Client Update. Arrangements Law

December 2015 Client Update New Developments in the Pension Field – The Pension Chapter of the Arrangements Law Dear Colleagues and Friends, On Novem...
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December 2015

Client Update New Developments in the Pension Field – The Pension Chapter of the Arrangements Law Dear Colleagues and Friends, On November 18, 2015, the Knesset plenum approved the chapter of "Pension Consulting and Pension Marketing" in the Economic Plan (Legislative Amendments for Implementation of the Economic Policy for Budget Years 2015 and 2016), 2015, Law (hereinafter: the "Pension Chapter" or the “Amendment", and the "Arrangements Law" respectively).1 The Arrangements Law was published on the official publication of the Israeli Knesset (the “Reshumut”) on November 30, 2015 and with its publication, most of the Pension Chapters’ provisions have entered into force, all as shall be elaborated hereinafter. The Pension Chapter includes significant amendments to provisions in the Control of Financial Services (Pension Counselling, Marketing and Pension Clearing System) Law, 2005 (hereinafter: the "Consulting Law") and the Control of Financial Services (Provident Funds) Law, 2005 (hereinafter: the “Provident Law”). The amendments included within the Pension Chapter constitute a material change in the Israeli pension sphere, especially in respect of the different meeting points between the "players" in this field – the insurance agents, employers, employees and institutional bodies. The Pension Chapter joins a long list of changes in the pension field, led by the Commissioner of Capital Market, Insurance and Savings Division in the Ministry of Finance (hereinafter: the "Commissioner of Capital Market" or the “Commissioner”) in recent times, including the

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The amendment was conducted also following the November 3, 2015 signing of the principles agreement between the “Histadrut” and the presidency of the business organizations, on the subject of pension arrangements.

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matter of the significant change in the pension budget (Amendment 12 to the Provident Law).2 As shall be further elaborated below, the Amendment requires the employers, the institutional bodies, insurance agents and pension arrangement managers to undergo an extensive and thorough preparation, to internalize the new provisions, while examining their specific circumstances. Below is a summary of the main provisions of the Pension Chapter 1. The Employee’s right to choose a license holder (Amendment to Section 20 of the Provident Law) 1.1. Prior to the Amendment: The employee’s right to choose a license holder (pension marketer, pension insurance agent or pension consultant) for the purpose of receiving pension marketing/consulting services was not grounded in legislation and many employees de-facto received marketing services from a pension insurance agent who also provided operating services to the employer. For a long period of time, questions have been raised regarding the employee’s right to choose a license holder, and given the Commissioner's positions in tangential issues as well as a law bill published in the past on the subject, some employers have chosen to allow their employees (even before the Amendment) to receive the abovementioned services through a license holder of their choice. 1.2. After the Amendment: Section 20 of the Provident Law, in its version after the Amendment, states unequivocally that any employee may elect a license holder, at any time, for the purpose of receiving pension marketing/consulting services or for the purpose of performing actions in a pension product. In the framework of this Amendment, an employer is prohibited from stipulating the deposition of funds to a pension product for the benefit of an employee or the 2

The Provident Law (the Control of Financial Services (Provident Funds)(Amendment No. 12), 2015). Under Amendment 12, the connection between the employee's choice of a specific type of pension product and the rate of employer's contributions in respect of the employee has been broken. For further details, please see our client update on this subject at the following link: http://www.hfn.co.il/equalisation-employer-pension-contributions-supervision-financial-services-provident-

