Pensions complémentaires (obligatoires)

Regulatory Framework

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2017: Change of earmarked bonds allocation in the pension funds. New pension funds are allowed to invest 30% of their net monthly assets in earmarked government bonds that provide a guaranteed real rate of return of 4.86%. Before the change, the allocation was equal between all savers regardless of their age. After the change, while the overall allocation remains 30% for the entire fund, the allocation varies by age and status: pensioners, savers over 50, and savers under 50. Pensioners are entitled to a 60% allocation; savers over 50 receive a 30% allocation; and savers under 50 receive the residual amount.

2017: Mandatory pension for self-employed workers. The Ministry of Finance issued a mandatory pension contribution requirement for self-employed workers.

2016: Automatic consolidation of inactive pension accounts. Regulations were issued in order to allow the automatic consolidation of a saver's inactive account in one management company, to his/her active account in another management company.

2016: Default pension funds. Certain pension funds were chosen to serve as default options for employees who did not make an active decision. The funds were selected for a limited period using a management fees parameter.

2015: Change of investment tracks in pension funds. Age-appropriate investment tracks were established as the default savings vehicles. In these tracks, as the saver becomes older, the investment's risk level is lowered.

2013: Establishment of a central information system for pension savings. This system enables all pension savings information to be retrieved in a quick, centralized manner.

2012: Change of ceiling for management fees. Setting a lower ceiling for management fees in life insurance policies & provident funds. The new ceiling is set to 1.05% of accrual and 4% of contributions, instead of 2% from Accrual.

2011: Locating unidentified beneficiaries. Set of regulations demanding financial institutions to establish a mechanism in order to locate plan members whom contact with has been severed as well as beneﬁciaries of plan members following a member's death. A "negative" incentive, in the form a reduction in managing fees, was introduced in cases where contact with members is not re-established within a given period of time.

2008: Portability regulations. Those regulations created a platform for an easy and timely transfer of funds between different long-term savings plans. Since the publication of these regulations a growing amount of members are using the option of portability in order to increase their bargaining power with the financial institutions.

2008: Mandatory pension for employees. The minister of industry, trade and labor issued an extension order of the collective agreement between employers and employees regarding contributions to pension plans. This order effectively made contributions to pension plans mandatory for employees and their employers.

2008: Control of Financial Services (Provident Funds) Law, Amendment No. 3. The capital accumulated in any of the pensions products (pension funds, provident funds and life insurance), can no longer be directly withdrawn, and can be only paid as an annuity. Until the amendment, provident funds and some of the life insurance plans were able to pay the capital accumulated as a lump sum.

2005: Control of Financial Services (Provident Funds) Law; provides for the authorization and supervision of pension management companies and provident fund management companies.

2005: Control of Financial Services (Pension Counseling and Pension Marketing) Law; supervises the work of councilors in the field of pension.

1997: Directives of the Supervisor of the Capital Market, Insurance, and Savings for the Establishment and Management of New and General Pension Funds; introduce plans implemented through subsidized pension funds (New Pension Funds( and non-subsidized pension funds (General Pension Fund), regulate their administration, and contain minimum requirements concerning benefits.

1981: Control of Financial Services (Insurance) Law; provides for the authorization and supervision of insurance and pension management companies.

1964: Income Tax Regulations; provide for the approval and supervision of pension and provident funds, establish rules for the protection of rights.

1961: Income Tax Ordinance; regulates the tax treatment of employee and employer contributions and benefits.

Different legal rules apply to pension funds first authorized before 1995 (known as old pension funds). These funds have not been permitted to accept new members since 1 January 1995, and are not covered in the following sections.

Types of Schemes

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Plan sponsors:

Pension management companies and insurance companies may establish complementary pension plans and offer them to employers.

