SAVING PLANS SAVING PLANS

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Table of contents

1. General ... 3

2. Accumulation in savings plans...5

Table G-1: Accumulation in all savings plans in the years 1997-2001...5

Table G-2: Accumulation in all savings plans classified per deposits in the years 1997-2001...6

Table G-3: Deposits, payments, accumulation and balance of assets In savings plans in the years 2000-2001...7

Figure G-1: Accumulation development in all savings plans in 2001...8

Figure G-2: Monthly accumulation in 2001 in continuance plans ...9

Figure G-3: Distribution of all savings plans per types in the years 1997-2001...10

Table G-4: Average yield of various investment channels between the years 1996-2001 ...11

Figure G-4: The amount of money a saver who invested NIS 100 in the same investment channel for 6 years will receive ...11

3. Index-linked Savings Plans...12

Figure G-5: Real average interest in index-linked savings plans for two years and real average yield for a redemption of two years on index-linked debentures at fixed interest ...12

Figure G-6: Deposits, payments and accumulation in index linked savings plans in 1997-2001 ...13

Figure G-7: Deposits, payments and accumulation in index-linked savings plans in 2001...13

4. Foreign currency linked savings plans ...14

Figure G-8: Rate of change in the dollar exchange rate compared with the rate of change in the consumer price index in the years 1997-2001 ... 14

Figure G-9: Deposits, payments and accumulation in foreign currency linked savings plans in 1997-2001 ... 15

Figure G-10: Deposits, payments and accumulation in foreign currency linked savings plans in 2001 ... 16

Figure G-11: Monthly accumulation in dollar linked savings plans and the dollar’s exchange rate in 1997-2001 ... 16

Figure G-12: Real difference in yield between an index linked savings plan and a dollar linked savings plan in 1997-2001 ... 17

5. Regulation ... 18

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1. General

The capital market plays a central role in the economy growth. It plays an important central role in the routing of savings money to investment purpose and bridges over the gap between the needs of savers on the one hand and the desires of investors on the other regarding the scope of amounts, their liquidity, the risk level and the investment channel.

Savings plans are one of the financial saving channels in the capital market and they have an important part in mediating between the parties by creating the proper financial frameworks.

Additional channels and additional financial mediators are the provident funds, trust funds, life insurance plans, pension funds and more.

The savings plans are designated for individual savers only that are not defined as a corporation and most of them are run in regular banks and mortgage banks. These plans cannot be transferred to another beneficiary therefore a beneficiary cannot be added to a savings plan after it is opened.

24 banks and other institutions are currently running savings plans for the wide public.

The scope of assets of the savings plans has reached in 2001 some NIS 100.1 billion. The savings plans act by virtue of the Saving Encouragement Law, income tax benefits and loan guarantees – 1956 that authorizes the Minister of Finance, with the approval of the Knesset Finance Committee, to regulate the depositing conditions and to manage deposits that are entitled to tax-exempts or tax benefits.

The savings plans used for short, medium and long-term saving for households (2-18 years) provide the savers with a tax-exempt on the profits of linkage differentials and the interest credited to these plans. There are dedicated savings plans that define in advance the purpose of saving and there are savings plans with no defined purpose.

Most of the savings plan management is done by the banks and may be classified according to several properties:

Linkage basis – index linked or exchange rate linked plans (including the currency basket) or a combination of the two.

Way of depositing – a one-time depositing or periodical depositing.

Purpose – savings plans for any purpose or dedicated savings plans e.g. for higher education, housing, car etc.

Hereinafter is a trend analysis of all the savings plans according to the linkage basis, analysis

of the total deposits less total payments (hereinafter:” the yield”) and a description of the part

of the Stock Market Section in the regulation and current supervision on the savings plans.

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Main findings

In 2001 the balance of assets in all the savings plans declined in a real rate of some 2.8% and aggregated NIS 100.1 billion. This was the continuance of the real decline at the rate of about 6.7% in 2001 and a minimum average real increase per year of 0.1% in the last five years.

Most of the decline in the balance of assets of all savings plans in the reviewed year may be explained by the negative accumulation that was set on some NIS 7.4 billion whereas the yield (linkage differentials and interest that are credited to the money in the savings plans) sets-off the negative accumulation, in continuance to the negative accumulation of about NIS 11.7 billion in 2000. The fact that the public continued to prefer depositing in Shekel deposits and trust funds that specialize in solid channels – on the background of the decline in the inflationary expectations, the actual decline in the inflation in 2000 and at the beginning of 2001 and the rise in expected yields on these assets (with them being more liquid) resulted in a high negative accumulation in the index-linked savings plans that are the lion’s share in all savings plans.

