Employers in Israel are obliged to set aside pension funds every month for the benefit of their employees. This has been the case since 1 January 2008, when an extension order for comprehensive pension insurance in the economy was published. It is relevant to all employees, apart from certain exceptions, such as men under the age of 21 and women under the age of 20.
This was a revolution in the field of pensions in Israel because in the past the entire pension issue was regulated at the collective level and applied only to certain sectors; however, there was still no general obligation for employers to set aside funds for their employees' retirement.
The extension order stipulated that pension arrangements must include "comprehensive insurance coverage" – that is, coverage that provides protection in three situations:
- old-age pensions for longevity;
- disability pensions for incapacity for work; and
- dependents' pensions for death.
The extension order, therefore, is paternalistic, as it extends the provisions of a collective agreement signed between the workers' organisations and employers to all employees.
In contrast to the extension order, article 20 of the Financial Services (Provident Funds) Supervision Law 2005 (the Provident Funds Law), which was also amended in 2008, gives employees as individuals the full right of choice to arrange the terms of their pension insurance. Thus, the starting point of the law sanctifies the freedom of choice and personal liberty.
This tension between the paternalism of the extension order and the freedom of choice in the Provident Funds Law was central in the Lillian Landsberg judgment. Landsberg had lost her ability to work due to cancer and was determined to have a temporary disability of 100%.
At the beginning of her employment, Landsberg chose insurance without coverage in case she lost her capacity to work. When she approached the insurance company, it was explained to her that she was not entitled to receive payments for her disability because she did not have the relevant coverage.
The employee filed a lawsuit at the regional labour court, seeking for it to be ruled that:
- her employer had violated its obligation under the extension order to insure her with a comprehensive pension that also included coverage for loss of ability to work; and
- she was owed compensation for the damage caused by the breach of duty.
She argued that comprehensive pension insurance is primarily a coercive right that could not be waived.
The court dismissed the employee's claim. Following an appeal against the ruling, the National Labour Court also dismissed the lawsuit and ruled that the provision in article 20 of the Provident Funds Law prevailed over the provision of the extension order.
It was also determined that once an employee has been given autonomy and the right to privacy (according to which they are entitled to choose the type of fund and insurance and without informing their employer), the employer has no right to impose an insurance policy on them. Therefore, employers have no responsibility for the individual's choice.
Subsequently, a petition was submitted to the High Court of Justice, which decided not to intervene. In its reasoning, it emphasised that the Provident Funds Law had been enacted in tandem with the Financial Services Supervision Law (Consulting, Marketing and Pension Clearing) – therefore, the legislation had provided employees with the appropriate tools to make an informed decision, in addition to transferring the responsibility and freedom of choice to them.
There was some criticism following the ruling that it was not clear whether the employee had known that she was giving up disability insurance when she had signed the papers presented to her, and that "freedom of choice" is a fiction because where there is no understanding there is also no freedom of choice.
In this context, the critics cited studies conducted in Israel and around the world that showed that large sections of the public do not have basic knowledge related to their pensions, and even educated workers have difficulty making informed decisions. The critics therefore argued that the ruling had strengthened the individual's right to make personally harmful decisions.
In general, there is a real difficulty for employees to assess the chances of a disability occurring, which seems to tip the scales in favour of purchasing appropriate insurance coverage; however, ignoring factors such as a health condition and age may result in costs being deducted for inappropriate insurance coverages. In view of the above, some propose(1) to take the option of setting a default for a comprehensive pension plan, along with the option of the employee to make an informed choice to waive it.
The creation of coercive rights (and in this case the coercion of a comprehensive pension plan) should be tailored to common situations. Therefore, regulators should collect relevant data, such as what percentage of employees choose to give up disability insurance and the proportion of workers who lose their ability to work and examine this against background data to determine whether a more paternalistic approach to pension funds would be appropriate.
For further information on this topic please contact Sagi Asman at Efrat Deutsch & Co by telephone (+972-3-6096960) or email ([email protected]). The Efrat Deutsch & Co website can be accessed at www.edz-law.co.il.