The original intent of this statistic is to provide another way to evaluate and assess a country’s medical system.  This figure is examined along with an entire slew of medical data and international comparisons highlighting a country’s absolute and relative standings on areas such as number of healthcare spending, hospital beds, MRIs, pharmaceuticals etc. In Israel we fare very well on most parameters resulting in the favorable PYLL and top ranking of average life expectancy (80.7 vs. the declining 76.1 in US).

As a financial planner I found this notion of “potential years of life lost” intriguing, as this term is what regularly encapsulates many of my meetings with clients.  The decisions and choices made by clients on a daily basis have potential impact on their PYLL.  In a sense, my job is to reduce PYLL by ensuring that life cycle decisions regarding savings, investments and insurances are optimal such that the PYLL is minimized whereever possible.

A person’s PYLL can be addressed in a number of ways:

The first and most important PYLL is retirement age – perhaps the most central question for people approaching middle age – “when can I retire?”  The official answer for national savings entitlement in Israel is 67 for men and 62-64 for women at present (which I model age 67, as Bruce Springsteen said “blind faith in your government will get you killed” or my version, “leave you to die poor.”  At the macro level, these ages are based on life expectancy, contributions to national insurance and government budgets, however for the individual this can be quantified based on current income/expenses and forecasted pension.  The question is usually how much higher will expected pension be if I work X years more, which may be different than desired retirement age.  Given the generous contributions to pension by employers in Israel, each additional year of income and pension contribution has a dramatic effect on future retirement scenarios.  Further, by choice or circumstance, many will retire earlier than the statutory age of 67 and for a high-tech employee this might be as early as age 55.

However, there is also a PYLL in qualitative terms.  From a living life fully and “each day as if it’s your last” perspective, the more years a person works might be potential years of life lost depending on the actual mental or physical strain of employment choice, the opportunity cost of time spent in leisure or family activities.

The second axis for PYLL might be medical and the importance of maintaining good health.  On this front, having comprehensive private medical insurance which supplements the public system improves your PYLL.  The Israeli public health system is chronically underfunded in many areas, most acutely in advanced medicine and surgery alternatives. For catastrophic situations necessitating expensive cancer drugs, overseas treatments or transplants, private medical insurance can be life-saving.  However, even for less critical needs, private medical insurance can save time and discomfort.  For example, Israel has a shortage of MRI and CT resources (5.2 units per 1M population vs 37.6 in US) resulting in long wait-times and the access via private system can reduce PYLL to the public system.  Similarly, private medical insurance contains coverages for maintaining health and preventative procedures including diagnostic testing, and additional consultations with specialists which may not be done if insured only using the public system.

The third axis for PYLL can be applied to investment and savings as potential for returns are lost. Often investment years and potential are lost due to large amounts of cash sitting on the sidelines earning zero interest. Sometimes asset allocation is faulty or potential investment opportunities are missed due to lack of attention or knowledge. Similarly, much can be done to protect assets from the tax regimes and further increase the long-term potential years that investments and savings can last.

Navigating these axes and extending the potential years for both clients and their assets is the core of financial planning with a client.   This is a long-term process, necessitating regular monitoring and adapting of investments and insurances to your financial situation as life events unfold, markets move and regulations change, learning and understanding where and how to improve your situation.

At this time of year insurance companies, pension funds, provident and sabbatical funds are sending their annual statements for calendar 2017. The statements provide a summary of contributions made during the year, tax documents and data regarding fees and returns. The 2017 calendar year returns for the industry have been stellar with averages ranging from 6.9%-8.8% before fees, with some funds even reporting double- digit returns

The strong returns can be attributed to strong bond performance, as well as equity markets underpinned by global economic growth. However, an interesting observation is that these returns were achieved despite a relatively low exposure to equities. Israeli institutions, in contrast to their global peers, in terms of portfolio asset allocation, are underweight equities. As can be seen from the diagram below, pension fund exposure to equities has hovered in the 20-30% range over the past decade. This is despite the huge influx of capital, with the industry more than doubling its assets during this period.

Israeli Pension Funds (New) Asset Allocation 2007-2016

Furthermore, this low level of equity exposure is even more surprising given the global bull market run from 2009, meaning that fund managers have not been drawn into the market to chase returns.

