New Pension Fund Management Is Still Facing Difficulties

On the morning of April 6, 2003, attorney Yaron Arbel arrived at the offices of Netiv, the Histadrut labor federation's long-standing pension fund, bearing a letter signed by Finance Ministry capital market supervisor Eyal Ben-Chelouche.

On the morning of April 6, 2003, attorney Yaron Arbel arrived at the offices of Netiv, the Histadrut labor federation's long-standing pension fund, bearing a letter signed by Finance Ministry capital market supervisor Eyal Ben-Chelouche. Arbel requested an urgent meeting with fund manager Reuven Abel, who was already in a meeting and had no intentions of curtailing it for Arbel, who did not have an appointment and whom he had never met. Arbel, who at that time was the deputy custodian general and deputy state receiver, swallowed his pride and waited patiently.

When Abel's meeting ended, Arbel entered the fund manager's office, handed him the letter and asked that he read it on the spot. The letter informed Abel that as of that moment, he was no longer the manager of Netiv, which handles the pensions for thousands of employees of Israel Railways, Solel Boneh Building and Infrastructure, and many factories. From that moment, Arbel was the newly appointed external manager of the fund, on behalf of the Finance Ministry.

The Finance Ministry's takeover of Netiv was actually a "trial run" before an all-out takeover of the other big pension funds that had been controlled by the Histadrut - Mivtachim, Makefet, the KGM workers' pension fund and the agricultural workers' pension fund. No one at the funds suspected anything and they continued to manage these enterprises as usual, for better or worse. Their top executives were therefore totally surprised when two years ago this week, on July 23, 2003, their offices were visited without prior warning by "messengers" bearing letters of dismissal from Ben-Chelouche.

Data in disarray

Those messengers were the treasury's newly appointed external managers, and the first major problem with which they had to contend was the total disarray in the pension funds' databases: The data on fund members' pension rights and the methods for calculating them were incomplete, as were the actuary assumptions, which seemed to lack any logic.

"The actuaries were never asked to respond to professional queries," say sources close to Arbel, "such as the assumptions on which pension rights calculations were based, or why the fund has so many members who are defined as `disabled.'"

The external managers proceeded to replace most of the funds' actuaries and accountants, and then the internal auditors, whom the external managers felt wrote reports lacking teeth.

The faulty actuary methods and weak auditors' reports, however, turned out to be just the tip of the iceberg of poor management and corrupt procedures, "bordering on criminal violations," that were rife throughout the funds. There were irregular pension agreements with certain groups of workers, granting them the same early retirement pension rights as other workers who retired after many more years of work. There were also cases in which an employer, such as the Ports Authority, dictated its workers' pension rights to the fund, and the fund's officials accepted the calculations as Holy Writ.

The external managers also revealed that groups of senior employees had set the level of their own pensions, with the funds' tacit approval. How did they do this? Quite simply. They were appointed to the internal committees operating within the funds.

Another gargantuan problem at the pension funds was the level of computerization, which Arbel defined as catastrophic. The databases were not being kept current, and it was impossible to calculate fund members' rights accurately. To solve this problem, the pension funds administration set up a subsidiary to maintain a combined computer system for two of the larger funds, KGM and Mivtachim, which also assists the other funds.

In July 2003 the external managers found that the pension funds were owed some NIS 130 million by companies in financial straits or in the process of being liquidated. Today that debt has been reduced to NIS 70 million, and a telephone call center has been set up with employers to maintain a steady stream of data.

The external managers further discovered that many of the vast real estate holdings purchased with the monies entrusted to the funds, especially Mivtachim, were very poor investments. One such property was a hotel that closed shop in the spring of 2003 due to a lack of guests, and is now standing empty. Another hotel was being run at a loss. The external manager closed the hotel, fired the workers and is in the process of selling it. A third hotel, on the Dead Sea, was profitable and continues to provide revenues. The managers hope that the prudent management of the real estate will increase the funds' revenues and reduce the huge actuary deficits that still remain.