The reform of the investment routes in the pension funds, which will take place at the beginning of the year, was published as a draft circular for comments. Ronan Margolis, CEO and founder of simplifynance and founder of Israel’s passive investor community, believes that until a revolution is made in the investment routes in the pension funds, it is time for a more aggressive implementation of investments for young people, in order to take full advantage of the first years of savings to accumulate returns.
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Today, the pension funds offer several investment routes for the pension funds. If you did not actively choose a route, you will automatically join the “Chilean model” route, where the percentage of shares will decrease over the years as you approach retirement age.
In addition, each horn has additional routes, some more aggressive than the default route, some more defensive. Thus, a saver who wishes to take a higher or lower risk than the default set by law, can do so.
The default routes in which the level of risk decreases will be segmented in a targeted manner: that is, if there are currently routes that are up to and over the age of 50, the new routes will be five years apart, so that every five years the investment route will be adjusted to the saver’s retirement horizon.
Alongside this, a number of special investment clusters will be established, where the pension funds will not be able to collect part of the costs that can be collected in the default routes. Among the tracks that will be established: tradable track – meaning that invests only in tradable assets; as well as a passive route, in which the investment management will follow tradable indexes only and offer the index yield to the followers, in exchange for a management fee.
“The default routes for young people are not aggressive enough”
“The first comment is that the default courses for young people are not aggressive enough. The governing bodies have a very wide range of discretion in the scope of the equity component, even in these courses, that there is actually no reason not to turn them into fully equity courses,” notes Margolis. “Today there is a 50% equity exposure in the path up to the age of 50. Here in Israel this may seem like a lot, but in the US it is a solid exposure, which is not suitable for saving with a horizon of another 40 years, and if you are already making a change, why not set the default for young people in advance Will you be at a high risk level? After all, they currently defined that in saving for each child his default will be high risk, and that is saving for 15 years, so why not do it with savings that are intended for another 40 years?”
Ronen Margolis / Photo: Hadas Moshe
Margolis’ second comment regarding the change concerns the nature of the default route: “For many years we see that passive investments are superior to active investments, so why not make the change really in favor of the saver and define the passive, cheap and efficient route as the default route? If someone wants something more Sophisticated and costly – let him choose it consciously and explicitly. It is true that the State of Israel wants savers’ money to be used for high-tech and infrastructure investments as well, but if the Capital Market Authority, which believes in the benefit of the saver first and foremost, is reforming, why is the default route not the route that would allow savers The maximum?”.
In addition, Margolis points out, the time has come to allow independent management through a pension fund as well and not only through the Provident Fund: “Today, the pension fund, with the accompanying insurances, is the main and central savings instrument in Israel, so those who want to manage their own pension investments, should receive the The possibility of doing it also through the pension fund.”