After about a year of uncertainty about the pension insurance allocation ratios according to Amendment number 12 to the Control of Financial Services (Provident Funds) Law of August 2015, the matter has recently been resolved.

In the wake of Amendment number 12 to the law, which triggered considerable public debate and opposition, the Manufacturers’ Association, the Presidium of Israeli Business Organizations, the Histadrut Federation of Labor and additional entities intervened and subsequently, in April 2016, a collective agreement was signed between the Presidium of Israeli Business Organizations and the Histadrut Federation of Labor, which regulates the increase in the ratios of both the employee’s contribution and the employer’s contribution to the pension component in employees’ provident funds, and this, in relation to all types of provident funds – pension funds and managers’ insurance policies (hereinafter: “the Collective Agreement”).

It should be noted that the numerous discussions and the signing of the Collective Agreement led the Ministry of Finance to accept the position of the parties to the Collective Agreement and, subsequently, in June 2016, the provisions of the Control of Financial Services (Provident Funds) Law were amended to conform to the provisions of the Collective Agreement.

At the end of May 2016, following the signing of the Collective Agreement, an Extension Order was issued that applies the provisions of the said Collective Agreement to the entire economy. The Extension Order prescribes the following provisions:

  • As of July 1, 2016, employers’ contribution to the pension component increased to 6.25% and, as of January 1, 2017, it shall increase to 6.5%.
  • Simultaneously, employees’ contribution to the pension component was also updated and increased to 5.75% and, as of January 1, 2017, it shall increase to 6%.
  • If an employee shall opt to insure his salary under managers’ insurance as a form of pension insurance, the employer shall also be required to purchase, at its own expense, a disability insurance cover at the rate required to insure 75% of the employee’s salary. Also in the instance of managers’ insurance, the new increased allocation ratios specified above shall apply to the employer. The Order further prescribes that the percentage of the employer’s allocation to pension insurance must not be less than 5%; however, the total allocation for the pension component and the disability component together must be between 6.25 – 6.5%. The Extension Order also clarifies that, insofar as the cost of the disability insurance cover shall be higher than 1.25% during 2016 and higher than 1.5% as of 2017, the employer shall be obligated to assume the increased cost of the disability insurance, so that the percentage of the employer’s allocations for pension and disability insurance together shall not exceed 7.5%.

Following the signing of the Collective Agreement, the provisions of the general approval regarding section 14 of the Severance Pay law, which refer to the pension insurance allocation ratios, are expected to be amended to conform to the new Extension Order.

The provisions of the Extension Order came into effect on July 1, 2016 and they require employers to take action to update the pension rights of their current and new employees, as well to update the wording of their employees’ employment contracts accordingly.