New draft rules give savers choice on pension fund fees

Is the end of uniform charges for direct expenses at the pension funds? Last week, the Capital Markets, Insurance and Savings Authority published new regulations on direct expenses, the expenses that pension funds collect for the use of external companies, amounting to 0.25% on top of the regular management fees paid by members.

Under the new regulations, the final wording of which will be published after public consultation, savers will be offered two tracks on which the pension funds, provident funds, and vocational training funds will collect a lower rate than the present 0.25% for direct expenses. At the same time, the funds will be able to offer tracks with higher exposure to non-marketable assets. With these, the management fees are likely to be higher than permitted up to now, as investment in non-marketable assets generally involves higher direct expenses.

The new regulations were drawn up in the wake of the committee’s recommendations set up by Commissioner of Capital Markets, Insurance and Savings Moshe Bareket in February 2020. The committee recommended forming three different pension tracks, distinguished one from another by management fees and investment instruments. The first is a passive investment track for investment in indexes only, that is, without private funds. In the second track, management fees will be based on performance. In the third tracks, management fees will be set in advance, including direct expenses, a model designed to provide an incentive to reduce direct expenses in order to be competitive on fees.

The first track is intended for savers who want to directly invest in marketable assets. On this track, only direct expenses of certain kinds characteristic of marketable investments will be permitted.

The second track is for savers who want investments that track indices. Since these are public indices, the intention is that investments should be in widely used, recognized instruments for tracking indices, and so in this case too only certain kinds of direct expenses are permitted. In the case of external management commissions, payments will be allowed only for investment in a tracking fund if it is a marketable security.

The Capital Markets, Insurance and Savings Authority explained that the charging of direct expenses on these tracks would improve the expected risk-adjusted return for savers, and in particular would make it possible to invest in tracking instruments in accordance with considerations of returns after deduction of direct expenses.

In any event, the Capital Markets, Insurance and Savings Authority has determined that for the tracks with variable management fees, no direct expenses of any kind will be chargeable, since, because the investment institution’s reward is a function of the track’s performance, there is a closer connection between its investment decisions and its reward. This is in contrast to tracks in which the financial institution charges fixed management fees, in which a ban on imposing direct expenses would be liable to lead it to choose not to carry out certain investments out of a desire to avoid having to absorb the expenses involved .

Published by Globes, Israel business news – en.globes.co.il – on April 20, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.


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