Keren Pensia (pension fund)
3 min read
Keren Pensia (קרן פנסיה) is the main retirement vehicle in Israel, and since 2008 almost every employee has one. It is more than a savings account: it combines long-term saving with insurance that protects you and your family if you cannot work or if you die. This guide explains how a pension fund works, the difference between the two main types, and what to compare.
What a pension fund is
A pension fund collects money from you during your working years, invests it for decades, and then pays you a monthly income, called an annuity, for the rest of your life once you retire. Part of your monthly contribution buys insurance cover, so the fund also pays out if you become disabled and cannot work, and pays your family if you die. This mix of saving and insurance is what sets a pension fund apart from a plain provident fund.
A mandatory pension
Since 2008 an employer must set aside pension contributions for almost every employee. The money is taken from the payroll each month and split between the employee's contribution, the employer's contribution, and an allocation towards severance pay. Because it is automatic and topped up by the employer, a pension fund is for most people the largest single pot of long-term savings they will ever build.
Comprehensive vs general funds
There are two kinds of pension fund. A comprehensive fund (קרן פנסיה מקיפה) is the standard one: it includes the disability and survivors' insurance and gives part of its assets a guaranteed return through special government bonds, which lowers the risk on that portion. It accepts contributions up to a monthly ceiling. A general fund (קרן פנסיה כללית) has no guaranteed-return portion and usually no insurance, and it is used mainly for money above the comprehensive-fund ceiling.
How the insurance works
The disability cover replaces part of your income if illness or injury stops you working, and the survivors' cover pays a monthly pension to a spouse and children if you die. The cost of this cover comes out of your contribution, so two funds with the same investment return can still leave you with different amounts, depending on how much insurance you are paying for and how the fund prices it.
From savings to pension
At retirement the fund converts your accumulated balance into a monthly pension using a conversion factor, which reflects life expectancy and the fund's assumptions. A larger balance and a better conversion factor both mean a higher monthly pension. This is why the return during the saving years and the fees you pay along the way matter so much: together they decide how big the balance is when it is turned into income.
Management fees
A pension fund charges two fees: one on every deposit and one on the accumulated balance, both capped by law. The caps are lower than the provident-fund maximums, most people pay less than the cap, and the fees are negotiable. Over a full career these fees compound, so a fund that charges a little less can leave you with a noticeably higher pension.
How to compare pension funds
Compare funds on their long-term net return, on both fees, and on the quality of the insurance cover, rather than on a single good year. Make sure you are comparing comprehensive funds with comprehensive funds, since a general fund is a different product. You can compare pension funds on this site using the official regulator data.
General information only, not advice. Sources: official Capital Market Authority data and Kol-Zchut.