In February, 2016, in the framework of a memorandum regarding Amendment #12 of the Supervision of Financial Services (Provident Funds) Law, 5765-2005, we drew attention to the many issues and questions that emerged as a result of said amendment and we noted that the final word had not yet been spoken.
Indeed, in light of the uncertainty created by Amendment #12 and following continued discussions among all those related to the matter, on February 23, 2016, a General Collective Agreement (Framework) to Increase Pension Insurance Contributions in the Market (the “Collective Agreement”), which is meant to address the issues that emerged, was signed by and between the Presidium of the Business Organizations and the General Employees Union (the ‘Histadrut’).
We shall state at the outset that the Collective Agreement is only scheduled to take effect on July 1, 2016, and in any event shall only become valid subject to the execution of an extension order that shall apply the Collective Agreement’s provisions to all employees in the market. Therefore, as emerges from the provisions of the Collective Agreement, there is no need to make any changes whatsoever to pension contributions until July, 2016.
The Contents of the Agreement
Contributions Towards Life Insurance and Pension and Disability
The Collective Agreement prescribes that the minimal rate of contributions towards pension shall increase, such that the employee’s contribution towards the life insurance and pension component shall ultimately be no less than 6%, and the employer’s contribution towards the life insurance and pension component shall ultimately be no less than 6.5% (the current contribution rates are 5.5% and 6% respectively), and this shall be applied in two stages:
- On July 1, 2016, the employee’s contributions shall increase to 5.75% and the employer’s contributions shall increase to 6.25%;
- On January 1, 2017, the employee’s contributions shall increase to 6% and the employer’s contributions shall increase to 6.5%.
The Collective Agreement further prescribes that the employer’s payment to an insurance fund/provident fund that is not a pension fund includes payment for disability coverage at such rate that guarantees 75% of the employee’s determining salary, with at least 5% of the employer’s total payment being allocated towards life insurance and pension. To the extent an increase of costs is necessary due to a disability policy (such that the employer’s total contributions towards such components shall exceed 6.25% or 6.5%, as applicable), the employer’s total payment towards disability insurance and towards the life insurance and pension component – shall not in any event exceed 7.5%.
Contributions Towards the Severance Payment Component
The Collective Agreement prescribes that the rate of the employer’s contributions towards the severance payment component in a pension fund/ insurance fund shall be as prescribed in the agreement by and between the employee and the employer, provided that it shall not in any event be less than 6%.
In the case of new employees, it was prescribed that the employer may determine that the rate of contributions towards severance payments be equal to the lowest rate of contributions customary in the pension fund, i.e. 6%, provided that a new employee with an existing policy shall not be adversely affected.
It is important to further note that until the Collective Agreement comes into effect, the wording of the General Approval Regarding Payments of Employers to Pension Funds and Insurance Funds Instead of Severance Pay pursuant to Section 14 of the Severance Pay Law, shall be amended in accordance with the provisions of the Collective Agreement, so that they shall comply with each other.
We shall issue a further update when the Collective Agreement takes effect. In light of the provisions of the Collective Agreement it is important to begin preparing for making changes in pension contributions in July, 2016. We are at your service should you have any further questions.