Employers are mandated to affiliate all of their salary workers to a pension plan and the contributions are mandatory for earnings up to the medium wage. Employers can increase their contributions, on a voluntary basis, and affiliate some or all of their employees to such a plan. The affiliation and the promise to make higher contributions than the mandatory contributions may be based on agreements between employers and individual employees or on company or industry-wide collective agreements with trade unions.

The choice of the pension management company or insurance company to which the employee is to be affiliated is made by the employee. Employees have, depending on plan rules, considerable choice concerning the benefit package that provides different replacement rates for disability, survivor and old-age pensions.

Types of plans:

New pension funds: Pension management companies may establish pension plans implemented through New pension funds. These plans must provide old-age, disability, and survivor benefits. The covered salary on which contribution rates are applied is up to twice the national average salary.

Pension plans implemented through New pension funds must invest 30 per cent of their assets in earmarked government bonds providing a guaranteed real rate of return (see section Asset management).

All the plans, which were opened after 1994, are defined contributions plans, but there is still a large amount of money invested in plans in the type of defined benefits, which were closed in 1995 to new members (the old plans).

The establishment of New pension funds is subject to the approval of the Commissioner of the Capital Markets, Insurance, and Savings Authority (CMISA). In addition, tax approval must be obtained from the CMISA for each tax year.

General pension funds: Pension management companies may establish pension plans implemented through General pension funds. These plans must be defined contribution and provide at least old-age benefits. There is no ceiling on covered salary and plans may be an alternative to a plan implemented through a new fund or complementary to such a plan for the part of the salary exceeding twice the national average salary. Investment in earmarked government bonds providing a guaranteed real rate of return is not permitted for general pension funds.

The establishment of general pension funds is subject to the approval of the CMISA. In addition, tax approval must be obtained from the CMISA for each tax year.

Provident funds: Provident fund management companies and insurance companies may establish provident plans.

Provident funds are "pure" savings plans, and all contributions made to these funds are intended for the accumulation of sources for retirement income. Provident funds, unlike pension plans and life insurance policies, do not provide members of the plan with the ability to purchase life and disability insurance from their contributions to the plan.

Until 2008, provident funds were authorize to pay the capital accumulate in a lump sum once the member in the fund reaches the age of 60. After 2008, the capital accumulated in provident fund cannot be directly withdrawn and must first be transferred to a pension fund or a life insurance plan for payment as annuity.

The establishment of provident funds is subject to the approval of the CMISA. In addition, tax approval must be obtained from the CMISA for each tax year.

Life insurance: Insurance companies may establish plans (that are implemented through life insurance policies).

Insurance companies must obtain yearly tax approval for their life insurance policies from the CMISA.

All plans: Participation is voluntary for covered employees and self-employed. Additional voluntary contributions are not prohibited, but will not necessary earn tax reliefs.

Institutional Framework

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New and general pension funds: Pension management companies (PMCs) manage the contribution and benefit administration.

PMCs must be established as limited joint-stock companies and must obtain an insurance company license from the Commissioner of the Capital Markets Insurance, and Savings (CMISA). Minimum capital requirements apply.

Each PMC must be governed by a board of directors of which at least two members (known as public directors) must not be members of one of the plans established by the company. All directors and officers of the company must have adequate qualifications.

The board of directors may delegate its powers to committees consisting of at least three of its members. One member of each committee must be a public director.

The board of directors must appoint the following committees:

- Audit committee (of which all public directors must be members);
- Investment committee;
- Balance sheet committee (optional) to discuss and approve financial statements and actuarial reports.
- Risk management (just for large PMC - AuM - more than 10 Billion NIS)
- Compensation (the Audit committee can nominate as the Compensation committee)

Each PMC may establish one defined contribution plan, implemented through a new fund, and one defined contribution plan, implemented through a general fund. PMCs must establish separate pension funds for each of their plans and maintain a separate bookkeeping and actuarial system for each fund.

Provident funds companies (see below) can manage new and general pension funds as well, and their institutional framework is identical to the PMC's framework.

