Israeli Pension Funds Rank High in Returns, But New Policy Sparks Concern
Israeli pension funds achieved the second-highest returns globally over the last decade, averaging 5.58% real annual yield. A new policy shift involving 30 billion shekels has raised concerns about potential government appropriation of surplus funds and a possible negative impact on the stock market. However, the article argues that the reform has ultimately benefited the capital market by releasing previously locked funds.
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- Israeli pension funds ranked second globally with a 5.58% real annual return over the past decade.
- A new policy shift involves approximately 30 billion shekels in pension fund surpluses.
- Investment houses fear the government may use surplus pension funds for budgetary needs.
- The transfer of surplus funds to the Bank of Israel could negatively impact the stock market.
- The author argues the new policy has ultimately benefited the capital market by releasing funds.
A new OECD report reveals that Israeli pension savings ranked second out of 31 countries for returns over the past decade, averaging a 5.58% real annual yield. This strong performance, however, is overshadowed by concerns regarding a new government policy affecting approximately 30 billion shekels in pension funds.
The policy shift, implemented in October 2022, replaced a previous system where pension funds transferred 30% of their assets to the state in exchange for government-guaranteed bonds yielding around 5-6% real interest. This old system was costly for the Treasury, which paid significantly higher interest than market rates, amounting to an estimated 9 billion shekels more in 2021 alone.
Under the new mechanism, pension funds invest these assets in the capital market, and the state guarantees a real annual return of 5.15%. If market returns fall short, the state covers the difference; if they exceed this rate, the surplus is transferred to a special fund for use in less successful years. The first accounting for this new system is due in October 2027, after a five-year investment period.
Reports suggest that investment houses fear the government might divert the expected surplus of around 30 billion shekels from this special fund for budgetary needs, rather than preserving it for future yield guarantees. While the Treasury has denied any intention to change the funds' purpose, the article notes that recent awareness of this large sum among Knesset members could potentially alter this stance.
Beyond the fear of government intervention, the article highlights another concern: the potential negative impact on the Tel Aviv Stock Exchange. As pension funds transfer these surplus billions to a locked account at the Bank of Israel, it could reduce demand for stocks and depress market prices. However, the author contextualizes this, noting that the monthly transfers are relatively small (averaging around 125 million shekels) compared to the market's daily trading volume and overall market cap. Furthermore, the reform has gradually released hundreds of billions of shekels previously locked in government bonds into the capital market, a move that has ultimately benefited the stock market.
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