy.

The inescapable conclusion is that if your head is screwed on straight, you should seriously consider moving your money from a life insurance plan to an alternative pension plan, meaning a pension fund, if you can. Until now, you couldn't. Having signed your Yoni Thomas on the dotted line, you were trapped in the clutches of the insurance companies and you know exactly what they thought of you.

Until now the treasury has not allowed people to move savings from life insurance policies to alternative pension plans. One might move between insurance programs in theory, but not in practice.

In practice, the only way for pension savers to improve their terms was to freeze their savings and open a new pension plan somewhere else.

Because of the inability to move, there was no competition in this NIS 70 billion market. There is no other way to explain why insurance companies felt comfortable charging management fees of 2.5% plus their  huge take on risk policies, while competition between provident funds at the banks reduced management fees to 0.6%.

When the time comes, namely retirement, you will feel the bite of those fees.  Multiply a 2.5% fee by 40 years' savings and you lose at least 25% of your retirement savings, compared with what you would get from a provident fund, and that's not including any loss on risk insurance. In the really old policies, the insurance companies would take 28 agorot of each shekel you paid in.

You'll be much better off after the treasury frees you from the iron embrace of the insurance companies and lets you save for your retirement wherever you please. Even if you choose to stay with your insurer, you can fight for better terms, which will mean a great difference in your old age.

Since the Israeli exodus from Egypt, there has yet to be a better reason to celebrate our freedom.