Provident funds: Provident fund companies and insurance companies manage the contribution and benefit administration.

Provident fund companies and insurance companies must be licensed by the CMISA.

Life insurance: Insurance companies manage the contribution and benefit administration.

Insurance companies must be licensed by the CMISA.

Coverage

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Covered population

All plans: Private- and public-sector employees.

Israel's long-term savings are divided into three pillars.

The first pillar of long-term savings in Israel is the basis for retirement savings for every Israeli citizen. This layer is the minimal income for every citizen in Israel that reaches retirement age. Also, this pillar provides insurance against death or work disability.

Savings in this pillar are being done mainly through employee and employer contributions during working periods. Although the level of deposits is made in accordance with the employee's salary level, each employee will receive at the "entitling event" the same amount of pension. Savings in this pillar are managed by the National Insurance Institute.

Subsidized and non-subsidized retirement products are considered to be the second pillar, and cover the part of the salary up to twice the national average salary that is not covered by the first pillar as described above.

Enforcement of affiliation

There are no legal rules concerning discrimination in coverage. Beginning on 1 January 2008, the Pension for Every Worker set the basis for that every salaried worker in the economy became entitled to receive pension contributions by the employee himself and by his employer.

Since 2017, self-employed persons must affiliate to a plan on a personal basis (for others - since 2008).

Financing / Investment

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Sources of funds

Member contributions

Employee contributions:

All plans: Employees are required to contribute.

New pension funds: The maximum contribution is 7 per cent of the part of the salary up to twice the national average salary.

The most common contribution rate is 5.5 per cent. If it is up to 5 per cent, the contribution of the employee and of the employer must be equal to qualify for tax benefits. Contributions above 5 per cent are dependent in the employee's requirements and on labor agreements.

General pension and provident funds and life insurance: The maximum contribution is 7 per cent of salary without ceiling.

The most common contribution rate is 5.5 per cent. If it is up to 5 per cent, the contribution of the employee and of the employer must be equal to qualify for tax benefits. Contributions above 5 per cent are dependent in the employee's requirements and on labor agreements.

Life insurance: The maximum contribution is 7 per cent of the part of the salary up to twice the national average salary.

Employees must match their employer's contributions, up to a maximum of 5 per cent.

Employer contributions

All plans: Employers are required to contribute.

The common contribution is 5.5 per cent for retirement saving and 6 per cent for severance payments. The contribution is contingent upon labor agreements.

New pension funds: The maximum contribution is 7.5 per cent of the part of the salary up to twice the national average salary.

The common contribution is 5.5 per cent for retirement saving and 6 per cent for severance payments. The contribution is contingent upon labor agreements.

General pension and provident funds and executive insurance: The maximum contribution is 7.5 per cent of salary without ceiling.

The common contribution is 5.5 per cent for retirement saving and 6 per cent for severance payments. The contribution is contingent upon labor agreements.

Life insurance: Employers may contribute a 2.5 per cent of the salary in addition to the 7.5 per cent limit above for contributions to purchase disability insurance for their employees.

Other sources of funds

All plans: None.

Methods of Financing

All plans: Funded.

The main method used to finance pension plans is by actuarial calculation of its assets and liabilities. Every pension fund must have its liabilities calculated by an actuary.

New Pension funds are all defined contribution plans and for every member of the fund there is an individual account for which an actuarial balance is made each year. In the old funds, which were closed for new members in 1995, the actuarial balance mechanism is not annual and some of the obligations are funded by the government (i.e. Control of Financial Services Regulations - Insurance).

Asset Management

All plans: The PMC, and also the insurance company or the provident fund company in the case of provident funds, manage the assets.

In New pension funds, thirty per cent of net monthly accrual (i.e. monthly accrual less management fees plus yield) must be invested in earmarked government bonds that provide a guaranteed real rate of return of 4.86 per cent and that are only issued to New pension funds. This rate is contingent upon governmental decisions.