It is worth pointing out that the composition of the Israeli public portfolio historically has been conservative, perhaps in response to the perceived risk or volatility of the Middle East, or more likely due to the overall wealth. Amazingly, the Israel public portfolio totaled over $1 trillion at end of 2017 or $117k/capita. This strong balance sheet reflects the emerging wealth of Israel as a result of the economic boom and is also what has been attributed to supporting the shekel against other currencies.

In general, retirement funds target a 5% annual real return over the long term. Investment giant Vanguard asked the question, “how often were retirement funds successful in meeting a 5% annual return over the long term?” They answered this question by analyzing the rolling 10-year real returns for a balanced portfolio of 60% equity/40% bonds historically. The graph below shows that nearly half the time the funds were unsuccessful in meeting this target. Interestingly, from the year 2000, this target was barely achieved; the last data point shows an 8.2% annual return for the customized period 2010-2017 period. Moreover, their analysis projects a median 2.8% annual return over the next 10 years, based on current valuation metrics for a 60/40 portfolio.

 Source: Vanguard

For the Israel retirement fund investor, the absolute and relative low exposure to equities might result in lower volatility of returns. Yet, implicitly, there appears to be a structural aversion to equities, which is not necessarily related to equity market valuation or performance. Due to the compression in bond yields over the past decade, this effect on overall performance may have been muted, as bond market returns gave back the “missing” equity market returns. Going forward, there is less room for capital appreciation based on bond yields and interest rate levels, such that the overall equity exposures will play a more crucial role in performance.

Therefore, the choice of retirement product and type of coverage is paramount. For a decision of this magnitude, professional advice by a licensed insurance agent is essential.

THE INFORMATION ON THIS SITE IS NOT INTENDED AS AND DOES NOT CONSTITUTE INVESTMENT, INSURANCE, LEGAL OR TAX ADVICE, NOR IS AN OFFER TO SELL ANY SECURITY, INVESTMENT PRODUCT, INSURANCE TO ANY PERSON OR A SOLICITATION OF ANY PERSON OF TO PURCHASE ANY SECURITY, INVESTMENT PRODUCT OR INSURANCE.

In the US, long-term care (“LTC”)  insurance is a major issue as the cost of quality nursing care is expensive and can last many years. Policymakers are concerned about the aging population and the long-term costs to care for the elderly. Insurance companies are concerned about the open-ended liability from existing policies which were modelled on optimistic investment returns, lower life expectancy, and lower policy cancellation rates as policyholders realized their insurer’s miscalculations. Consumers are confused by alternatives and fear nursing care costs wiping out a lifetime of earnings and being a burden on their families.

Whilst these common concerns are shared in Israel, there are some major differences between Israel and the US. Firstly, Israel has one of the highest penetrations of LTC insurance members via the public health system, with over 4 million members. These policies are collective policies offering basic coverage at competitive premiums, but the premiums are periodically updated with regulatory oversight. Further, this coverage is for a fixed period only, typically 5 years; for a payment amount which only partially covers the costs; and is dependent on the age at enrollment. These policies are typically viewed as only the first tranche of LTC insurance protection and are not sufficient on their own.

Private insurance companies provide the second tranche of LTC insurance which supplements the public health system and further protects family assets. These policies can be set to the desired level of coverage and accumulate over time a cash value, and are marketed as a means of “pre-paying” for nursing care. The monthly premiums paid are significant and the decision to begin a policy is a major decision as once started the policy is unlikely to be cancelled. This is due to the increased likelihood of the insured growing older and developing a new medical condition that would render cancellation not worthwhile. Further, switching to a new company or policy is unlikely as newer LTC policies have tighter underwriting, higher premiums and harsher definitions for claim eligibility.

In response to increased life expectancies, rising LTC costs and a future of lower investment returns, many US insurance companies have gone out of business or have discontinued selling the policies. Currently, only about a dozen companies in the US still offer LTC policies. Most of the companies that remain in the business have taken steps to increase premiums for both existing policyholders and new customers. While current policyholders continue to pay premiums with the hope that their company will be solvent to pay their future claims.

Similarly, in Israel the feasibility of these policies has attracted the attention of the regulator. In both countries, there is no guarantee that if an insurance company is forced to liquidate, the policyholder will receive the coverage they initially contracted for. However in Israel, there is little, if any, attention paid to the financial strength of the insurance company.

