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larger inflows, meaning that investors chose to place their money with provident funds on the basis of the funds’ performance in recent months, even though provident funds are instruments for long-term savings. |
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Momentum is evident in provident funds’ inflows and yields: provident funds that enjoyed strong inflows (yields) in preceding months are likely to enjoy strong inflows (yields) in the current month, and vice versa. |
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In response to a one-time increase in the yield, inflows to provident funds that charge low management fees increase three times as much as inflows to high-management-fee funds, and inflows to low-risk provident funds respond four times more strongly than inflows to high-risk provident funds. |
| Provident funds are an important component of Israel’s pension savings market. The recent reforms in regard to these funds enhanced competition in this industry and made it easier for savers to switch from one provident fund to another and from this avenue of pension savings to alternative avenues. A study carried out at the Bank of Israel looked into the bidirectional relation between savers' inflows to provident funds and the funds’ yields. |
| Various studies abroad elicited a range of results concerning the effect of the yields of mutual funds on the funds’ inflows and the effect of mutual funds’ inflows on their yields. A smaller number of studies have examined this issue in the context of pension-saving funds. However, provident funds are a savings instrument unique to the Israeli market and, as such, have hardly been studied. The few studies performed in this field in Israel found that provident funds underperform the market and yielded evidence of a positive effect of provident funds’ short-term yields on inflows to those funds. |
| The recent reforms in Israel’s provident-fund market, coupled with the severe blow that savers in these funds suffered in the global financial crisis that peaked in late 2008, reinforced questions about the inflows of savers’ money into provident funds, the funds’ yields, and the relation between these variables and the funds’ levels of risk and management fees. |
| A study by Yehuda Porath and Nadav Steinberg of the Bank of Israel Research Department examined the relation between inflow and yield among 'Allowance and Compensation'-type provident funds in Israel. For the purposes of the study, a panel of data from all provident funds in Israel in 2003–2010 was constructed, combining data from the Ministry of Finance’s Gemel-Net system, which is accessible to the public, and individualized data from the Bank of Israel’s KLGEMEL system. |
| The main finding of the study is that provident fund savers tend to deposit (and withdraw) money from the funds in accordance with the funds’ yields in recent months (see graph below). By implication, the savings decisions of those who invest with provident funds are based on the funds’ short-term yields even though the funds are meant for long-term saving. This finding strengthens fears that surfaced in the wake of recent reforms in Israel’s pension-savings market, i.e., that the ability to move between savings vehicles with relative ease may, its clear advantages aside, lead to an emphasis on short-term instead of long-term performance. Other findings of the study, however, show that investors take account of provident funds’ levels of risk and management fees and are more inclined to transfer money to funds that attain stronger yields despite their relatively solid assets or relatively low management fees. |
| Since the period being studied was typified by a global financial crisis—an exceptional event in the global and Israeli economy generally and the provident-fund market specifically—the authors examined three subperiods separately: pre-crisis, crisis, and post-crisis. The findings for the “pre” and “post” subperiods resemble the overall findings. In the crisis subperiod, in contrast, the relation between provident fund inflows and the funds’ past yields weakened, evidently due to a flight to safety that came at the expense of the pursuit of yields. |
| The unique data available to the researchers also allowed them to examine the deposits of self-employed savers in provident-funds as distinct from those of employees. It was found that the deposits of the self-employed, which one would expect to be affected only by their investment preferences, have a positive dependency on the yields of, and the deposits in, the provident funds in preceding months, resembling the general findings of the study. The deposits of employee savers, in contrast, were not affected by the provident funds’ yields and deposits in preceding months. This raises the hypothesis that employees’ investments with provident funds are influenced by workplace-related considerations and not only by their investment preferences. |