In 2001, the index-linked savings plans had a negative accumulation of some NIS 7.1 billion and their balance of assets has really declined at the rate of some 4.2% compared with the year 2000. Foreign currency linked savings plans also had a negative accumulation of about NIS 1.3 billion and their balance of assets declined at the rate of about 6% compared with the year 2000.

Unlinked savings plans had a positive accumulation of about NIS 1 billion in 2001. In 2001, the balance of assets of the unlinked savings plans really increased at the rate of 60%. The rate of these plans out of all savings plans aggregated about 4.1% compared with 2.5% and 1.8%

in the years 2000 and 1999 correspondingly (see figure G-3).

The rate of all savings plans out of all public assets increased in about 8.4% in 2001 (according to the estimate of the Bank of Israel), compared with about 9.1% in 2000 and about 10.5%

in 1999. The decline in the rate of all savings plans out of the total of public assets integrates with the general trend in the portfolio of public’s assets, that is characterized by an increase in the value of unlinked assets on account of index linked assets.

All the data are in current prices unless stated otherwise.

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2. Accumulation in savings plans

Table G-1: Accumulation in all savings plans in the years 1997-2001 Classified by the type of plan

(In billion NIS in current prices)

Year Index-linked

plans

Foreign currency linked plans

Unlinked plans

Total accumulation

Balance of assets at end of year

1997 2.8 0.6- 0.2 2.5 90.4

1998 3.3 0.0 0.5- 2.8 104.3

1999 -0.9 0.5 0.5 0.1 109.3

2000 -13.6 1.5 0.4 -11.7 101.5

2001 -7.1 -1.3 1.0 -7.4 100.1

Quarter 1/01 -3.5 -0.3 0.3 -3.5

Quarter 2/01 -3.6 -0.7 0.3 -4.0

Quarter 3/01 -0.2 -0.3 0.4 -0.1

Quarter 4/01 0.2 0.0 0.0 0.2

Source: Bank of Israel

Note: The gap between the balance of assets for year X plus the accumulation for year X+1 and the balance of assets for year X+1 is the linkage differentials and interest credited to the money in the savings plans.

In the years 1997-2001 the scopes of positive accumulation that characterized the years 1993- 1996 changed. These scopes peaked in 1996 where there was a positive accumulation of about NIS 11.8 billion. In 1999, for the first time since 1992, there was a negative accumulation in the total accumulation of index linked savings plans and foreign currency linked plans.

Nevertheless, the total accumulation in all the savings plans (including unlinked plans) remained positive, and was set on about NIS 48 million. One can see that in the years 2000 and 2001 the negative accumulation yield was strengthened in all savings plans although the positive accumulation in unlinked savings plans for the third year in a row.

The negative accumulation recorded in 2001 in all savings plans resulted mainly from the accumulation in the two first quarters of the year where there was a negative accumulation of about NIS 7.5 billion. In the third quarter, a real moderation in the scopes of negative accumulation was indicated whereas in the forth quarter of 2001 there was a positive accumulation.

The negative accumulation in all savings plans was unable to lower in a considerable manner

the balance of assets of the savings plans, due to the linkage differentials and interest that set

off in some NIS 6 billion the negative accumulation.

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Table G-2: Accumulation in all savings plans classified per deposits in the years 1997-2001

(In billion NIS in current prices)

Year Accumulation in one time

deposits Accumulation in periodical deposits Total accumulation

1997 6.20 4.60- 1.60

1998 6.50 3.60- 2.90

1999 0.79- 0.84 0.05

2000 11.7- 0.04- 11.74-

2001 6.02- 1.36- 7.38-

Quarter 1/01 3.24- 0.16- 4.40-

Quarter 2/01 3.33- 0.63- 3.96-

Quarter 3/01 0.08- 0.31- 0.39-

Quarter 4/01 0.47 0.26- 0.21

Source: Bank of Israel

Note to the matter of deposits: the data include unlinked savings plans.

The negative accumulation trend in savings plans characterized in periodical deposits in the years 1997-1998 ended in 1999, yet was resumed in the year 2000 and strengthened in the year 2001 where there was a negative accumulation of about NIS 1.36 billion. By combining the information of Table G-1 and Table G-2 one can see that the positive accumulation in the forth quarter of 2001 is in one-time deposits in index-linked savings plans.

