On February 5, 2016, Amendment no. 12 of the Supervision of Financial Services (Provident Funds) Law, 5765-2005 (“Amendment 12” and the “Law”, respectively) came into effect, constituting an additional development in a series of recent far reaching changes in the pension arena.
The publication of Amendment 12 and the various interpretations thereof, have led to significant uncertainty in the market regarding the amendment’s impact on employers. However it is evident to all that the amendment, as currently drafted, definitely imposes significant costs upon employers and necessitates amending some of the contractual arrangements between employees and employers that currently exist in the market (whether by virtue of personal contracts or by virtue of collective agreements).
The Purpose of Amendment 12
The rationale of Amendment 12 was to sever the linkage between the employee’s choice of a pension product and the rate of the employer’s contributions towards such product, and consequently to increase the employee’s freedom of choice. Therefore, Amendment 12 prescribed that the employer is prohibited from stipulating the rate of the employer’s contributions to the pension product which shall be chosen by the employee, so this would no longer be among the employee’s considerations when selecting the pension products.
We shall state at the outset, that despite the fact that Amendment 12 has already come into effect, the matter is still currently being addressed by the Knesset Finance Committee and discussions regarding the matter, including the matter of the rate of the employers’ contributions following the amendment, are still being conducted between the Ministry of Finance, which initiated the amendment, and employer organizations.
The language of Section 20(a)(1) that was added in the framework of Amendment 12, reads as follows:
“If a law or contract includes a stipulation that is contrary to the provisions of sub-section (a), pursuant to which the rate of the contributions to a certain fund or to a certain type of funds or to a fund that shall be selected from a certain list of funds, shall be higher than the rate of contributions to other funds or types of funds, the employee shall be entitled to the highest rate of contributions from among the rates so prescribed, until the law or the agreement have been amended.”
“The Rate of Contributions” pursuant to Section 20(a)(1) is one of the following:
The rate of the components of the employer’s payments, including the maximum rate of the employer’s payments towards purchasing disability insurance to which the employee is entitled under law or the agreement, and excluding the employer’s payments towards the severance payment component.
The rate of the employer’s payments towards the severance payment component.
It shall be emphasized that a violation of the provisions of Section 20 of the Law, including the provisions of Amendment 12, constitutes a criminal offense and could lead to the imposition upon employers of a monetary fine in a total amount of up to approximately 1.8 million NIS or a year imprisonment.
The Implications of Amendment 12 for Employers
Under the majority of the pension arrangements currently existing in the market (either by virtue of collective agreement or by virtue of employment contracts), the rate of the employer’s contributions to pension savings depends on the product.
For example, according to the general approval that was issued by virtue of Section 14 of the Severance Payments Law, 5723-1963, the rate of the employer’s contributions to managers insurance policies includes 5% employer contributions towards life insurance and pension, 8.33% employer contributions towards severance payments, and in cases in which there is also disability insurance coverage, up to 2.5% employer contributions towards disability insurance; while the rate of the employer’s contributions to a new comprehensive pension fund, includes 6% employer contributions towards life insurance and pension and 6% or 8.33% employer contributions towards severance payments.
According to the Ministry of Finance’s position, as was expressed in clarifications that were provided orally by the Deputy Supervisor of Insurance, and in light of the definition of “Rate of Employer Contributions” in Section 20 of the Law, pursuant to Amendment 12, in the event that an employee has an employment contract that includes an option of managers insurance and a comprehensive pension fund, which include different contribution rates, the employer will be obligated to increase the contribution rates for each of the components, to the maximum that is prescribed in the legal arrangement pursuant to which the contributions are made. In the above example, 8.33% will be contributed towards severance payments and 7.5% shall be contributed towards life insurance, pension and disability insurance.
Therefore, according to the amendment, every employer in the market will have to examine the existing pension arrangements of each of its employees and to verify whether the rate of the employer’s contributions to all of the employee’s existing pension products has to be revised.
Here as some sample questions which emerge in light of Amendment 12 and the clarifications that have been provided to date by the Ministry of Finance:
Does the comparison relate to all of the employer’s employees or does it only require examining the rates of contributions with respect to each employee separately, in accordance with the arrangements applicable thereto?
According to the Ministry of Finance’s position, as was expressed orally, the comparison is to be applied to each employee separately in accordance with the arrangements applicable thereto.
What happens in the case of employers who operate pursuant to the General Approval under Section 14 – what is considered the highest rate under this arrangement?
According to the Ministry of Finance’s position, as was expressed in various forums, in this case, the “highest rate” for the life insurance and pension component, including disability insurance, is 7.5% (although there are those who have adopted an interpretation that it is a lower percent which reflects the actual cost of the premium for disability insurance for the employee).
As mentioned at the outset of this memorandum, the purpose of Amendment 12 was to create a situation in which the employer shall be indifferent to the employee’s choice. De facto, the amendment has created a vague legal situation, sufficient clarifications have not yet been provided by the Ministry of Finance and large insurance companies that insure employees are finding themselves in a situation in which, on a practical level, they are unable to implement the amendment.
Although the final word has not yet been spoken, in light of Amendment 12’s far reaching implications for employers, we recommend contacting us in order to examine the amendment’s impact on your currently existing pension arrangements and to update your employment contracts, if and to the extent this shall be found to be necessary.