Proposals to clients in the US typically show rating agency A.M. Best’s credit rating for the issuing insurance company. This is a major factor in the sales process as the LTC policy is exactly that, for the long term. If the insurance company due to mis-management, lack of underwriting, or cut-throat premium pricing becomes insolvent then its policyholder might be left in a terrible situation.

In Israel, at present there is tremendous attention to premium levels and fees by consumers, and meetings with clients usually start with costs and fees rather than qualitative factors. However, for LTC insurance due to the underlying nature, price should not be the primary criterion, rather the long-term ability of the insurer to meet its obligations in the very far future. The decision for LTC insurance is in effect a lifetime decision as premiums might be paid for 20+ years, with little or no ability to switch companies without impairing benefits. Therefore the choice of insurer and type of policy coverage is paramount. For a decision of this magnitude professional advice by a licensed insurance agent is essential.

THE INFORMATION ON THIS SITE IS NOT INTENDED AS AND DOES NOT CONSTITUTE INVESTMENT, INSURANCE, LEGAL OR TAX ADVICE, NOR IS AN OFFER TO SELL ANY SECURITY, INVESTMENT PRODUCT, INSURANCE TO ANY PERSON OR A SOLICITATION OF ANY PERSON OF TO PURCHASE ANY SECURITY, INVESTMENT PRODUCT OR INSURANCE.

Within the 2017 Framework Legislation, the Government legislated new changes for retirement and benefits in order to ensure that the self-employed will be better prepared for retirement and periods of unemployment.

The law now requires a minimum contribution for retirement, along with tax benefits for making contributions.  A portion of the contributions can also be used when you’re not working, as unemployment insurance. Failure to make at least the minimum pension contribution will result in financial penalties – currently announced as 500 shekels.  However, the real penalty is in forfeiting the tax benefits from making the contribution which can be considerably higher in both value and percentage terms.

The minimum pension requirement can be divided into two tranches:

The first level is earnings up to 50% of the average salary in the economy.  For this first tranche of earnings 4.45% must be contributed.

The second tranche goes from 50% of the average salary in the economy (NIS 9,673) to 100% of the average salary in the economy.  For this second tranche, 12.55% must be contributed. For earnings above the average salary, contributions are optional, but are deductible up to the statutory limit (2017: NIS 33,024 if disability insurance is not paid).

For illustration purposes:

The pension contribution is allocated as follows: two-thirds for retirement benefits, and one-third for periods of unemployment.

The contributions can be made into qualified pension plans, provident funds and manager insurances depending on needs and circumstances. Over the past 5 years the returns on these plans in aggregate have been stellar while fees have come down tremendously.

As always, it is advisable to consult with a licensed professional to ensure that your retirement plans and obligations are being adequately met.

THE INFORMATION ON THIS SITE IS NOT INTENDED AS AND DOES NOT CONSTITUTE INVESTMENT, INSURANCE, LEGAL OR TAX ADVICE, NOR IS AN OFFER TO SELL ANY SECURITIES TO ANY PERSON OR A SOLICITATION OF ANY PERSON OF ANY OFFER TO PURCHASE ANY SECURITIES OR INVESTMENT PRODUCTS.

What is Tikun 190?

Over the past decade the Israeli Government has been encouraging citizens to ensure they have long-term savings for retirements. A classic example would be a doctor who is working in a public hospital who contributed to his pension plan based only on his paltry government salary, while in his private practice he earns a multiple of this figure but neglected to put aside funds for retirement income.

This strategic goal has reshaped the investment landscape with new laws, new financial products and constant tax rule updates and changes. The most current ruling titled “Tikun 190” is an opportunity for huge tax savings, efficient estate planning and maximum investment flexibility and returns.

In short, “Tikun 90” allows an Israeli citizen to contribute significant amount of funds into a provident fund or kupat gemel. Funds invested in these provident funds are locked until retirement age, which is at the young age of 60, and earlier than the official retirement ages of 64 for women and 67 for men.
A provident fund is a long-term savings vehicle that does not pay tax on interest, dividends, or capital gains. In other words, all investments inside the fund are tax-free (aside from certain foreign withholding taxes). Of course, there is a catch; in order to withdraw funds tax-free, they must be paid as an annuity, i.e. a monthly payout for life.