The accumulation in savings plans characterized by periodical deposits is less influenced by other alternative investments than savings plans characterized by one-time deposits, for two reasons:

1. In these plans the savings is mainly done by standing orders or deduction from salaries therefore the savers in these plans are less inclined to transfer their money to other investment channels.

2. Periodical deposits are in most cases characterized by deposits in small amounts

of NIS 200-400 per month. On the other hand, one-time deposits are very much

influenced by the actual rate of inflation, the expected rate of inflation, the yields of

other alternatives in the capital market and by changes in the preferences of the public

of savers (liquid preferences, range of saving, the saver’s level of carefulness in taking

risks, exploitation of tax attributes etc.). Therefore the option given to savers to change

their preferences and channels of investment in savings plans characterized by one-time

deposits is broader than their option in savings plans that are characterized by periodical

deposits. Indeed the lion’s part of savings plans (about 80%) is characterized by one-

time deposits, compared with 20% that are characterized by periodical deposits.

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Table G-3: Deposits, payments, accumulation and balance of assets in savings plans in the years 2000-2001

(In billion NIS in current prices)

Savings plans Deposits Payments Accumulation1 Balance of assets 2000 2001 Change 2000 2001 Change 2000 2001 Change 2000 2001 Change Index linked 33.0 32.7 1%- 46.6 39.8 15%- 13.6- 7.1- 48%- 91.3 88.6 3%

Foreign currency

linked 4.5 1.6 64%- 3.0 2.9 3%- 1.5 1.3- 187%- 7.8 7.4 5%-

Unlinked 1.2 2.1 75% 0.8 1.1 38% 0.4 1.0 250% 2.4 4.1 71%

Total 38.7 36.4 6%- 50.4 43.7 13%- 11.7- 7.4- 35%- 101.5 100.1 1%- Source: Bank of Israel

1 Deposits less payments.

Table G-3 shows that the decline in negative accumulation in index-linked savings plans in 2001 compared with the year 2000 resulted mainly from the decline in the rate of payments that declined at the rate of about 15%. Yet the decline in accumulation in foreign currency linked savings plans in 2001 compared with 2000 is explained by the decline of about 64%

in deposits to these plans. Unlinked savings plans had a certain positive accumulation due to the sharp increase in the amounts of deposits at the rate of about 75%. In spite of this sharp increase, unlinked savings plans continue to be a marginal part of all savings plans – about 4.1% as of the end of 2001 (2.5% at the end of 2000).

Most of the amounts of payments in savings plans were transferred to alternative investment

channels, like Shekel deposits and short term-loans (STLs). These channels offer a nominal

yield that embodies the inflationary expectations for the period of investment in these

channels. It seems that the nominal yield less inflationary expectations offered by these

channels in the first five months of 2001 was higher than the real yield offered by index-

linked savings plans, since during this period there were higher scopes of payments than those

in other months of the year.

5000 4000 3000 2000 1000 0 -1000 -2000

Deposits Payments Net accumulation

January February March April May June July August September October November Desember

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Figure G-1: Accumulation development in all savings plans in 2001 (In million NIS in current prices)

Source: Bank of Israel

Figure G-1 shows that the trend of negative accumulated moderated in all savings plans in June, a trend that also changed direction in August. There may be three possible explanations:

1. Starting from the month of June there was a decline in the scopes of negative

accumulation in continuance plans (see figure G-2). This explanation is technical, since

this means that a smaller number of continuance plans reached the end of the saving

period in the second half of year 2001. It should be mentioned that throughout 2001 the

negative accumulation in continuance plans added up to about NIS 2.46 billions which

are about 33% of the total negative accumulation in all savings plans. As of the end of

2001 the continuance plans had about NIS 5.2 billions that are supposed to get out of

the channel of savings plans in about three years compared with about NIS 7.4 billion

in 2000 and about NIS 10.2 billion in 1999. The money in these savings plans, which

basic saving period expired or which continuance plans ended and that in the past the

banks would have transferred them to continuance plans (usually under conditions that

are less favorable than the conditions at the date of transfer) are currently transferred

according to the Saving Encouragement Law and the instructions of the Capital Market

Section in the Ministry of Finance to a renewable monthly deposit (see also Chapter 5

– Regulation).

