Sweeter Pensions at Electric Corp May Mean 10% Tariff Hike

Now that many have hit top pay bracket, they'll get inflation linkage too.

Electricity prices may be rising yet again - and this time the move would be to improve the pension terms of Israel Electric Company employees.

The Knesset Labor, Welfare and Health Committee is scheduled to discuss today a bill that would increase electric utility employees' pensions by NIS 2.5 billion. IEC employees and former employees already have some of the best pension terms in the country.

Covering this sum would mean a rate rise of 10%. But gradual increases are more likely than a sudden jump.

Rates have already increased due to the shortage of natural gas (because of the breakdown of the gas supply from Egypt ), which forced the IEC to resort to more expensive fuels. Power prices are expected to increase 7% next month, another 3% in July, and then another 3% annually for the next two years.

The bill is the result of an agreement signed between the government, the Histadrut labor federation and the IEC. The agreement needs the approval of the Knesset Labor, Welfare and Health Committee, not the Knesset Finance Committee as in other cases.

The deal covers a wide range of wage-related subjects and offers retroactive approval for some wage irregularities while mandating that workers return money in other cases.

Regarding pensions, the bill states that IEC retirees will have their pensions updated to keep up with inflation. This would increase the IEC's actuary liabilities by NIS 2.5 billion - meaning it would need that much more in its pension fund to cover future pension payments.

Up to now, IEC pensions have been linked to the salaries of current employees.

In 2008, all other state employees were transferred to inflation-based pension linkage, and retired civil servants received one-time compensation equal to 20% of their monthly pensions.

Under the latest agreement, IEC retirees are receiving one-time compensation worth 8% to 12% of their monthly pensions. The average compensation is 9%.

While it would appear that the IEC employees are receiving worse terms than other civil servants, they are actually starting off from a much better position.

The average retired civil servant saw his pension erode over the past decade. IEC retirees, on the other hand, saw their pensions increase in real terms by as much as 40% since the day they retired. This is because the IEC boosts employees into higher pay brackets even after they retire - a benefit available nowhere else in the public or private sector.

In recent decades, the rate of pension growth at the IEC slowed, apparently because more than 75% of retirees had already reached the maximum salary bracket.

Now pensions will start eroding 1.5% in real terms, the IEC estimated.

Now that most retirees are receiving the maximum possible pension under the IEC's exclusive raise mechanism, the new agreement is changing their pension structure to make sure their pensions continue increasing to keep up with the CPI.

The IEC is in dire financial straits, so it wants the Public Utilities Authority - the regulatory body under the Industry and Trade Ministry - to let it raise rates to fund the additional pension expenditures.

While the regulator is not obliged to increase rates, it may have trouble not doing so if the Knesset enshrines the higher pensions into law.

In the final agreement, the state dropped its insistence that pensions be downsized due to the unusual raise mechanism, thus fixing the pensions at their current size.

The deal may also have implications for the IEC's pension fund. Over the years, the IEC set aside money based on the assumption that pension payments would increase 2% annually in real terms, a calculation made by the IEC's pension fund. If its latest estimate that payments would start eroding by 1.5% is accurate, this means the IEC has set aside an extra NIS 8 billion to NIS 9 billion. IEC denies this, saying that in practice it actually owes the pension fund money.

So far, excess pension costs have not been covered by raising electricity rates, but by raising the IEC's debt. Under the deal, the state is not demanding the IEC return any excess money in its pension fund, which apparently includes these extra billions.

The state has argued that the agreement with IEC employees is the lesser of evils and notes that after years of increasing 2% in real terms, IEC pensions will now not be increasing at all in real terms.

It rejects the IEC's argument that pensions would start shrinking 1.5% in real terms, pointing out that such a thing has never happened to date.