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על מנת לשמור על אבטחתך, בוצע ניתוק אוטומטי.
Jobnet’s previous two homepage articles dealt with mandatory pensions, providing an overview of the Israeli pension market. The present article assesses the considerations to weigh when choosing a pension plan to match the employee’s needs, and how to go about making the selection. We spoke about these matters with Yaakov Zlotnik, a seasoned retirement consultant.
Today it’s generally assumed more advisable for an employee to save through a pension fund than through senior employees’ insurance or provident funds. Why is this?
The reform in the capital market created a situation in which pension insurance includes three components: old-age payments, disability insurance and survivors’ benefits (in the event the employee passes away).
Provident funds only provide old-age payments, so generally this option is not worthwhile. At the same price you can get more with a pension fund, which includes insurance coverage as well.
Then what justifies the existence of provident funds from the salaried employee’s perspective? [This article focuses on salaried employees, but it should also be kept in mind that provident funds serve as an important pension savings track for self-employed workers.]
They are justifiable as an additional savings layer. If an employee with high income wants to put aside for his pension amounts that exceed the ceiling set for him in the framework of the pension fund, provident funds allow him to put aside this money in order to increase savings for retirement age (whether as capital savings, i.e. a one-time withdrawal, or payment savings, i.e. receiving a monthly payment).
If you have to make a choice it should be between pension funds and senior employees’ insurance, since they also allow you to receive the three components of insurance.
Pension funds provide much better savings terms, especially when it comes to the management fees paid into them out of the balance.
Therefore senior employees’ insurance can also be used as another layer of savings, including supplementing survivors’ insurance and disability insurance. In certain cases senior employees’ insurance policies also know how to provide flexibility that the pension funds cannot provide.
Retirement consultant Yaakov Zlotnik
Can you give an example of this flexibility?
For instance, in the event of the pension holder’s death the money that has accrued in the pension fund will go only to his survivors, while with senior employees’ insurance the policyholder can determine who the beneficiaries will be, not necessarily his surviving family members. So in this case it offers flexibility for those who need it.
But as we said, all this is relevant primarily for those who have relatively high income, meaning for those who earn up to NIS 15,000 [$4,100] in monthly gross income [which accounts for 90% of the population] pension funds are the best way to save. Employees who earn more can consider the other insurers regarding contributions beyond this amount, based on their needs.
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How do you choose a pension fund?
We’ll take the case of an employee entering the workforce for the first time. There are a lot of pension funds and he wants to know what the difference is between them. He must assess several variables. The first is of course the financial factor – the fund’s performance over time, i.e. the profits it has yielded and the fluctuations in its results. In today’s world the level of the pension at retirement age is determined according to the total amount the funds have generated during the years of savings.
But that creates a well-known problem: its past performance does not necessarily reflect its future performance, certainly not over a long period of time, and here we’re talking about long-range savings in the most salient sense – savings for old age.
Yes, but still if you assess the pension fund’s performance you’ll find that certain funds keep appearing in the top 20 percentile over the course of several years. On the other hand there are funds that languish for many years. They don’t manage to pick up.
Today it’s easy to assess this. The Finance Ministry website has up-to-date comparative data on the performance of all of the funds.
What does this employee have to evaluate besides financial yields?
Today there’s another important component, which unfortunately many people don’t pay enough attention to: the level of service the fund provides its customers.
What does that mean? Why is this important nowadays?
In the past the employee had no control over his pension, but today he is the master of his own destiny. Not just in choosing the fund, but also the insurance plan right for him within the fund. So today a substantial part of providing decent service is the fund’s willingness and ability to offer the insurance holder a plan that’s right for his needs.
Can you give us an example?
Let’s take two policyholders in their 30s. One is single and the other is married and has four children. Obviously their insurance needs differ. For instance, the single person doesn’t need survivors’ insurance, while a family man definitely does.
A 30-year-old single man came to me for a consultation. In the annual report he received I saw that he’s eligible for survivors’ benefits. Why should he be paying over NIS 100 a month for insurance he has no need for? I suggested he report to the fund that he’s single. That way, as long as he remains single, these costs will go toward his old-age pension, instead of going down the drain.
A pension holder is entitled to expect the fund to help him maximize his insurance and adjust it to his needs. This isn’t a one-time service, because the pension holder’s needs change. The single person, for instance, gets married and has children.
Can you give us another example of good service?
A pension holder wants to find out if he can increase his monthly payment into the pension fund and what that would mean. Many pension holders don’t know they can increase their monthly contributions from 5.5% to 7%. [By increasing his contribution, the employee also receives a tax benefit. See Part I of “Mandatory Pensions.”]
Why would they opt to do that?
Let’s assume a 35-year-old pension holder asks the pension fund for a forecast. He wants to know the amount of the monthly payment he can expect to receive when he reaches retirement. Upon receiving the data he discovers the amount is less than he’d like to live on, so in order to increase that amount he may want to raise the monthly contributions set aside for savings.
Then why can’t you increase the amount beyond 7%?
Income tax regulations allow the saver to receive tax credit up to this amount. It’s possible to set aside larger amounts if you want, but without the tax benefit.
How does that tie in with the question regarding service?
There’s someone there to conduct all these dialogues with. It’s not self-understood that a pension holder receives this kind of service. There are pension funds where the personnel come to the pension holder at his workplace, advise him regarding how to choose the right plan for him, sit down with him and his wife (pension savings is based on the family, not the individual), and evaluate the level of the pension in light of the family income level and the insurance coverage the family already has [to avoid unnecessary redundancy]. Not every fund is able to provide this level of service.
Another example: When there are regulatory changes the fund has the sense to send a letter out to its members offering them an opportunity to contact the fund to assess how the regulatory changes affect them.
How does a pension holder know in advance which fund gives better service?
He should do a market survey and consult with a pension consultant.
I’m consulting with you. Which are those funds?
I don’t want to mention them by name. It would be unethical because there are funds that I haven’t been exposed to yet and maybe the service they provide is just as good as at other companies. But to give you an answer, I can say that the large funds have taken the issue of service seriously and know how to do it well. The competition is definitely to the pension holders’ benefit.
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Which clients are most likely to hire your services? Private individuals or employers who want you to provide consulting services for their employees?
Both. Private individuals come to me independent of their workplace, and I also provide consulting services for workplaces. Corporate clients generally come to me through a joint initiative between the employers and the employee committees, which want to choose a pension fund and plans suitable for the company’s staff.
As a general rule it’s important to consult with a professional anytime there is a raise or decrease in salary, and when changing jobs.
How can the person hiring your services rest assured that you and other pension consultants don’t have an interest in recommending certain funds? It used to be that such claims were commonplace.
In the past it really wasn’t regulated and there were gray areas. There was no need to have a pension consultant’s license and consultants had working relations with pension funds. Today the rules are clear: a pension consultant has a license and he cannot have any interest with any pension fund or he has to have an equal interest with all of them. I, for example, am not compensated in any way by any pension fund.
Part II of this article will appear next week