70 per cent of remaining total assets are invested in accordance with the instructions below concerning life insurance policies, provident funds and general pension funds.

The restrictions on investments are as described in Regulations of Financial Services (Provident Funds) (Investment rules applicable to financial institutions) 2012.

Over the years, the rules were anchored in two separate rules files, one for insurers and one for pension funds and provident funds. The new regulations are meant to bring to harmonization of investment rules of long term saving products, adjust regulation to capital market developments, and increase the involvement of organs in the company.

Benefit provisions

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Waiting period:

All plans: No legal rules.

Vesting rules:

All plans: Employee contributions vest immediately.

Vesting of employer contributions depends on the agreements between employers and employees or trade unions (see section Plan sponsors) and there is no legally prescribed vesting period.

Preservation, portability, transferability

New and general pension funds: Upon termination of employment before retirement, members may either transform their accrued rights or accumulated capital into deferred pension rights or receive a withdrawal benefit equal to the vested employer and their own contributions less management fees. The contributions must be adjusted for the calculation of the withdrawal benefit:

- in line with the consumer price index (CPI) if membership lasted less than five years;
- in line with the CPI plus interest of 1.5 per cent per year if membership lasted from five up to 15 years;
- in line with the CPI plus interest of 2 per cent per year if membership lasted more than 15 years.

Preserved rights must be indexed to the CPI.

Provident funds: Upon termination of employment before retirement, members receive their own and the vested employer contributions as a lump sum.

Life insurance: Upon termination of employment before retirement, the insurance policy may be partly or fully surrendered.

Retirement Benefits

Benefit qualifying conditions

All plans: Benefits may be paid from age 67 (men) or age 62 (women).

Early retirement is allowed for men and women from age 60.

Withdrawal of funds before retirement

Early retirement is allowed for men and women from age 60.

Benefit structure / formula

New pension funds: Defined benefit or defined contribution.

In the case of defined benefit plans, the old-age pension equals the sum of each year's product of the annual/monthly accrual rate and the member's covered salary during that year. The covered salary must not exceed twice the average national salary. Each year's product must be indexed to the Consumer Price Index (CPI) from the relevant year to the date of retirement. The accrual rate depends on the benefit package chosen by the employee. An increased disability benefit will result in a lower accrual rate for the old-age pension.

In the case of defined contribution plans, the old-age pension is the product of the accrued amount accumulated by the member at retirement and a factor calculated based on the member's age at retirement, sex and date of birth, and yearly returns, mortality tables, etc.

Early retirement benefits are actuarially reduced.

Benefits must be paid as pensions, but retirees whose pension is less than the minimum pension regulated in the plan rules receive the cash value of their accrued rights or accumulated capital as a lump sum.

Twenty-five per cent of a maximum of five years' pension payments may be commuted to a lump sum provided that the reduced pension is not lower than the minimum pension defined in the plan rules.

If, at retirement, members have no spouse and no children younger than age 21, they may cease being covered for the risk of death and receive an increased old-age pension.

General pension funds: Defined contribution.

There is no ceiling on covered salary.

The old-age pension is the product of the accrued amount accumulated by the member at retirement and a factor calculated based on the member's age at retirement, sex and date of birth, yearly returns, mortality tables, etc.

One-time discounting of the money accrued in general pension funds will be permitted, provided that the amount of the annuity remaining with the member after the said discounting amounts to NIS 3,850 (half of the average salary in Israel), adjusted to the consumer price index.

Provident funds and Life insurance: Defined contribution.

There is no ceiling on covered salary.

One-time discounting of the money accrued will be permitted, provided that the amount of the annuity remaining with the member after the said discounting amounts is NIS 3,850 (half of the average salary in Israel), adjusted to the consumer price index (current amount is 4,360 NIS).

Benefit adjustment

All plans: No legal rules.

Survivors

Benefit qualifying conditions

New pension funds: Survivor benefits must be provided according to plan rules.

