Pension Reform Chaos: Savers Lose Their Way in 'Black Box' Funds

Two years after the launch of the Capital Market Authority's investment track reform, the disorder is increasing. As recalled, the reform was intended to bring order and create a uniform standard for pension savings tracks (pension, provident, and advanced training funds).

However, in practice, it turned out that the differences between the various tracks with the same name (such as 'traded mixed', 'traded stocks', or 'flexible index tracker') included huge yield gaps between different investment bodies due to different investment compositions. Now, the bodies are starting to change their investment policy. Is this the beginning of a new trend among companies that achieved lower yields in a certain track?

This week, the insurance company Migdal announced a 'strategic update' in which the 'flexible index tracker' track will change from an overseas track consisting of bonds and stocks (50%-60% exposure to stocks) and full (100%) exposure to foreign currency, to a track that will invest only in technology giants with no exposure to foreign currency at all. The change is significant because it increases the exposure to stocks within the portfolio composition (and therefore the total risk of the track), while reducing foreign currency exposure to zero.

Change in policy to meet market needs

This change comes after the 'flexible index tracker' track of Migdal failed to provide yield to savers in the last year. In June, the track did rise by 4.7%, but this was mainly due to exposure to foreign currency and the strengthening of the dollar against the shekel. Conversely, in the last year, the dollar weakened against the shekel, so the yield of the track for the whole year is only 0.4%.

What is the tracks reform?

It was intended to create a uniform standard for pension savings tracks; it limited exposure to specific stock indices and mandated diversification. It also required bodies to offer savings tracks with uniform names in various categories.

For comparison, the average yield of all bodies under this category stood at 1.7% in June and 7.5% in the last year. However, the average does not give the full picture due to the flexibility in the track composition. Analyst, for example, presents a completely different track: full exposure to stocks, only to Israel and without foreign currency. The result for them is completely opposite; in June, their track fell by 9.6% when the local market corrected, but in the last year, it excelled with a yield of 24.3% thanks to the strengthening of the shekel and the jump of the local market.

At Migdal, they explain to Globes that the change in the 'flexible index tracker' track has nothing to do with past yields, but with the desire to meet the need in the market. 'We changed the investment policy because there is a very large demand for a technology track, and on the other hand, people are worried about the dollar-shekel,' explains Yuval Beer-Even, director of member investments at Migdal Insurance and Finance. 'Therefore, we decided on a track that invests only in the technology sector that is neutralized from foreign currency, so that the member's yield will be influenced by the behavior of tech stocks and not by an external factor like currency.'

It should be noted that Migdal chose to notify the savers of the change but is not obligated to do so, which only intensifies the problem with the reform. It is possible that your investment track will change completely, but you will not know about it at all. According to a market source, 'according to the new reform, when you want to change an investment policy in the name of a track, it is enough to approve it in the internal investment committees of the body, update on the website, and send in the quarterly report to the saver.'

Transferring funds following the yields

Another motivation for changing the track can be seen in the clear connection of the movement of funds. From the 'flexible index tracker' track in the advanced training funds of Migdal, more than 300 million shekels left and moved to competitors. Also at Meitav, the change came after weak yields and the departure of 1.1 billion shekels. On the other hand, Analyst, whose yields are excellent, transferred to it from competitors no less than 1.3 billion shekels. As mentioned, the reason for the yield gaps is that it is not the same product at all.

'This is a delusional reform. It's not apples to apples,' says a market source. 'The reform turned everything into black boxes, and you need to dig to understand what is happening in each track. The only thing you can compare today is general tracks and stock tracks.'