The Pension Market in Israel Ongoing Progress

1
The Pension Market in Israel - Ongoing Progress
OECD, Insurance and Private Pension Committee
Working Party on Private Pensions, 16th session,
Paris, 11-12 December 2006
Lavi Schiffenbauer Head of Information and
Development Department
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
2
Overview of the Topics

• The publics financial asset portfolio
• Insurance and LT savings general information
• Type of pension funds in Israel
• Basic elements of pension coverage in Israel
• Pension market overview
• Israeli pension system selected indicators
• Israel vis-à-vis OECD countries selected
  comparison indicators
• Conclusion

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
3
Entities Supervised by the CMISD

• 439 Provident funds
• 22 New pension funds
• 18 Old pension funds
• 26 (Life and Non-life) Insurance companies
• Total Assets (September 2006)
• NIS 626 billions (146 billions)

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
4
The Publics Financial Assets Portfolio,
September 2006
Contractual Savings
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
5
Insurance Long Term Savings -General
information ( billions)
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
6
Type of Pension Funds in Israel

• New pension funds Every pension plan
  established after 1994. A hybrid of
  defined-contribution (DC), group insurance and
  defined-benefit (DB) elements
• Old pension funds Private sector
  defined-benefit pension plans established before
  1995

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
7
Basic Elements of Pension Coverage in Israel

• 1st Pillar
• Compulsory, defined benefit old-age, disability
  and survivors pensions
• Providing a very basic level of benefits
• Financed on a pay-as-you-go basis from current
  contributions of all workers and employers
• Managed by a government agency (The National
  Insurance Institute of Israel)

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
8
Basic Elements of Pension Coverage in Israel

• 2nd Pillar
• Voluntary pension plans and insurance contracts,
  providing old-age, disability and survivors
  pensions on a hybrid DB/DC/group insurance basis
• Fully funded from contributions of insured
  members and their employers
• Eligible for tax relief on contributions and
  investment income and for some investment
  subsidies
• Managed by private sector companies

Up to 7.5 of salary
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
9
Basic Elements of Pension Coverage in Israel

• 3rd Pillar
• Voluntary long term savings vehicles
• Ineligible for investment subsidies and tax
  relief
• Managed by private sector companies

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
10
Pension Market Overview

• 22 New pension funds. Mostly owned by insurance
  companies
• 11.8 billions (at the end of Sep. 2006)
• 21.0 asset growth (in terms) between Dec. 2005
  and Sep. 2006
• HHI (at the end of Dec. 2005) 0.28
• 18 Old pension funds (closed to new members)
• 33.2 billions (at the end of Sep. 2006)
• 7.3 asset growth (in terms) between Dec. 2005
  and Sep. 2006
• Total assets of both pension funds types 32 of
  the GDP

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
11
Israeli Pension System Selected Indicators

• Pension funds assets
• Distribution of selected items of the pension
  funds asset portfolio
• Distribution of selected items of the contractual
  savings institutions asset portfolio
• Annual rate of return for members
• HHI by active members and total assets

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
12
Pension Funds Assets, 1999 10/2006
A rapidly growing market
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
13
Distribution of Selected Items of the Pension
Funds Asset Portfolio, in , 1998 09/2006
Effect of increased exposure to capital markets
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
14
Distribution of Selected Items of the Contractual
Savings Institutions Asset Portfolio, in ,1996
09/2006
and increasing diversification
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
15
Annual Rate of Return for Members, in ,
1999-10/2006
High returns, mainly due to the development of
the capital markets
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
16
HHI by Active Members and Total Assets in the New
Pension Funds, 2000-2005
A trend of reducing concentration and increasing
competition
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
17
Israel vis-à-vis OECD Countries Selected
Comparison Indicators

• Structure of assets of pension funds
• Population of 65 year olds as of total
  population
• Pension funds assets as of GDP
• Market capitalization as of GDP and ratio of
  pension plans and life insurance as of GDP
• Population of 65 year old as of total
  population and ratio of pension plans and life
  insurance as of GDP

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
18
Structure of Assets of Pension funds, Israel and
OECD Countries, 2005
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
19
Population of 65 Year Olds of Total
Population, Israel and the OECD Countries, 2005
Israel Relatively young population
Source The World Bank
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
20
Pension Funds Assets in Israel and the OECD
Countries, of GDP, 2005
but advanced pension market
Source OECD and CMISD
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
21
Market Capitalization as of GDP and Ratio of
Pension Plans and Life Insurance as GDP, Israel
and Selected OECD Countries, 2005
High correlation between developed contractual
savings market and developed capital market
Source OECD and The World Bank
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
22
Population of 65 Year Olds as of Total
Population and Ratio of Pension Plans and Life
Insurance as of GDP, Israel and Selected OECD
Countries, 2005
Israel - Relatively young population but
considerable contractual savings market
Source OECD and The World Bank
Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel
23
Conclusion

• High growth rates of the long-term saving plans,
  especially pension markets
• Increasing investment flexibility help to improve
  the Israeli capital markets
• Increase in competition and reduction in
  concentration
• The Pension market in Israel is in an ongoing
  progress

Capital Market, Insurance and Savings Division,
Ministry of Finance, State of Israel