0 -50 -100 -150 -200 -250 -300 -350

January February March April May June July August September October November Desember

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Figure G-2: Monthly accumulation in 2001 in continuance plans (In million NIS in current prices)

Source: Capital Market Section.

2. Starting from July, there has been a decrease in the amounts of payments and an increase in the amounts of deposits in index-linked savings plans. Here too the decline in payments results from a technical reason; meaning less money in the savings plans reached the end of the saving period or the first exit station in the said period. Regarding the increase in the amounts of deposits, no satisfactory reason has been found.

3. For the first time since October 2000 there were net redemptions in the Shekel trust funds in July. These redemptions kept increasing in the two following months, and peaked in September where there were redemptions of about NIS 5.1 billions. In the three months starting from July there were redemptions of about NIS 10.5 billion.

These redemptions are on the background of a decline in the high yields relatively to

alternative channels of investment that these funds achieved at the end of 2000 and in the

first half of 2001 (an average negative accumulation of – 0.2 in the Shekel funds in July-

September 2001). It is estimated that these funds were in the last years a relatively attractive

channel of investment for savings plans, therefore the decline in yields and peak redemptions

of these months may explain the reduction in the scope of payments and the small increase

in the amounts of deposits, since the alternative of investing in these funds have become less

attractive.

2001

2000

1999

1998

1997

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Unlinked plans Foreigncurrency linked plans Index-linked plans

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Figure G-3: Distribution of all savings plans per types in the years 1997-2001 (In percentage)

Source: Bank of Israel.

Between the years 1997-2001 the rate of assets of unlinked savings plans increased in about 100% (from 2% to 4%). This increase was on account of a reduction in the rate of assets of index-linked savings plans, as the rate of assets of foreign currency linked savings plans remained at a similar level in these years. It should be indicated that unlinked savings plans are defined as alternative plans that impart the saver the increase of index rate plus a certain interest or the Shekel interest specified in the savings plan, the higher of the two. Since the banks are obligated as a minimum to impart the savers, at the end of the saving period, the amounts of deposits fully linked to the increase of index rate or the appreciation of the exchange rate of the foreign currency to which these savings plans are linked.

Table G-4 shows the yields of various investment channels between the years 1996-2001.

These yields express the average yield assured to a saver during the said years at the time of investment. These yields do not express the actual yield achieved by the saver in the various channels, since this depends on additional factors including merchantability, market prices, dates of investment and exercise etc. One can see that there is a correlation between the interest offered in the savings plans (index and foreign currency linked) and the average yield for redemption in debentures (index linked at average interest and dollar linked at a variable interest correspondingly).

Figure G-4 shows the amount of money a saver who invested about NIS 100 in a certain

channel and persisted in that channel of investment for 6 years (1996-2001) will receive. The

basis of calculation is that the interest and principal obtained from an investment in a certain

channel are immediately invested in the same channel for the same period. For example,

an investor who invested in 1996 in Short-Term Loan “recycles” his investment each year

whereas an investor who invested in other channels, as stated, “recycles” his investment each

160.0 155.0 150.0 145.0 140.0 135.0 130.0 125.0 Dollar linked

savings plans 143.2

132.2

151.5

134.0

150.5

142.8

Index linked savings plans

Dollar linked bonds at variable

interest

Linked bonds at fixed interest

Unlinked bonds STL

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two years. The amount of money was calculated based on the data on yields for redemption indicated in table G-4 and does not take into consideration the influences of tax on those who invest in debentures directly by buying them in the stock exchange.

Table G-4: Average yield of various investment channels between the years 1996-2001

(In percentage)

Year

Average nominal yield for a redemption

of STL¹

Average nominal yield for a redemption of two years of unlinked bonds at fixed interest¹

Real average yield per redemption of two years of index-linked government bonds at

fixed interest¹

Average dollar yield for a redemption of two years of

dollar linked bonds at variable

interest ¹

Real average yield in index linked savings plans for two years ²

Average dollar yield

in dollar linked savings plans for two years ²

1996 15.5 16.1 4.3 6.1 3.6 5.3

1997 13.4 13.6 3.9 6.1 3.8 5.4

1998 11.4 11.6 5.1 5.5 5.0 4.5

1999 11.5 11.4 5.8 5.6 5.7 4.5

2000 8.8 8.8 6.2 6.6 5.9 5.4

2001 6.5 6.5 4.7 3.5 4.6 3.0

Source: 1) Bank of Israel; 2) Bank survey

Figure G-4: The amount of money a saver who invested NIS 100 in the same investment channel for 6 years will receive

