Pension conversion factor: the hidden number that determines your monthly pension

The basic calculation looks like this:

Your accumulated savings ÷ pension conversion factor = monthly pension

Because the pension fundA savings vehicle based on mutual risk sharing that includes insurance coverage in cases of disability or death. does not pay you all the money on retirement day. It commits to paying a monthly pension for the rest of your life.

To calculate the factor, the pension provider needs to estimate the average number of years for which people will receive a pension, life expectancy, economic assumptions, and the retirement track you choose. According to Kol Zchut, the conversion factor is determined in part by life expectancy and mortality tables, and it may change during the pension-saving period.

Here is the sentence nobody likes to hear:

When people live for more years, the money needs to coverA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. more months. Therefore, an increase in life expectancy can generally lead to a higher factor—and a lower monthly pension.

During our working years, we are accustomed to talking about accumulation: how much money is in the fund, what returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. it achieved, and how much was deducted in management fees.

As retirement approaches, the question changes. It is no longer only “How much money do I have?” but:

How much monthly income will this money provide?

Two people can reach retirement with exactly the same amount of savings but receive entirely different pensions because of:

• Different retirement ages.
• Different retirement tracks.
• Family status and the percentage of pension guaranteed to a spouse.
• A guaranteed payment periodA provision guaranteeing a minimum number of pension payments to heirs if the saver dies shortly after retirement..

Before you begin withdrawing the money, you therefore need to examine the factor’s terms and the effect of every choice on your net income.

At retirement, you generally need to choose a pension track. This is not merely a technical or procedural choice. The track determines not only how much you receive each month, but also what happens to your spouse, survivors, or heirs if you die.

Every protection you add costs money and changes the factor:

• Protection for a spouse: If you choose a track that guarantees a higher pension for your spouse after your death, the factor will generally rise and your current pension will fall.
• Guaranteed payments: If you set a guaranteed payment period—for example, a commitment to 240 pension payments for the family even in the event of an early death—the factor will rise and the ongoing pension will decrease.

If you have an older Bituach Menahalim (ביטוח מנהלים)A savings product based on an individual contract between the saver and the insurance company, combining a savings component and insurance coverage., you may have heard the term “guaranteed factor.”

A guaranteed factor is a number set on the day you joined the policy, and it is fully protected from changes or increases in market life expectancy. Such a factor exists only in certain Bituach Menahalim policies opened before 2013. In pension funds, Kupot Gemel (קופות גמל), and newer Bituach Menahalim policies, the factor is not guaranteed and is determined according to the relevant terms and tables on the actual retirement date.

You need to examine the full picture: management fees, which tend to be very high in older products; the fund’s performance and returns; insurance costs; and how the policy fits your actual needs today.

On paper, a lower factor means a higher pension. But you should not choose a pension product based on this measure alone, for the simple reason that the factor is only one part of the formula.

Even if your factor is excellent, expensive management fees or low returns over the saving years can significantly reduce your investment portfolio. Sometimes a product with a less attractive factor but very low management fees and strong returns may bring you to retirement with a substantially larger balance—enough to compensate for the higher factor.

If you are young and far from retirement age, the factor displayed in your annual reports is mainly a simulation and general estimate. It will change many times before you retire.

At a young age, your strategic focus should be on the things you can control here and now: the size of your monthly deposits, reducing management fees, choosing an age-appropriate investment track, and maintaining pension continuity. As you approach age 60, this number will change from a distant figure in a report into part of your financial reality.

1. Kol Zchut (כל זכות) — Pension conversion factor — An explanation of the pension conversion factor, a guaranteed factor, and the relationship between the factor and the monthly pension. (Kol Zchut)
2. Kol Zchut — Bituach Menahalim — An explanation of Bituach Menahalim, guaranteed factors, and the changes applying to new policies from 2013. (Kol Zchut)
3. Kol Zchut — Comprehensive pension fund — An explanation of how a pension is calculated, including accumulated savings, returns, and calculations based on life expectancy. (Kol Zchut)