The satisfaction on the faces of the members of the Accountant General’s Division and the Budget Division in the Treasury could not be missed yesterday. A few minutes earlier, the Finance Committee had approved one of the most significant reforms that has taken place here in recent years when it comes to the pension security of the country’s citizens. This reform is sheltered under the boring name “Cancellation of the designated bonds“, But it should interest anyone reading these lines.
If you want to go down to its bottom line and skip over the technical details, then the State of Israel took another step yesterday on the way to reducing its responsibility in the pension market. To be precise, after the law passes a second and third reading, the state will save billions of shekels every year (for example, in 2021 the cost to the state is about 9 billion shekels) because it will no longer be required to issue pension savers a guaranteed return of 4.86% per year by issuing bonds. The bond machines are designed. Instead it will create a mechanism that will guarantee them a return of 5.15% on 30% of the pension savings.
It is undisputed that this burden on the state budget is unnecessary and the debate over the implementation of the current reform was on the way of its implementation and the degree of its security will save savers instead of the excellent security given to them until the current reform came.
This move was carried out in full cooperation with the three most powerful divisions in the Ministry of Finance: Accountant General Yahli Rotenberg was the architect of the idea and responsible for its initial drafting; The Budget Division took advantage of its relative advantage in negotiations with Knesset members; And the Treasury’s attorney general, Asi Messing, was present at the hearing and repeatedly repeated the mantra that he “does not understand the claim that the state may not meet its obligations.” However, two other parties, the Bank of Israel and the Capital Market Authority, with financial expertise no less than the Treasury, expressed reservations about the original outline, which sought to replace the designated bonds, which led to changes in the outline.
The designated bonds are index-linked government bonds that the state issues specifically to pension funds, amounting to about NIS 30 billion a year, and undertake to pay 4.86% per annum-indexed interest on them per year. They are a stabilizing factor in the returns of pension savers, so even if the capital market experiences falls, the level of damage to the pension is limited because 30% of its assets are invested in a solid asset at a handsome return. However, their high interest rates increase the cost of raising debt for the country, so the Treasury decided to cancel them. The designated bonds are a very expensive operation, because today the state raises bonds in the capital market at zero interest, and most issues are not index-linked. To understand the absurdity of the current situation, it is enough to think of two figures: And in 2020 – had it not been for the corona crisis – 40% of the total bonds that Israel issued were in fact designated bonds.
The proposal passed by the Finance Committee dictates that from now on all the funds will be managed in the capital market. Pension fund managers will manage these 30% themselves in the same way as managing the rest of their assets, as stipulated by an amendment introduced to prevent a situation where they will take unnecessary risks. And what about securing a return for the citizens of Israel? This will be through the state’s commitment to give a return of 5.15%, after a last-minute amendment was added to the committee that adds another 0.15%, regardless of the actual fund performance. In case the return on the funds is 5.15%, the money will go to a designated fund, and in case it is lower – the state will supplement the return to 5.15%. The calculation will be done monthly, and the reckoning will begin in five years.
The Israeli government took another step yesterday to reduce its responsibility in the pension market and save billions of shekels a year. The debate was about the application and the degree of security for savers
But as the Bank of Israel has argued, no reasonable person will replace a real financial asset with a future legal obligation in the form of a fund on behalf of the state. Finance officials have repeatedly tried to make peppered arguments that “the law is also the one that requires the payment of bonds,” and that “it is not appropriate for this House (Knesset) to question legislation.” An asset in which a fund is entitled to a return guarantee will be entitled to a return guarantee for 15 years. ”
The meaning of this paragraph is that every month, the insured pension assets (30%, as stated) are entitled to a fixed return of 5.15%. This makes the state commitment an immediate commitment, rather than a future commitment; To a commitment that is both contractual and not just legal. The Bank of Israel has expressed satisfaction with this clause, and they see it as a complete victory that now makes the commitment a contract. Legal sources told Calcalist that the difference from the previous situation can be seen through the “High Court test”: “The law in its previous version could have been changed, the High Court would have allowed it. “Z allows it. It has actually become a kind of financial contract.”
