Israel's Pension Funds Face Scrutiny Over 30 Billion Shekel Surplus

Israel boasts high returns on pension savings, ranking second globally over the past decade with an average annual real return of 5.58%. However, a recent report has raised concerns about a potential risk to the stock market stemming from approximately 30 billion shekels in surplus pension funds. These funds are slated for transfer to a special account, prompting fears that the government might tap into them to address budget deficits.

The surplus arises from a reform implemented in October 2022 concerning the guaranteed yield mechanism for pension savings. Previously, 30% of pension funds were invested in special government bonds offering a guaranteed real return of about 5-6% annually, with the state covering any shortfall. This system proved costly for the government, which incurred additional expenses of around 9 billion shekels in 2021 alone.

The new system allows pension funds to invest these funds on the stock market, with the state guaranteeing a 5.15% real annual return. If investments yield less, the state compensates; if they yield more, the surplus is directed to a special fund for future compensation. This surplus is now estimated at 30 billion shekels, with the first assessment due in October 2027.

Concerns have emerged that the government might seek to use this surplus for budgetary needs, a prospect denied by the Ministry of Finance. Journalist Ariel Feiglin, writing for Maariv, notes that while the ministry assures no such plans exist, the revelation of these sums to lawmakers could change perceptions. Feiglin also points out a potential market impact: even if the government doesn't seize the funds, their transfer to a blocked account at the Bank of Israel could reduce demand for stocks, potentially pressuring the Tel Aviv Stock Exchange.

However, Feiglin argues this impact might be overstated. The transfers will be gradual, involving hundreds of millions of shekels monthly, not a sudden withdrawal. Furthermore, not all funds are invested in Israeli stocks; some are in bonds or foreign equities. The estimated monthly impact on the Israeli stock market is around 125 million shekels, a sum unlikely to crash the market, which has a daily trading volume of about 4.7 billion shekels and a total market capitalization of approximately 3.1 trillion shekels. The reform, Feiglin concludes, has ultimately benefited the stock market by freeing up hundreds of billions of shekels previously tied up in government bonds.