If the total survivor pension is less than the minimum pension stipulated in the plan rules, survivors receive the cash value of the deceased member's accrued rights or accumulated capital as a lump sum.

If an old-age pensioner dies before having received 60 monthly pension payments, the fund must pay 100 per cent of the member's old-age pension to the eligible survivors for the remainder of the 60 months.

If the old-age pensioner dies after having received 60 but before 120 monthly pension payments, or after 120 but before 180 monthly pension payments, the full pension continues to be paid for the remainder of the 120 months or 180 months respectively.

General pension funds: The provision of survivor benefits is voluntary.

If survivor benefits are provided, the same rules apply as for new pension funds.

Provident funds: The provision of survivor benefits is voluntary.

Survivor benefits are not usually provided. When provided, survivors receive the deceased member's accumulated capital as a lump sum.

Life insurance: The provision of survivor benefits is voluntary.

Survivors usually receive a lump sum, the amount of which depends on the savings in the policy and the type of the policy.

Benefit structure

Benefit adjustment

Disability

Benefit qualifying conditions

New pension funds: Disability benefits must be provided.

Full disability benefits are payable to members with a reduced earnings capacity of at least 75 per cent and partial disability benefits with a reduced earnings capacity of at least 25 per cent.

Disability pensioners continue to accrue old-age benefits, but they are exempt from making contributions.

General pension funds: The provision of disability benefits is voluntary.

If disability benefits are provided, the same rules as for new pension funds apply.

Provident funds: Disability benefits are not provided.

Life insurance: The provision of disability benefits is voluntary.

Employers may make additional voluntary contributions to provide for disability insurance for their employees (see section Sources of funds, employer contributions).

If disability insurance is provided, a full disability pension usually of 75 per cent of the disabled member's salary is paid after a waiting period of between 3 and 12 months.

Depending on the policy, disability pensioners may continue to accrue old-age benefits and be exempt from making contributions.

Some policies also provide disability benefits in the case of a partial loss of earnings capacity (i.e. reduction in earnings capacity of 50 per cent).

Benefit structure

Benefit adjustment

Protection of Rights

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Protection of Assets

New and general pension funds: Pension management companies must hold pension fund assets separate from their own assets.

Provident funds: Provident fund management companies must hold provident fund assets separate from their own assets.

Life insurance: Insurance companies must hold insured assets separate from their own assets.

Financial and Technical Requirements / Reporting

New and general pension funds: Pension management companies (PMCs) must, for each pension fund managed, prepare the following:

- Monthly financial statements including a cash flow report;
- Quarterly reports containing a list of assets and a rate of return report;
- Yearly reports containing audited financial statements and actuarial balance sheets prepared by the actuary.

PMCs must appoint an auditor and an actuary.

The Commissioner of the Capital Market, Insurance, and Savings (CMISD) may make any remarks on deficiencies or request any clarifications.

Provident funds: Provident fund management companies must, for each provident fund managed, prepare:

- Monthly financial statements including a cash flow report;
- Quarterly reports containing a list of assets and a rate of return report;
- Yearly reports containing audited financial statements.

Provident fund management companies must appoint an auditor.

The CMISD may make any remarks on deficiencies or request any clarifications.

Life insurance: Financial and technical requirements and requirements for regular reporting to the CMISD of insurance companies are defined in the legislation governing insurance companies.

Whistleblowing

All plans: The Israeli Control of Insurance Law sets that the auditor must only report regarding a violation of the law or of the Director's directives as published in circulars issued pursuant to that law, and even such reporting is done only after the auditor has reported to the CEO and received a response from the CEO and that response did not satisfy the auditor.

Standards for service providers

All plans: Auditors must be certified public accountants and hold a license from the Auditors' Council.

While the applicable legislation sets out detailed actuarial bases and methods that must be used, there are no legal rules concerning who is entitled to be an actuary. Actuaries appointed to carry out actuarial examinations are usually members of the Israel Actuarial Association.