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provision of other benefits to the employee, under a condition that a specific license holder shall provide the employee with the abovementioned services. Note: the employee's right to choose does not apply in respect of the action of depositing funds by an employer, which is conducted by the employer or an operational entity on its behalf. 1.3. Date of entry into force: Immediate, with the publication of the Arrangements Law on November 30, 2015. 2. A separation between the entity providing operational services to the employer from the entity providing pension marketing services to the employees (Amendment to Section 3 of the Consulting Law) 2.1. Prior to the Amendment: Many pension arrangements managers provide employers with operating, supervision and monitoring services in connection with their employees' pension arrangements and at the same time provide pension marketing services to the employers' employees. Many times the operating services provided to the employer free of cost. There has been some criticism with respect to this practice, according to which, the costs of operating, supervision and monitoring services provided to the employer, are actually imposed on the employee. The Ministry of Finance deems that these costs are embodied by higher management fees, paid by the employee as a member/insured to the Institutional Body (i.e. the management company of the provident/pension fund or an insurance company) which manages the pension product. 2.2. After the Amendment: a) The general rule: a separation between the services – an entity engaging in pension marketing or a "related entity" to such entity shall not provide Operational Services to an employer if it provides pension marketing services to the employees of such employer Operational Services are defined in the Amendment as at least one of the following: (1) depositing funds in an institutional body for the benefit of the employer’s employees; (2) transferring of information while depositing such

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funds; (3) handling of feedback between the institutional body and the employer for monitoring purposes while depositing such funds; and - (4) other operational activities as determined by the Commissioner. b) An exception to the rule: simultaneously providing Operational Services to the employer and pension marketing services to the employer’s employees by the same entity, is allowed subject to the fulfillment of the following three cumulative conditions: 1. The employer shall bear the cost of the Operational Services – the pension insurance agent shall charge monthly clearing fees for Operational Services, solely from the employer, in respect of each employee, at an amount no less than the higher between the following: (a) 0.6% of total payments deposited by the employer to pension products for the benefit of the employee, plus VAT; (b) NIS 10.5 plus VAT. 2. Management fees paid by the employees shall be reduced by an amount equal to the clearing fees which shall be paid by the employer.3 3. Electing a “default fund” for employees – An employer must institute a default pension arrangement for employees in the workplace.4 Provisions in this regard are expected to be published in the near future by the Commissioner of Capital Market. 2.3. Date of entry into force: Immediate, with the publication of the Arrangements Law on November 30, 2015, with the exception of Articles 2.2(b)2 and 3 above, that shall come into force on June 1, 2016. In addition, with respect to "small" employers (who

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In general, the amount of the distribution fee that an institutional body shall pay to the pension insurance agent shall be reduced at a sum equal to the amount of clearing fees paid to the pension insurance agent by the employer. The management fees that an employee that in respect of which, clearing fees shall be paid as abovementioned, shall be reduced at a sum equal to the amount of the reduction in the distribution fee. The abovementioned Section is expected to come into force on June 1, 2016, however this shall also be in respect of refunds from January-May 2016. In accordance with the provisions of Section 20 (b) of the Provident Law, after an employee is given the opportunity to choose a pension product and as long as he did not choose such product, the employer is entitled to deposit the funds for the benefit of the employee in a default pension arrangement, chosen by the employer, in order to comply with its obligation to deposit pension funds. It should be emphasized that there is no operative obligation to institute a default arrangement in the workplace, but rather a possibility to institute such an arrangement. However, now (pursuant to the Amendment included in the pension chapter - see paragraph 2 above), any employer wishing to receive Operational Services [for himself as an employer] and pension marketing services [for his employees] from the same pension arrangement manager must institute a default pension arrangement in the workplace.

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employ ten employees at most) there is a delay in the date of entry into force to January 1, 2017. 3. The Regulation of "directly joining" a pension product (without a process of pension consulting/marketing) (Amendment of Section 13 to the Consulting Law) 3.1. Prior to the Amendment: the Consulting Law established the rule, according to which a transaction in respect of a pension product for the benefit of a client, shall only be made as part of a pension consulting/marketing process and following such process. In 2008, in the frame of a clarification circular, the Commissioner of Capital Market determined that in either of the following two cases, a pension product may nevertheless be joined without a process of consulting/marketing: (a) Joining initiated by a client, when the institutional body is passive in the process; and- (b) joining of employees by their employer to a default pension arrangement, in accordance with the provisions of Section 20 to the Provident Law. 3.2. After the Amendment: the Amendment sets exceptions in the Consulting Law, to the general rule of pension consulting/marketing process obligation. Section 13 to the Consulting Law, after the Amendment, allows to join/be joined to a pension product, directly, and without receiving pension consulting/marketing in the following circumstances: 1. "direct joining" by an employee – the execution of a transaction concerning a pension product between a client and an institutional body, directly, following a request initiated by the client to the institutional body, unless one of the following holds true in respect of the client: (a) the client is actively insured in a Veteran Fund or in an Insurance Fund; (b) the execution of the transaction shall include exclusions due to ill-health of the client; or - (c) fulfillment of additional conditions stipulated by the Commissioner. In other words, the exception is intended to regulate the situation of direct joining by an employee to a pension arrangement not through a license holder. 2. Employer's contribution to a default pension arrangement5 - an employer’s contribution to a default pension arrangement for the benefit of its employees does not require pension consulting/marketing.

