Is there any point to buying the same product at four times the price? Thousands of Israelis do just that. Every day, they choose to buy bituach minhalim [literally managers' insurance, a type of policy that some employers offer as a benefit for their employees] instead of contributing to a pension fund, despite the fact that they are almost identical products except for their cost components. The costs of the insurance policy, in management fees, are from twice to four times as high as the pension costs.
Standard management fees for life insurance are today around 11 percent of the monthly premiums, and about 1 percent of the savings accrued in the policy. While in the pension fund, the equivalent figures are 6 percent of the premium and 0.5 percent of the accrued sums - half that of the insurance. In practice, due to the competition that has broken out in the pension sector, management fees in the pension funds have dropped further and now stand at around 2 percent of the premium and 0.3 percent of the accrued - a quarter of the insurance charges.
This vast price difference cannot continue for long. Control of the pension funds has been bought recently by the insurance companies and the interesting question is what will that do to the gap. The fear is that the price difference will shrink, but unfortunately in the wrong direction - the insurance companies will abuse their strong position and raise their pension fees, thereby reducing the competitive edge of the industry.
This was all made possible when the treasury allowed one competitor (those selling life insurance policies) to swallow up another (the pension funds). The resulting damage is palpable. One of the pension funds calculated that a 30-year-old man earning NIS 4,000 a month and with 37 years of work (read: of saving contributions) in front of him will see a 10 percent jump in his pension as a result of the lower fees. Seeing this price gap shrink would reduce his savings by 10 percent. Moving to an insurance policy, where the management fees are twice as high, would result in a similar drop in his final pension allowance.
Up to now, this discount on management fees is one of the best economic incentives the pension funds offer vis-a-vis the life insurance policies, although it isn't the most important asset. The crowning asset of the pension option is the fund's actuarial surplus (or deficit). Starting from this year, that surplus has turned fund members into "shareholders" reaping the profits.
According to new treasury rules, pension funds must distribute their surpluses, if there are any, each year. The surplus is the fund's profit above and beyond the commitments it has made for payments (i.e. pensions) in the future. And this surplus has double importance.
First, it is worth lots of money. Some of the pension funds accrued surpluses of 10 percent up to 2003, that is in the eight years since they were set up. By distributing this 10 percent windfall, the fund members reap the "profits" of their savings in one fell swoop, instead of over the next 37 years.
And second, the actuarial surplus is an indication of the fund's quality of management. Better fund management, which brings in better yields on investments over the years, and better management of the fund's commitments, in which it chooses which new members to accept - these are what determines the long-term profits. Profits add up to the actuarial surplus (or deficit). The fund that shows a greater surplus is a fund that is managed better. That's the fund that is worth joining.
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