(In Shekels)

Source: Bank of Israel

0.30

0.25

0.20

0.15

0.10

0.05

0.00

0.10 0.10

0.27

0.05

1997 1998 1999 2000 2001

7.00

6.00

5.00

4.00

3.00

0.13

Savings plans Debentures Spread

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3. Index-linked Savings Plans

Figure G-5: Real average interest in index-linked savings plans for two years and real average yield for a redemption of two years on index-linked debentures

at fixed interest (In percentage)

Source: 1) Bank survey; 2) Bank of Israel

The level of yield for redemption in index-linked governmental debentures was in 2001 about 4.7% in average compared with about 6.2% in 2000. Since a considerable part of the assets of index-linked savings plans is invested in index-linked governmental debentures, the level of yield for the redemption of these debentures may explain the rates of interest in index-linked savings plans.

Figure G-5 shows that the average rate of interest in index-linked savings plans equals the

rate of yield for redemption in index-linked governmental debentures less a deduction for

a certain spread. This spread is set by each bank for the savings plans it runs according to

the additional channels of investment where it invests the money of the savings plans. It

should be mentioned that this spread does not represent the banks’ profits from the money

that savers are investing in the savings plans, since part of the money in the savings plans

is invested in index-linked debentures and some is given as credit to the public, where the

spread is of course much higher.

1997 1998 1999 2000 2001 50.0

40.0

30.0

20.0

10.0

0.0

-10.0

-20.0

Deposits Withdrawals Accumulation

In billions

5000 4000 3000 2000 1000 0 -1000 -2000

January February March April May June July August September October November Desember

Deposits Payments Net accumulation

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Figure G-6: Deposits, payments and accumulation in index linked savings plans in 1997-2001

(In billion NIS in current prices)

Source: Bank of Israel

Figure G-7: Deposits, payments and accumulation in index-linked savings plans in 2001

(In million NIS in current prices)

Source: Bank of Israel

Figure G-7 shows that the amounts of monthly payments in index-linked savings plans in 2001 were quite similar to each other, so did the amounts of deposits in the 2

half of 2001.

In July, the amounts of deposits increased in a rate that exceeds the increase in the amounts of

payments and until October 2001 it remained in a similar level. It turns out, therefore, that

these are responsible for the slight reduction in the negative yield in the 2

half of 2001.

1997 1998 1999 2000 2001 20.0

15.0

10.0

5.0

0.0

-5.0

Rate of foreign currency change Rate of index change

In percentage

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4. Foreign currency linked savings plans

In 2001, in foreign currency linked savings plans there was a negative accumulation of NIS 1.3 billion, compared with a positive accumulation of NIS 1.5 billion in 2000. In general, at the end of 2001, foreign currency linked savings plans were about 7.4% out of the total assets of the savings plans, compared with about 9.8% at the end of 1995. It is possible that the public failed to foresee a considerable long-lasting devaluation of the Shekel vs. the Dollar, therefore refrained from investing money in these plans although in certain years the rate of change in the dollar’s exchange rate was higher than the rate of change in the consumer price index (see figure G-8).

Figure G-8: Rate of change in the dollar exchange rate compared with the rate of change in the consumer price index in the years 1997-2001

(In percentage)

Source: capital market Section

From January to November in 2001, there was an average negative accumulation of about NIS 95 million in foreign currency linked savings plans, on the background of the sharp devaluations in the Shekel value vs. the Dollar value in some months of the year. On the other hand, in December there was a positive accumulation of NIS 280 million. One can see (see figure G-10) that the amounts of payments remained in December at a level similar to that of other months of the year, whereas the amounts of deposits increased in December at the rate of hundreds of percentages compared with previous months of the year.