The political cunning of finance officials has culminated in the question of provisions for the designated return fund. The original wording of the law did not set a deposit requirement on the part of the government, with the fund to be based on the excess return (above 5.15%) in the good years. However, already at the first hearing, the Bank of Israel representative said that the assumption that there would be a 5% return is unreasonable, and that past returns cannot be used as a benchmark, after the Treasury showed that the return in recent decades has been 6.3% annually. Following this, the Treasury appropriated to oblige the government by law to set aside regularly for the fund. These are provisions that are supposed to reach a rate of 1.8% of the total assets that the state seeks to insure. So the state now estimates that the average annual return will be 3.25%. The law also stipulated that the Minister of Finance could reduce the provisions for the fund with the approval of the Finance Committee, and the vigilant Knesset members demanded and accepted that if the Minister of Finance wanted to change the provisions he would have to make primary legislation, and could not be satisfied with the committee.
One loophole remained open. The Accountant General insisted that the provisions for the Defense Fund be purely for registration, meaning that the Treasury is not obligated to transfer real money to the Fund.
But one loophole remains open and has far-reaching implications for the collateral provided by the state for the purpose of meeting its obligations. It turns out that the Accountant General has insisted that the provisions for this fund be purely accounting provisions, meaning that the Treasury is not obligated to transfer real money to this fund. In fact, the term “provisions for the fund” was removed from the wording of the law and replaced with the phrase “shall be determined in the state budget.”
The logic of finance is clear, he does not want to confine funds at the expense of running them. Representatives of the Ministry of Finance said at the hearing: “For us, it is like a commitment to social security, to a budgetary pension, like a property tax fund. We do not actually hold the money, it is no different from any commitment of the state, we will allocate some of the money to the fund, according to our risk management model. ” However, the Bank of Israel emphasized that this was a different type of event, which could cost the country NIS 70 billion in a time of economic crisis. In other words, real money saved in the designated fund will not be. This means that the funds actually set aside will depend on the “risk management” of the Accountant General, which is – surprisingly – what would have happened even without the amendment in the law that requires the state to set aside for the fund. The state’s position behind its retirees will depend on the politicians who will serve at the time. Prepare for the words “temporary order”, “education and security before securing pensions” in the next financial crisis.
The Treasury explained that the accounting provisions will also be taken into account every year, but it is clear to everyone that in the future there may be a politician on duty who wants to change the spending limit – as happens all the time – to allocate the money for other urgent purposes. The Knesset members did not heed the Bank of Israel’s warnings, bought the Treasury’s promises, and moved on. A senior economist told Calcalist: “After hearing in committee how the Accountant General wants to manage the risks and preparing for the risk scenario, I can not say I am calm.”
Anat Levin, CEO of BlackRock Israel, which is also a member of the expert cabinet of Finance Minister Avigdor Lieberman, claims that the intended bond reform was Opportunity to increase pension protection On the weak savers and reduce the protection of the strong. Levin’s remarks are reaffirmed following the publication of the State Comptroller’s report last night, which revealed that the tax benefits for pensions amount to NIS 28 billion a year, and 40% of them go to the top decile. But it must be admitted that despite Levin’s vision, this was not possible under the current time pressure and current political culture.
In fact, many senior economists who spoke with Calcalist tend to see the reform as one that transfers to institutions institutional financial management for which the state should be responsible.
The domestic capital market has also expressed concern that the 30% increase in funds they need to manage will make it very difficult for them to cope with the current investment regulations that restrict them. For example, they can not hold more than 7.5% in the bank. The Treasury responded that this is in fact only a three-year advance in relation to the natural growth rate of pension funds.
Another interesting issue was raised by Levin, who believes that the increase in funds managed by the institutions will increase their exposure abroad, which will lead to hedging actions, which may lead to the appreciation of the shekel. This is despite sources in the Bank of Israel saying that, in principle, the demand for foreign currency will increase, and thus this should lead to a devaluation of the shekel. And the hedging actions may at most offset the impact. “