But, in contrast to the typical provident fund (for which tax relief was given at time of deposit) this annuity will be paid tax free as it is coming from after-tax funds. In other words, if the account holder has a monthly pension of 20,000/month at retirement, which according to current tax laws is liable for taxes, the additional annuity monthly payment generated by the Tikun 90 kupat gemel will be paid out tax free!

Now, what about paying out a lump sum? According to current rules, a lump sum may be withdrawn provided that the account holder can demonstrate a minimum monthly pension of approximately NIS 5,000/month, which is deemed to be the minimum living pension; then he will be entitled to withdraw the funds as a lump sum, but with payment of 15% nominal tax on cumulative capital gain – versus the current capital gains rate of 25%.

Lastly, and perhaps most importantly, if the account holder passes away, the beneficiaries can reap as well certain tax benefits.

As such, for people who are nearing retirement, in their 50s and 60s this might be an opportunity to allow tax free investing for the short-to-medium term, with the ability to withdraw funds in an efficient manner.

The information on this site is not intended as and does not constitute investment advice or legal or tax advice or an offer to sell any securities to any person or a solicitation of any person of any offer to purchase any securities or investment products.

This strategic goal has reshaped the investment landscape with new laws, new financial products and constant tax rule updates and changes.  The most current ruling titled “Tikun 190” is an opportunity for huge tax savings, efficient estate planning and maximum investment flexibility and returns.

In short, “Tikun 90” allows an Israeli citizen to contribute significant amount of funds into a provident fund or kupat gemel.  Funds invested in these provident funds are locked until retirement age, which is at the young age of 60, and earlier than the official retirement ages of 64 for women and 67 for men.

A provident fund is a long-term savings vehicle that does not pay tax on interest, dividends, or capital gains. In other words, all investments inside the fund are tax-free (aside from certain foreign withholding taxes).  Of course, there is a catch; in order to withdraw funds tax-free, they must be paid as an annuity, i.e. a monthly payout for life.

But, in contrast to the typical provident fund (for which tax relief was given at time of deposit) this annuity will be paid tax free as it is coming from after-tax funds.  In other words, if the account holder has a monthly pension of 20,000/month at retirement, which according to current tax laws is liable for taxes, the additional annuity monthly payment generated by the Tikun 90 kupat gemel will be paid out tax free!

Now, what about paying out a lump sum?  According to current rules, a lump sum may be withdrawn provided that the account holder can demonstrate a minimum monthly pension of approximately NIS 5,000/month, which is deemed to be the minimum living pension; then he will be entitled to withdraw the funds as a lump sum, but with payment of 15% nominal tax on cumulative capital gain – versus the current capital gains rate of 25%.

Lastly, and perhaps most importantly, if the account holder passes away, the beneficiaries can reap as well certain tax benefits.

As such, for people who are nearing retirement, in their 50s and 60s this might be an opportunity to allow tax free investing for the short-to-medium term, with the ability to withdraw funds in an efficient manner.

The information on this site is not intended as and does not constitute investment advice or legal or tax advice or an offer to sell any securities to any person or a solicitation of any person of any offer to purchase any securities or investment products.  

The Provident Fund for Investment (PFI) allows savers to deposit up to 70,000 shekels per year into a provident fund and is designed to entice additional retirement savings.  A provident fund is a collective investment vehicle that earns interest, dividends and capital gains free of tax that until now was only withdrawable at retirement without onerous penalties.   This new type of provident fund allows for withdrawal at any point in time, but with the payment of 25% capital gains tax that would have been paid in any event on ordinary savings.  However if the saver can hold off until retirement age, the provident fund can be withdrawn tax-free as an annuity.

The new Provident Fund for Investment is similar to traditional provident funds in that there are a myriad of investment objective options that a saver can choose, from conservative to aggressive.  Moreover, switching between investment objectives is not a taxable event and typically there are no switching costs.  A compelling feature is the ability to switch between provident fund managers without incurring tax liability.  This is a core advantage over the current insurance company saving policy product whereby a saver is compelled to sell his or her policy in order to switch to a better performing investment manager.  A second key advantage over the insurance company product is the lower management fees versus the insurance company saving policy product which typically costs 1.2% annually.

