karnit flug : challenges in the field of pension savings remarks by dr karnit flug, governor of the bank of israel, at the pensions, insurance and financial literacy research center, ben - gurion university, beer - sheva, 20 november 2014. * * * good morning, the festive opening of this institute is a very important event, and its work plan seems promising. there is tremendous importance to raising awareness and research on the matter, and action in this direction is to be welcomed. it is also important to improve the public ’ s ability to make an informed decision in this field as this is one of the most important financial decisions a household makes. i therefore see tremendous importance in working on financial literacy. i would like to briefly touch upon a number of facts and trends that point to the challenges in the field of pension savings, and then to present a series of questions that i believe are proper to deal with in an institute such as this. projected demographic trends as we know, life expectancy is increasing, and if we look at the past 40 years, the life expectancy of those reaching age 65 increased from 80 years to 86 years for women, and from 79 years to 84 years for men. this fact, together with the fact that the retirement age increased by only two years, means that men are expected to live an average of 17 years after retirement and women are expected to live 24 years after retirement. this leads to the question of whether, during the working period, the public is saving enough to ensure a proper income at retirement age. another way of looking at the demographic change is to look at what is happening to the ratio between the working - age population and the retirement - age population. the trend in israel is similar to the trend in other countries in the world, although with some lag. as of today, there are 5 working - age people for each person over age 65 in israel, while the ratio in 2050 is expected to narrow to 3 : 1. this change obviously has serious implications for the labor market, the dependency ratio, and various aspects of policy. an international comparison of retirement arrangements shows that in israel, the retirement age for women is relatively low, and even after it is raised to 64, as is supposed to happen in 2017, it will be significantly lower than in most european countries, some of which are also in a gradual process of raising it. the retirement age for men in israel was raised to 67, and

found it increasingly difficult to assess which risks financial institutions where subject to, and institutions had more difficulty with valuing their products. transparency was gone, which not only contributed to the lack of trust between financial institutions, but also between client and institution. you will therefore understand that we, as supervisors, had to act quickly and act decisively. as chairman of the basel committee, let me mention some of the measures that the committee proposes. and i would also like to use this opportunity to convince you that these measures are really necessary. despite being a significant improvement over the previous accord, basel ii has shown to still contain some significant weaknesses and shortcomings. of many of these we were aware, but we were not able to adequately address them. however, now, under the pressure from the crisis, many of these issues are open for debate again. let me talk about some of these measures in more detail. first, we are going to improve the level and quality of capital. we have seen during the crisis that the current levels are not adequate and that in the end it is only the capital of the highest quality that counts in adverse conditions. an extension of this measure is that we will make capital requirements less cyclical, by means of additional capital buffers that are built up during economic upswings. this might imply that less profit can be used to pay out dividends or bonuses, as it is instead used for increasing the firm ’ s capital buffers. second, we want to make sure that we really cover all risks and allocate adequate capital to each. a key aspect of this is to prevent regulatory arbitrage opportunities, particularly with securitizations and between banking activities and trading activities. third, we will work on an international accord on liquidity buffers and supervision, instead of the current fragmented, national rules. furthermore, the basel committee proposes to supplement these risk - based measures with a non risk - based measure that acts as a backstop in order to prevent an excessive build - up of leverage during favourable economic periods. the design of the leverage ratio as a simple, transparent, and supplementary measure of capital that is based on gross exposures, will therefore serve as a safeguard against attempts to game the risk - based requirements and address model risk and measurement error. by the end of 2010 we hope to have fully calibrated these measures such that they can be phased in as economic conditions improve, with the aim of implementing them by end - 2012. i