The reason is the public expectations that the Bank of Israel will lower the interest in a

considerable manner during the 2

half of December. These expectations and the actual

reduction in interest on 23/12/2001 have led to a devaluation of about 4.3% in the last two

weeks of December. In the meantime, expectations towards another continuous devaluation

of the shekel also evolved in the first months of 2002. These expectations have increased the

1997 1998 1999 2000 2001 5

4 3 2 1 0 -1 -2

Deposits Withdrawals Accumulation

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attractiveness of dollar linked savings plans and have resulted in deposits of about NIS 500 million in December alone. It should be mentioned that in dollar linked savings plans, the deposit’s nominal principal is assured to the savers, by maintaining the foreign currency rate of exchange to which the amounts of deposits are linked as the floor rate when withdrawing the money. So that in fact the savers can buy put options from the banks according to the foreign currency rate of exchange in periods where there’s a fear from revaluation of the shekel vs. the foreign currency. At the same time the banks “price” this benefit and offer the savers a substantially lower interest than the labor interest that is the upper limit to the interest offered in foreign currency linked savings plans. This spread is considerably higher than the spread in index linked savings plans, due to the historical behavior of the consumer price index compared with the historical behavior of the dollar’s exchange rate.

The reason for the difference in spread is twofold: first, whereas in a 2-year saving period (the minimum in savings plans) since 1998 until 2002 there has been no negative change in the consumer price index, the dollars’ exchange rate has had a negative change. Another reason is the lack of organized merchantable market for buying foreign currency options for periods of two years and more, a fact that makes it difficult for the banks to find sources for financing their commitments towards the savers, not to mention the fact that the cost of these options is as stated very high.

Figure G-9: Deposits, payments and accumulation in foreign currency linked savings plans in 1997-2001

(In billion of NIS in end of period prices)

Source: Bank of Israel

600 400 200 0 -200 -400 -600

January February March April May June July August September October November Desember

Deposits Payments Accumulation

400 300 200 100 0 -200 -300 -400 -500

4.50 4.40 4.30 4.20 4.10 4.00 3.90 3.80 3.70 3.60 3.50

January 98 March 98 May 98 July 98 September 98 November 98 January 99 March 99 May 99 July 99 September 99 November 99 January 00 March 00 May 00 July 00 September 00 November 00 January 01 March 01 May 01 July 01 September 01 November 01

Accumulation Exchange rate

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Figure G-10: Deposits, payments and accumulation in foreign currency linked savings plans in 2001

(In million of NIS in end of period prices)

Source: Bank of Israel

Figure G-11: Monthly accumulation in dollar linked savings plans and the dollar’s exchange rate in 1997-2001

(In million of NIS in end of period prices)

Source: Bank of Israel

The difference in terms of yield

between a deposit of 1 NIS in a dollar linked savings plan and an identical deposit in a index linked savings plan in 2001 was about 6.1% in annual terms, meaning a clear preference (post-factum) to a dollar linked savings plan. Similarly, a calculation for this gap has started in 1997 (see figure G-12).

1 Explanation for the calculation: 1 NIS multiplied by (1 + annual dollar interest in a dollar linked savings plan), multiplied by the annual rate of dollar change in relation to the NIS less 1 NIS multiplied by (1 + Annual real interest in an index linked savings plan), multiplied by (1 + the annual increase of index rate).

1997 1998 1999 2000 2001 4.0

2.0

0.0 -2.0

-4.0 -6.0

-8.0

16

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Figure G-12: Real difference in yield between an index linked savings plan and a dollar linked savings plan in 1997-2001

(In percentage)

Source: Capital Market Section, Ministry of Finance

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5. Regulation

The Capital Market, Insurance and Saving Section in the Ministry of Finance is responsible for the regulation of the bank savings plans and their supervision. The Section’s activity is conducted in cooperation with the Bank Commissioner in the Bank of Israel.

As part of this activity, the following subjects were regulated in 2001:

Clarification circular regarding the investment of savings plans’ money

On February 14, 2000 the Savings Encouragement Law (Teshura savings plan and income tax exempt) –1993, Savings Encouragement Law (Teshura continuance savings plans and income tax exempt) – 1993, the Savings Encouragement Law (a foreign currency savings plan and income tax exempt) –1993, Savings Encouragement Law (continuance foreign currency savings plan and income tax exempt) –1993, Savings Encouragement Law (a housing savings plan and income tax exempt) –1993, Savings Encouragement Law (an apartment savings plan and income tax exempt) –1993, Savings Encouragement Law (higher education for civil servant savings plan and income tax exempt) –1993 were regulated.

As part of the amendments, it is impossible to open a continuance plan for new joiners starting from July 2 2000 and a new arrangement for investing the money was set instead. At the end of the basic savings plan, in case that the saver does not notify the bank what to do with the money released from the savings plans, the bank will transfer the money to an interest bearing monthly deposit that will be self-renewed each month for a period of ten months. The deposit will bear interest of no less than the interest customary in the bank for the deposit of that amount for that period. The regulations also say that after ten months the bank will invest the money according to the Banking Order (deposit with no movements) – 2000.

