CLIENT UPDATE
Publication of an Extension Order on the Increase in Contributions for Pension Insurance in the Market
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Dear Clients and Friends
Further to our update of 24 February 2016 (attached here for your reference), regarding the signing of a General Collective Agreement (framework) for the Increase in contributions for Pension Insurance in the Market, we can update you that on June 20th 2016, an Extension Order was published[1] which extends the provisions of the Collective Agreement that was signed on 3 April 2016 between the Presidium of Israeli Business Organizations and the Histadrut Labour Federation, to increase contributions for pension insurance in the market (the "Collective Agreement")[2].
With the publication of the Extension Order, the provisions of the Collective Agreement came into force, and the application date of the Collective Agreement and the Extension Order is 1 July 2016. The Extension Order applies to all employees and employers in Israel.
In general, the Extension Order increases the minimum rate of employee contributions for savings to 6% and employer contributions to 6.5% from the determining salary as defined in the Extension Order[3], in two stages as follows:
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From 1.7.16 |
From 1.1.17 |
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Employee contributions |
Employer contributions |
Employee contributions |
Employer contributions |
New Pension Fund
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5.75%
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6.25%
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6%
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6.5%
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Managers' Insurance Policy
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5.75%
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6.25%
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6%
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6.5%
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The Extension Order provides that employer payments for savings into an insurance fund or provident fund which is not a pension fund as described above, will include the employer's payment for disability insurance in the amount required to insure 75% of the determining salary of the employee, provided that the rate of employer contributions for savings is not less than 5% of the determining salary. The Extension Order further provides that if there is an increase in the cost of cover for disability insurance, the cost to the employer for savings and disability insurance together shall not exceed 7.5% in any event.
Furthermore, the Extension Order states that the rate of deposit to the severance pay component will be as stipulated by the agreement applicable to the employee and the employer so long as it is not less than 6%. Where a workplace has a different rate of severance pay deposit between an insurance fund or a provident fund that is not a pension fund, and a pension fund, the employer will be entitled to match the rate of deposit to the severance pay component to the customary rate in the pension fund, so long as it is not less than 6% of the determining salary, subject to the terms of the Extension Order.
As you will recall, Amendment 12 to the Supervision of Financial Services (Provident Funds) Law – 2005 (the “Provident Funds Law”), which came into force on February 5, 2016, remains in effect. Nonetheless, as we stated in our update of 24 February 2016, and in accordance with what was stated at the Knesset's Finance Committee hearing held on 23 February 2016, Amendment 16 to the Provident Funds Law was published on 16 June 2016, which amends Section 20 to the Provident Funds Law to bring it in line with the provisions of the Collective Agreement.
In addition, in the context of the Collective Agreement, the parties announced that they intend to request that the Minister of the Economy conform the terms of the “General Authorization Concerning Employers’ Payments to Pension Funds and Insurance Funds Instead of Severance Payments” by virtue of Section 14 to the Severance Pay Law – 1963 to the Collective Agreement, but as of the date of this Update, such a correction has not been publicized.
Thus, the entry into force of the Extension Order gives clarity regarding employer and employee rates of deposit to savings. There still remain, however, a number of open questions and the last word has yet to be said.
In any event, we recommend that you review the provisions of the Extension Order from a legal, operational, and HR perspective, consider its implications for customary pension arrangements in the workplace, and prepare to raise the rates of deposit into savings and severance packages (where relevant).
As always, we would be pleased to advise you on the foregoing, as well as any other issues you may be facing.
Best regards,
Employment Department
Herzog Fox Neeman
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[1] The Extension Order was signed by the Minister of the Economy on 23 May 2016.
[2] The Collective Agreement of 3 April 2016 replaced and corrected the provisions of the Collective Agreement dated 23 February 2016, which was cancelled.
[3] The "Determining Salary" - as defined in the agreement that applies to the employee and not less than the insured salary as required by the Compulsory Pensions Extension Order in the Market.
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