  Numerical simulations of the kinematic induction equation are performed on a
model configuration of the Cadarache von-K\'arm\'an-Sodium dynamo experiment.
The effect of a localized axisymmetric distribution of relative permeability
{\mu} that represents soft iron material within the conducting fluid flow is
investigated. The critical magnetic Reynolds number Rm^c for dynamo action of
the first non-axisymmetric mode roughly scales like
Rm^c({\mu})-Rm^c({\mu}->infinity) ~ {\mu}^(-1/2) i.e. the threshold decreases
as {\mu} increases. This scaling law suggests a skin effect mechanism in the
soft iron disks. More important with regard to the Cadarache dynamo experiment,
we observe a purely toroidal axisymmetric mode localized in the high
permeability disks which becomes dominant for large {\mu}. In this limit, the
toroidal mode is close to the onset of dynamo action with a (negative)
growth-rate that is rather independent of the magnetic Reynolds number. We
qualitatively explain this effect by paramagnetic pumping at the fluid/disk
interface and propose a simplified model that quantitatively reproduces
numerical results. The crucial role of the high permeability disks for the mode
selection in the Cadarache dynamo experiment cannot be inferred from
computations using idealized pseudo-vacuum boundary conditions (H x n = 0).
