Taking Stock / A Pension Prelude

A billion shekel check.

Checks photograph well. They talk the talk. A check that size exudes success. We can state with surety that even in his gauziest dreams, Finance Minister Benjamin Netanyahu never thought he'd get a billion shekels for the pension funds nationalized just a year ago.

In most cases of privatization, the check vanishes into the void of the national budget. But this time the public knows exactly where the money is going - into reducing the actuarial deficit of the veteran pension funds.

The sum is impressive, but the real message screaming from the blitzkrieg sale of the three new pension funds - New Mivtachim, New Meitavit and New Makefet - isn't the billion-shekel check. It's that there's a new era dawning in Israel's pension and savings industry.

Until a year ago, most of Israel's major pension funds were controlled by the Histadrut. The fact that a guild ruled the pension sector essentially rendered most of the depositors captive.

The moment the funds pass into private hands, they have to compete over clients. And the only way to compete is through price and performance.

What's next?

Until a year ago, the pension market was the least competitive around, and now it's going to become the most. Not only will all new money stream into bodies managed by private hands, but also under the treasury's new regulations, the members will be free to move their money between funds every year, if they wish.

Selling the new pension funds was the opening shot in the revolution scheduled for next week. Now that the pension funds have been severed from the Histadrut, the provident and mutual funds are about to be severed from the banks.

The result will be similar. The Histadrut had been wearing two hats - labor union controlling the workers and pension provider. But the banks are wearing four hats. They are the main source of advice to savers and investors in Israel. They also market most of the financial instruments. The bank also owns the provident and mutual funds. And it also manages them.

That structure reduces the banks' motivation to give clients sound advice. Nor are the banks motivated to improve performance of the funds.

In a few days, the Bachar team will be publishing its recommendations for capital market and banking reform. It will be recommending a scissors action: to extract the management and ownership of the funds from the banks and, in parallel, to motivate the banks to provide objectively sound advice by forbidding them to take commissions from the new owners of the provident and mutual funds. They will charge the client for advice, instead.

The banks have raised sundry outlandish claims against the anticipated recommendation. For one thing, they charge that the fund members are not being consulted. They also claim nobody will want to buy their provident and mutual funds.

Buyers lining up

The successful sale of the pension funds as last week ended proved that the fund members have no real problem with new ownership, private ownership. Within a year, some 600,000 pension funds depositors shifted from Histadrut ownership to state ownership and thence to the ownership of three insurance companies - Menorah Holdings, Migdal Insurance and Clal Insurance. The public did not take fright. We did not witness a mass flight from the funds.

The sake of the pension funds also proved that despite their low management fees, which had plunged as competition ensued, there were a lot of potential buyers lining up for money management assets.

The foreign investors who participated in the tenders ultimately didn't make it to the finish line, but that's just because the locals were so hot to buy the pension funds themselves that they paid full price and then some.

The foreign investors have a better chance of winning the tenders for the banks' provident and mutual funds if only because the scope of assets is so big that the locals would have difficulty swallowing them.

We must conclude that selling the banks' provident and mutual funds should lead to dramatic diversification in the structure of long-term savings in Israel. No small proportion of the public's assets will wind up being managed by private hands, foreign and local, whose only way to fight over the funds will be through performance, not shackles and chains.