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See footnote 4 above.

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3. Performing actions in a pension product by an institutional body under a duty by law, e.g. in cases of unification of non-active pension funds in accordance with Amendment 13 to the Provident Law.6 3.3. Date of entry into force: Immediate, with the publication of the Arrangements Law on November 30, 2015. 4. The Prohibition of double compensation to an insurance agent with respect to pension marketing (both from a client and an institutional body) (the addition of Section 19A to the Consulting Law and the Amendment of Sections 38 and 52 to the Consulting Law) 4.1. Prior to the Amendment: Some insurance agents were accustomed to charging fees in respect of pension marketing services and additional ancillary actions from the client and, in addition, receiving compensation for the same services, from the institutional body that manages the pension product that the client joined following the agent's recommendation. The Ministry of Finance's position was that this should be considered double compensation in respect of the same service. 4.2. After the Amendment: a) A prohibition on the insurance agent to receive any benefit, directly or indirectly, in connection with pension marketing/execution of a transaction for the benefit of a client, except in one of the following: (1) fees and reimbursement of expenses paid directly by the client (in this regard the Commissioner of Capital Market shall determine certain actions that in respect of which, additional collection shall be permitted); (2) a distribution fee from the institutional body. In the framework of the Amendment, an institutional body is also prohibited from compensating the agent beyond the said distribution fee. b) The Amendment explicitly states that the abovementioned prohibition does not derogate from the employer's option to refund the employee any fees paid by the employee for pension consulting/marketing, in whole or in part, provided that such benefit is granted subject to the employee's right to choose a license holder of his choice. 6

The Control of Financial Services Law (Provident Funds) (Amendment No. 13 and Temporary Order), 2015.

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Conclusion and Recommendations As indicated by this update, the Pension Chapter includes significant changes in the pension field, requiring extensive and suitable preparation while examining both the regulatory aspects of the issue and the aspects of labor law and labor relations. For your convenience, we have listed below the main issues requiring preparations of all the parties involved, as applicable: •

Examination of the entity providing operational services to the employer and pension marketing services to employees in the workplace; and whether the employer desires to leave the situation as it is (keeping in mind that the aforementioned conditions will need to be met) or to change it, as well as the decision of the relevant pension insurance agent in this matter.



Examination of the existing agreements between the employer and the various “players", including pension arrangement managers and the institutional bodies, and adapting them to the new provisions of the law.



The default pension arrangement in the workplace – does one exist? Is the workplace required to institute such an arrangement (taking into consideration the identity of the entity providing the operational services and the entity providing pension marketing as aforementioned)? Is the workplace interested in such an arrangement?



Examination of the existing procedures in the workplace/leading new procedures in the workplace regarding requests from employees in the field of pensions, and any communications on this matter between those who deal with the various pension issues in the workplace and the employees.

We shall be glad to assist you with all issues abovementioned. We shall be glad to be of your service in any question or clarification required.

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Ayelet Regavim-Kahanov, Adv. Partner, Securities and Capital Market Department Phone number: 03-6922291 E-mail: [email protected]

Liat Shaked-Katz, Adv. Partner, Labour Law and Labour Relations Department Phone number: 03-6922245 E-Mail: [email protected]

Asia House, 4 Weizmann St., Tel-Aviv 6423904, Israel | Tel: (972)-3-692-2020 | Fax: (972)-3-696-6464 [email protected] | www.hfn.co.il