Fees

New and general pension funds: Pension management companies (PMCs) may charge a maximum of 6 per cent of contributions and a maximum of 0.5 per cent of accumulated savings.

Provident funds: Provident fund management companies may charge a maximum of 1.05 per cent of accrual and 4% per cent of contributions.

Life insurance: Insurance companies may charge a maximum of 1.05 per cent of Accrual and 4% per cent of contributions.

Winding up / Merger and acquisition

New and general pension funds: Plans must be wound up if the minimum membership requirements (see section Types of plans) are not fulfilled.

If all plans of a pension management company (PMC) fail to meet the minimum membership requirements, the management company's license is revoked and it must be wound up.

Provident funds: The winding up of provident plans and provident fund management companies is subject to legislation governing provident funds.

Life insurance: The winding up of insurance companies is subject to legislation governing insurance companies.

Bankruptcy: Insolvency Insurance / Compensation Fund

New and general pension funds: As long as a pension plan has not reached the required minimum membership of 1,500, the pension management company (PMC) must reinsure disability and survivor benefits with an insurance company. The reinsurance policy must be submitted yearly to the Commissioner of the Capital Market, Insurance, and Savings (CMISD) for approval.

All plans: There are no other requirements for plans to insure against financial loss, and no compensation fund exists.

Disclosure of information / Individual action

All plans: Members must be provided with a quarterly report and with an annual report including at least:

- A presentation of basic information and financial data concerning the member (e.g. contributions and accrued rights or accumulated capital);
- A statement of fund or policy assets and investment performance including information on management fees;
- A form on which the member may update or correct personal information;
- Explanations of the information included in the report.

Members may complain to a consumer ombudsman who is responsible for resolving disputes. The ombudsman investigates complaints and instructs the correction of deficiencies.

Other measures

All plans: None.

Tax Treatment

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Taxation of member contributions

All plans:
Since 2008, the capital accumulated in any of the pension products (pension funds, provident funds and life insurance policies) has to be converted into an annuity, up to a minimum of NIS 4 418 (based on minimum indexed wage as of 2008). If the capital accumulated translates into a larger annuity, the individual can asks for the minimum annuity and take the difference as a lump sum. Lump sums below NIS 747,936 are tax free and anything in excess is taxed at 35%.

Annuities below a limit called "entitled annuity" are tax exempt. The tax rate for the part of the annuity above the entitled annuity is 35%. The entitled annuity amount depends on the extent to which the right to an exemption on severance pay was used. In 2018, the full exemption was NIS 8,380 monthly.

Taxation of employer contributions

All plans:
Employer contributions are not included in the taxable income of the individual up to 7.5% of the individual's salary, with different caps on the salary for employees and self-employed workers.
Employee contributions are subject to a 35% non-refundable tax credit, up to a cap.

The ceiling for entitled income, based on a monthly calculation, is equal to two and half times the average income in the economy on the pension track.

Taxation of investment income

All plans: Tax-exempt up to a limit.

Taxation of benefits

N/A

Regulatory and Supervisory Authorities

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Commissioner of the Capital Market, Insurance, and Savings Authority (CMISA): Supervises pension management and insurance companies, new and general pension funds and provident funds.

The Capital Markets, Insurance, and Savings Division (CMISA) receives and verifies reports submitted by supervised entities and may carry out on-site inspections at any time.

Since 2017, the CMISD (Capital Markets, Insurance and Savings Division) became an independent authority as the CMISA (Capital Markets, Insurance and Savings Authority) and also supervises new institutions (mainly in the lending market) which were currently unregulated (for example: electronic money institutions, currency providers, payment institutions, pay-day loans providers, financial companies, P2P platforms, etc.).

Am ve Olamo 4
P.O.B. 12195
Jerusalem 91131
Israel

Tel.: (+972) 2 6211501
Fax: (+972) 2 5695342

Internet: http://www.mof.gov.il

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