Yet the Banking Order instructs that: ”a bank corporation will invest the deposit money with no movements according to the last instructions received from the deposit owner, yet if the deposit owner fails to give an instruction during the last four years before the time of investment, the bank corporation will invest the money in a deposit in NIS for the same period with the same type of linkage.” Yet what are the set period and the type of linkage used as a basis for reinvestment? Does it refer to those of the original savings plan or those of the unlinked monthly deposit where the money was invested over the last ten months?

Therefore the Capital Market Section has published in cooperation with the Bank of Israel a

clarification that says that at the end of the ten months where the money of the savings plan

were invested in an interested bearing monthly deposit, the money as stated will be invested

in an interest bearing monthly deposit that will be self-renewed on a monthly basis according

to section 3 (2) of the above order. Consequently, the money will be deposited in an interest

bearing monthly deposit that is renewed on a monthly basis both at the end of the savings

plans’ period and after ten months since that date.

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Clarification publication regarding the opening of trust savings plans for individuals In several applications filed to the Capital Market, Insurance and Saving Section, the Section was asked to approve the opening of savings plans for a private customer through a trust company of the bank, that holds financial and other assets for him. The stand of the Capital, Insurance and Saving Market Section was that these savings plans couldn’t be opened (except for exceptional cases to be specified below) for the following reasons:

Section 5 to the Saving encouragement, Income tax discounts and loan guarantees Law–

1956 says that the tax benefits shall apply to a deposit deposited according to the regulations for saving purposes that cannot be transferred. The Saving Encouragement regulations set additional instructions regarding the nature of the saver (an individual only), the capability to withdraw money under special conditions (car, higher education etc.)

Opening a savings plan by a trustee, whether the trustee is a private person or a trust company, raises a basic difficulty in the application of the above section and instructions and their supervision. In a state where the savings plan is opened by a trustee as stated, the bank has to deal with the trustee only and to rely on his declarations regarding the beneficiary. In such case it is impossible to verify the saver – whether this is indeed an individual or a corporation, what is the source of money (in cases where there may be a case of money laundering), if during the saving period the beneficiary (or the trust company of his behalf) has transferred the ownership over the deposit money to an unknown party etc. Moreover, the bank cannot check and verify that the money taken out of a savings plan managed by the trustee indeed reaches the account holder at the end of the saving period. It should be also noted that in cases where the trustee acts in a saving plan by virtue of an irrevocable power of attorney given to him by the saver, then this is in fact a case of transferring the ownership of the savings plan.

The policy of the Capital Market, Insurance and Saving Market Section in the Ministry of Finance is to approve the activity of a trustee in a savings plan only under exceptional circumstances, where the savings plan is aimed in favor of a certain individual and on condition that the individual is not an inmate, under age or seek.

In any case that does not fall into the said exceptions, the Capital Market, Insurance and Saving Section does not approve opening a savings plan by a trustee for the reasons detailed above.

Notification on an additional extension of the completion date of various savings plans (8/2001)

According to the decision of the Knesset Finance Committee dated 13.9.2001, the Ministry of Finance has signed Saving Encouragement Regulations for all the savings plans that extend the transition period in which it is possible to join the savings plans.

The transition period that started on 8.5.2000 and ended on 31.8.2001 was again extended

until 30.6.2002.

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SAVING PLANS

All the rules that were applicable in the transition period that ended on 31.8.2001 shall also apply in the extended period as specified below:

During the transition period savers who have joined the savings plans until May 4, 2000 (inclusive) will be allowed to deposit additional periodical deposits as the interest, linkage differential or exchange differentials and benefits on them will be tax exempt.

In periodical deposits where with the agreement of the saver and the bank the amount of saving may be increased, the amounts of deposits in the transition period will be at the rate of the last deposit, rounded upward to the closest sum that is a product of NIS 50 (plus the index linkage or rate linkage as set by the bank). In case where the periodical deposits are set as a rate of the saver’s income or as a rate of another amount, the amount of deposit will not exceed this amount during the transition period.

For joiners to the savings plans starting from May 8, 2000 the interest, linkage differential or

rate differentials and benefits up to 30.6.2002 or at a later date will be tax exempt.