how the Israeli pension system works part 3 – what’s in your pension fund?

A קרן פנסיה  is not the same as a קרן השתלמות.  When choosing a keren hishtalmut, one usually looks at the returns, sharpe, etc, but when it comes to a pension, one item reigns supreme – stability.  If I lost my קרן השתלמות in the stock market the night before collection, I’d be upset, angry and frustrated all at once.  If I lost my קרן פנסיה – I’d be terrified and fear for my life.  This is all I have to live on, and once it is gone, my entire life is in serious financial jeopardy.

In order to achieve stability and growth, a balance  must be made between two basic types of investments – debt and equity.  Debt is as simple as it sounds – I loan you money and you pay me back (with interest).  Debt usually comes in the form of a bond, but can be in outright loans and certificates of deposits.  Equity is an investment into an entity for which one expects a return that is somehow connected with the success of the investment – for example I invest $100 into your business, but we agree to share all the profits 50/50.  Equity usually comes in the form of stocks, funds and options (options are kind of like insurance on stocks).

Most pension funds provide a mix between cash, debt, and equity.  Generally speaking, cash is the most stable, debt is a bit less, and equity is the most risky.  On the other hand, potential return on investment is the result of risk, so cash will make you the least money, debt can make a bit more, and equity can bring the greatest returns.

So how can you understand what is risky?  The first step is to understand what is in the pension.  Go to pensia net, click on “חיפוש פשוט”, choose “קרנות חדשות” and then “הצג דו”ח”.

A table with lots of options should be presented below.  Click on any of the pensions names on the right that is in blue with a hyperlink.  This will bring you to a description of what is inside of the fund.  Scroll down (the first part is the assets and returns, which we’ll get to later) until you see a screen like this:

Now for the description of what is in the קרן (fund):

The assets contained in the קרן change all the time in order to keep up with and profit from the changes in the market.  The table above lists each of the following items and how they change on a monthly basis:

1 – מזומנים ושווי מזומנים – Cash or short term CDs (less than 3 months)

2 – אג”ח מיועדות – Government subsidized bonds specifically for a pension.  These bonds are given a slightly higher rate in order to subsidize retirement planning.  As I mentioned in the last post about pensions, only the חדשות pensions have these, not the גלליות.

3 – אג”ח ממשלתית סחירות – Government bonds (non-subsidized)

4 – אג”ח קונצרני סחירות ותעודות סל אג”חיות – Tradable Corporate bonds

5 – מניות, אופציות ותעודות סל מנייתיות – Tradable stocks and securities

6 – אג”ח קונצרני לא סחירות – Non-tradable Corporate bonds

7 – פיקדונות – Deposits for more than 3 months

8 – קרנות נאמנות – Mutual funds

9 – הלוואת – Loans from your pension fund

10 – נכסים אחרים – Real estate, CDO, and ABS

Next is a listing of the percentage of the assets in the fund in Israel and abroad.  Then there is a listing of the percentage of the funds that are liquid and non-liquid. This means how easily the fund can get all of its money.  Remember that your money only makes money in return for two things – risk and liquidity.  Some bonds, which may make some good returns, are not liquid because they are only redeemable on a certain date in the future.

Finally, and in my opinion most importantly, the assets are listed according to level of risk (from safest to riskiest):

Category 1 – מזומנים ואג”ח ממשלתית – cash and government bonds

Category 2 – אג”ח, הלוואות ופיקדונות עם בטוחה מספקת או מדורגת בי.בי.בי. לפחות ותעודת סל אג”חית – bonds loans and deposits rated at least BBB.  Generally these are safe investments

Category 3 – מניות, קרנות נאמנות ותעודות סל מניית – stocks, mutual funds, and stock indexes

Category 4 – השקעות ללא בטוחה מספקת או מדורגת פחות מ בי. בי. בי. – Non-secure investments and junk bonds.  There are there to allow the possibility of getting a large return on investment.  Remember, the riskier the investment, the higher the potential return.

Generally, when the market does well, you should expect to see the percentage of categories 1 and 2 drop a bit and 3 and 4 increase a bit.  This means that you pension is cashing in on the growth of the market.  Alternatively, when the market is doing poorly, there should be less of categories 3 and 4 and more of categories 1 and 2.  this means that your pension is sticking to conservative bets to avoid the chaos and versatility of the market.

So what is right for you?  When you are younger, and have more time to recoup your potential losses, you want a portfolio  that is a bit more daring.  But as you approach retirement, your portfolio should become less risky and more stable.  After all, you can’t afford to loose everything on a great potential investment if you need your money tomorrow.

In Part 4, I will discuss how to analyze individual funds as well as understand the importance of fees.  In Part 5, I will finally answer the most important answer of this series: how you can choose your own pension.