This new product also finally provides a sensible way for gifting to grandchildren and investing bar/bat mitzvah gifts.  The child’s name can be entered as the account holder with a “custodian” family member and the funds can be invested in more attractive alternatives.

In summary, the PFI funds provide a compelling opportunity for savers, seeking to alleviate the tax burden, with the worst case being a deferral of taxes and reinvesting profits, and the best case the funds being used for retirement and pulled out tax-free.

As the curse or blessing goes, “we are living in interesting times.”  We have seen interest rates go below zero in major currencies, while major government and safe corporate bonds are yielding less than 2%. The unprecedented pumping of liquidity in a coordinated action by the global central banks has created an environment of There Is No Alternative (“TINA”) whereby investors are pushed by the zero-interest rates into higher risk investments by force.   This new market phenomenon of investors paying a government, bank or even a company to hold their money at a negative rate of interest is unprecedented and goes against the first rule of finance – the time value of money.  This has rendered classical investment models and strategies useless and has made many economics textbooks redundant.  Many leading market pundits have warned about the eventual need to unwind this government intervention and return interest rates to a more normal level.  However, the fear of deflation and slowing economic activity has pushed out these fears (“kicked the can”) each year as government balance sheets continue to balloon with endless printing of money, causing a scramble for assets such as stocks, bonds and property.  As a result of this forced buying, current market valuations appear expensive and as a result projected long-term returns are unfavorable. The net result of this means that as asset managers we have had to work doubly hard, to look more broadly at all viable asset categories while increasing diligence on quality and concentration on capital preservation to avoid being seduced with the crowd and to protect our clients’ assets.

Our primary focus, as you are aware, is the Israeli market, and interestingly, Israel has not been a major player in this global economic story; as Bilaam prophesized, we as a nation reside alone. This massive global intervention is fighting the effects of slow growth and deflation being caused by household balance sheet correction from the crash of 2008, increasing technological displacement and demographics.  Interestingly, Israel has suffered from none of those events.  Israel weathered the financial crisis due to its antiquated banking laws from the 1950s which hampered securitization and kept underwriting tight (for household sector as opposed to corporate/tycoon sector!).  Technology is the most important part of the Israeli economy and is a source of job creation and growth, not economic devastation, compared to Detroit as an example.  Lastly, demographics, well above OECD birth rate and consistent immigration.  These factors combined have rendered Israel stronger in relative and absolute terms with steadily rising GDP per capita and is manifested by the shekel appreciation.  We can proudly say that our portfolio is Israel dominant, and we have bought on behalf of you, our clients, millions of shekels, and invested in Israeli bonds and equities.

We hope Israel continues to grow from strength to strength and wish you, our clients and your families, a happy and healthy new year.

Moshe Klempner

There are many ways to save and invest money in Israel, in the article below we will outline a few of the most popular.

Bank Deposits and Bank Savings Plans (תוכניות חסכון)

This is the classical way for saving money due to the very low risk and protection of principal.  The rates offered vary by the size of the deposit and time length chosen to lock in the funds.  Further some of the smaller banks offer more competitive rates than the larger banks.  The disadvantages of this type of investment include lack of liquidity, low rates of interest, taxation, lack of choice and flexibility in terms of investment options and terms.

Managed Investment Accounts

A managed investment account is suitable for clients who want the security of funds remaining in their own name in their own bank account along with the transparency of knowing exactly where their money is being invested.  The type of investments held can be custom tailored to personal circumstances and risk profile and can be altered at any given time in consultation with the investment manager.  Fees for managed investment accounts compete favorably with mutual funds but typically there is a minimum account size. Investment managers are regulated by the Israel Securities Authority and have various compliance and internal controls ensuring client’s interests are protected.

Insurance Company Savings Policy (פוליסות חיסכון פיננסי)

Insurance company savings policies offer a wide range of investment options and flexibility to savers of all sizes and types.  Typically a lump sum is invested along with monthly contributions into a savings policy that is invested according to the preference of the policyholder following consultation with the insurance agent.  A core advantage of these policies is that tax is only paid at the redemption of policy allowing deferral of taxes yet policies can be redeemed at any time.  Investment options are wide while account minimum is low.

Please feel free to call us +972 72 222 3330 to learn more!