Is the end of uniform charges for direct expenses at the pension funds? Last week, the Capital Markets, Insurance and Savings Authority published new regulations on direct expenses, the expenses that pension funds charge for using the services of external companies, amounting to 0.25% on top of the regular management fees paid by members.
Under the new regulations, the final wording of which will be published after public consultation, savers will be offered two tracks on which the pension funds, provident funds, and vocational training funds will collect a lower rate than the present 0.25% for direct expenses. At the same time, the funds will be able to offer tracks with higher exposure to non-marketable assets. With these, the management fees are likely to be higher than permitted up to now, as investment in non-marketable assets generally involves higher direct expenses.
The new regulations were drawn up in the wake of the recommendations of the committee set up by Commissioner of Capital Markets, Insurance and Savings Moshe Bareket in February 2020. The committee recommended forming three different pension tracks, distinguished one from another by management fees and investment instruments. The first is a passive investment track for investment in indexes only, that is, without private funds. In the second track, management fees will be based on performance. In the third tracks, management fees will be set in advance, including direct expenses, a model designed to give an incentive to reduce direct expenses in order to be competitive on fees.
The first track is intended for savers who want direct invest in marketable assets. On this track, only direct expenses of certain kinds characteristic of marketable investments will be permitted.
The second track is for savers who want investments that track indices. Since these are public indices, the intention is that investments should be in widely used, recognized instruments for tracking indices, and so in this case too only certain kinds of direct expenses are permitted. In the case of external management commissions, payments will be allowed only for investment in a tracking fund if it is a marketable security.
The Capital Markets, Insurance and Savings Authority explained that the charging of direct expenses on these tracks would improve the expected risk-adjusted return for savers, and in particular would make it possible to invest in tracking instruments in accordance with considerations of returns after deduction of direct expenses.
In any event, the Capital Markets, Insurance and Savings Authority has determined that for the tracks with variable management fees, no direct expenses of any kind will be chargeable, since, because the investment institution’s reward is a function of the track’s performance, there is a closer connection between its investment decisions and its reward. This is in contrast to tracks in which the financial institution charges fixed management fees, in which a ban on imposing direct expenses would be liable to lead it to choose not to carry out certain investments out of a desire to avoid having to absorb the expenses involved.
Inbar Steiner, managing partner at Phoenix Value and manager of HA Global, a private capital strategic advisory in Israel, said, “The decision of the Capital Markets, Insurance and Savings Authority might give rise to a better allocation to private capital funds, based on the expected risk-return policy of the specific investment track. Also, it is expected that in certain investment tracks, investment managers will be able to increase the exposure to international private capital, as one major barrier is now removed.
“It is encouraging to realize that the Capital Markets, Insurance and Savings Authority trusts the discretion of the institutions to create their own cap for external expenses, with reasonable and fair balance, given the competition on return and management fees in the long-term savings industry. According to HA Global’s research, as of 2021, most Israeli investment houses and insurance companies increased the rate of ‘direct expenses’ compared with 2020, and significant entities are quite close to the 0.25% cap. It is crucial for investment managers to have enough flexibility to invest in excellent and well-performing products without being concerned about an arbitrary limitation”.
Published by Globes, Israel business news – en.globes.co.il – on April 20, 2022.
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