Menachem Kali, chairman of the New Israeli Pension Funds Association, said the institutional investors cannot invest solely in Israel because it is too small a country to absorb all of the capital. But Mr. Kali emphasized the change will take some time, however, as members of the funds' investment committees will have to digest the change. He also expects more foreign investment managers to be opening offices in Tel Aviv and competing for the Israeli assets.
The changes in the Israeli pension fund market began last year. Finance Minister Benjamin Netanyahu instigated a reform in order to save from collapse the seven large pension funds run by the Histadrut Labor Union and three company funds. The pension funds had funding deficits of 120 billion shekels. Mr. Netanyahu nationalized the pension funds, which have 1 million participants, and gave a government guarantee of 73 billion shekels in the coming years to subsidize the funds. This step was accompanied by the decision to take over the running of the funds, and special directors were appointed to prepare the funds for privatization.
The Histadrut funds offered old-age pensions based on an employer contribution of 12% of salary and an employee contribution of 6%. For years, 93% of the pension assets were required to be invested in special government-linked bonds carrying an annual interest of 5.3%. (Under the reform, that 93% will gradually be lowered to 30% over several years.)
The crisis in the pension funds began 25 years ago when a report found their assets and liabilities were out of balance, but no action was taken. A minor reform took place in 1995, when the government and unions agreed that the seven largest funds would stop enrolling new participants, and the government would try to assist in financing the deficits. Subsidiary funds were set up for new participants. These measures, however, did not succeed in overcoming the problem of the growing accumulated deficits of the old pension funds.