This week two investment houses for pension fund management were successful in the tender which had been issued by the Ministry of Finance and which will act as the 'choice by default' of the employers. So what are these 'default choice funds'? In July 2016, the employee pension fund contribution reform - which was overseen by the Commissioner of Capital Markets, Insurance and Savings (as the Supervisor of Insurance) - entered into force. An order of the Supervisor was recently approved by the Supreme Court, although the period was reduced to two years (instead of three). In this newsletter, we will review the regulatory reform and its standing in light of the Supreme Court decision.
Recently, the Supervisor has been overseeing a reform to the pension savings of employees who have not selected a pension fund, by means of introducing provisions for placing the contributions to a pension fund which is a 'default choice fund'. The contributions of those employees who have not selected a pension fund will be deposited in these 'default choice funds' once the employees commences employment with a certain employer. According to the Circular published on the subject, the employers are to issue a tender for the selection of a 'default choice fund', which tender will take into account the management fee offered, the level of service offered by the pension fund which is published by the Supervisor, and the yield of the pension fund. An employer, which waives the issuing of a tender, will be obliged to make deposits with one of two 'default choice funds' selected - once every three years – on the basis of the management fee alone.[1]
The Association of Life Insurance Companies, filed a petition against the Supervisor with the Supreme Court (sitting as a High Court of Justice), in which it was claimed that the Control is not empowered by the Supervision of Financial Services (Provident Funds) Law – 5765-2005, to decide on an arrangement which is so material for the market, such as that requiring all employers to issue a tender to provident funds and such as that regarding the selection of 'default choice funds' for employers which do not issue a tender. These issues, which are known in public or administrative law as 'primary arrangements', claimed the petitioners, should be handled by primary legislation and not by regulatory measures via Circulars.
The Supervisor responded that this was a consumer arrangement which was intended to answer the failures of the market which harms the pension saving public, and in particular those employees who are not unionized. It was also argued that this arrangement assists to promote competition in the pension savings market.
The Supervisor also emphasized that the reform was required in light of the indifference of a large part of the employee market to pension savings notwithstanding the considerable importance which this subject has for the lives of all employees, as well as the considerable influence the management fee rate has on the amount of the pension which will the saver will receive on retirement. With respect to administrative law aspects, it was argued that this is not a 'primary arrangement' and that there is no need for primary legislation. According to the Supervisor, the arrangement simply provides instructions for the implementation of the existing legislation and the Supervisor is empowered to do this.
The decision was handed down by the Vice President of the Supreme Court – His Honor Mr. Justice Rubinstein. During the hearings, the Supreme Court suggested to the Supervisor to consider shortening the period of time provided for in the Circular for declaring a 'default choice fund', from three years to two years, although the Supervisor took the view that this is too short a period in order to evaluate the arrangement. In the end, His Honor Mr. Justice Rubinstein approved the said pensions' arrangement, while mentioning that 'many employees, including educated ones, are not sufficiently aware of the subject of pensions and in particular those at a young age when old age seems far off'. The Supreme Court also supported the purpose of the reform – to protect the employee and to address the concern that various interests of the employer would lead to the selection of a particular provident fund which fund is not necessarily in the best interests of the employee. It was found that the arrangement was decided upon with authority and that it did not amount to 'an arrangement from zero' of the pensions market and therefore is not a primary arrangement. Nevertheless, the period for declaring a fund as a 'default choice fund' was shorted to two years in order to enable the promotion of legislation addressing this issue as well as to quickly draw conclusions from the new arrangement.
The date for the entry into force of the arrangement is set for 1.11.2016 and from that time, an employer of an employee which has not selected a provident fund (in accordance with Section 20 of the Supervision of Financial Services (Provident Funds) Law, will be entitled to deposit contributions to one of the two 'default choice funds' which have been declared.
References: Petition to Supreme Court 3430/16 The Association of Life Insurance Companies v the Commissioner of the Capital Market, Insurance and Savings, Ministry of the Finance (2016); the Control of Financial Services (Provident Funds) Law, 5765-2005; Circular of the Commissioner of the Capital Market, Insurance and Savings 'Provisions Concerning the Choice of a Provident Fund' of 13.3.16 and the accompanying document on 'The Procedure for Determining Default Choice Funds' of 10.4.16.
[1] On 1.8.2016, the Supervisor published the results of the winners of the tender which had been issued by it. The winners of this tender were Meitav Dash Provident and Pension Ltd and Halman Aldubi Provident and Pension Funds Ltd. The rates of the management fee which was set at the end of the tender proceedings were considerably lower than the average management fee rate in various pension funds, such that the accumulated management fee rate is lowest (0.01% and 0.001% instead of up to 0.5% in pension funds), and also the management fee rates of the deposits are 1.31% and 1.49% (instead of up to 6% in the pension funds). The 'default choice funds' are obliged to maintain these low rates for a period of at least 10 years from the date a beneficiary joins the fund. The hope of these funds is that in the future, in light of the low management fee rates, many additional employees will join these 'default choice funds' as beneficiaries'