Expect market consolidation in Turkey’s young private pensions sector. Reeta Paakkinen outlines the issues behind this as 13 pension insurance companies battle for a market of two million, with the potential to grow tenfold

In Turkey, the domination of foreign firms has become a prominent feature of the local private pension sector. At present, foreign investors have majority ownership in eight of the existing thirteen companies. Axa and Ziraat have applied for licences to operate pension companies and Mapfre has announced its plans to launch a pensions arm. However, despite rapid growth of the market after its launch in 2003, consolidation is likely to be on the cards.

Jetse de Vries, chief executive officer of ING Emeklilik thinks there is still plenty of space in the market for newcomers. ING Emeklilik is the private pension insurance company ING Group acquired from the Turkish Armed Forces Pension Fund (OYAK) for €110m in 2008.

“Thirteen pension insurance companies in a market of this size means very little competition. Only two million people of the population of 73 million in Turkey have a private pension plan, whilst there is potential for 23 million customers. In these circumstances there is no need to be worried about competitors. The market opportunity is huge,” de Vries says.

Taylan Türkölmez, general manager of Yapi Kredi Emeklilik, however, notes that new entrants to the market have not been able to capture significant market share. Some 73% of the whole market is currently held by the four biggest players, Anadolu Hayat, Avivasa, Yapi Kredi and Garanti Pension, on the basis of total assets under management - TRY9.88bn (€4.98bn).

“The new players in the market have very small market shares varying from 1-6%. In these circumstances, consolidation is inevitable. Sooner or later there will be takeovers and only five or six companies will remain,” Türkölmez says.

On the other hand, foreign investors are still attracted to the Turkish market, he notes. “International investors have different kinds of long-term strategies and future expectations in Turkey. A foreign player may initially be happy with a one-percent market share, expecting private pension insurance will become mandatory after some years. That is when an investor will be able to benefit for having had a presence in Turkey for some years.”

Some foreign players, however, have been determined to secure a notable share of the market from the beginning. “These are groups that overseas are very powerful and they want to do the same in Turkey. But to achieve even 15% of the market they will have to invest huge amounts of money,” Türkölmez says.

Before the crisis of August 2008, Yapi Kredi Emeklilik was very close to being acquired by a foreign bank insurance company. However the deal did not close. “Interest of foreign investors in this market is such that sooner or later, foreign players inside, or outside, the Turkish system will knock the door of our shareholders again,” Türkölmez on says.

Gökhan Dereli, actuarial consultant for OYAK, agrees with Türkölmez on pending consolidation. “Thirteen pension companies in Turkey just isn’t feasible. Pensions are not profitable business in Turkey yet. No firm here has made ends meet,” Dereli says. “The existing firms should merge or take over each other. My expectation is that in the end some five companies will remain in the market as the leading four companies take over the other smaller players,” he adds.

Gökhan Özum, head of strategic planning at Garanti Pension, agrees. “At the moment, the market is too crowded. As a result, new players, and especially those who do not have a strong distribution channel, will not make much profit. Consolidation is inevitable within three years, the landscape is bound to evolve,” he says.

Potential acquisition targets are said to include Deniz Emeklilik, the private pension arm of Dexia, which only started its operations in late 2009. Months after its launch, Hakan Ateş, general manager of Denizbank’s financial services said in early 2010, the bank is “waiting for a signal from Dexia” regarding the sale of Deniz Emeklilik.

Another potential acquisition target is said to be Finans Emeklilik, the private pension arm of Finans Bank, which the National Bank of Greece acquired in 2006.

“In this sector in Turkey it is hard to grow as a new player, and as a company with a market share less than 10%, because unemployment for young people is increasing and structurally the situation is anything but temporary, which on its part limits private savings,” Dereli says.

In the past few years, the valuations of local insurance firms have also gone up radically, he adds. “In fact, there are no more good deals left in the pensions sector here. The sales side is quoting high prices and the buy-side expecting to buy something for as low price as possible.”

De Vries of ING agrees. “I earlier asked if we should grow in this market by acquiring one more firm but from conversations with investment bankers realised this would require deep pockets.”

Those seen to be in a particularly weak competitive position are new foreign entrants, such as Ergo, who do not have a local bank channel to act as their distributor. Ergo entered the market in 2009, and currently has a market share of less than 0.5% in terms of assets and customers. The firm’s managing director Recep Akkaya however is confident on future growth: “Over the first quarter of 2010 a few high-profile big companies made institutional pension contracts with us. Further growth in the future will come also from foundations and associations, which are now allowed to transfer their assets to the pension system. This presents important growth potential for the sector as a whole”.

At the moment individual plans make a lion’s share, 75%, of all contracts. One of the main obstacles to the growth of group plans, or further, the second pillar, is the scale of the informal economy, according to some estimates making as much as 25% of Turkey’s GNP. There are still employers who evade paying social security contributions for their employees in full either by not registering them or registering them as earning the minimum salary or as contract workers. Partly as a result of this, as well as earlier low retirement ages - which could be as low as 44 for women and 47 for men a decade ago - Turkey’s social security gap was TRY52.5bn, or 5.5% of last year’s national income.
De Vries notes that in Romania, which used to have similar security evasion problems, the launch of second pillar in 2004 helped to tackle the informal economy. “Within the space of a few months, there were thousands of companies that suddenly registered all their employers. ING alone got two million new customers in a couple of weeks. This is an experience Turkey could benefit from,” he says.

De Vries also notes entering Turkey as a foreign player was “relatively straightforward” because the local private pension system was created as late as in 2003 and is based, by-and-large, on a modern regulatory framework. “In Russia, for example, people have a very different kind of mindset and they have a much shorter term vision than in Turkey. In Turkey the tax system is a little bit more favourable than in Russia, the regulatory environment is well-developed, products transparent and people a bit more long-term focused. Turkey’s pension sector is today one of the best organised in the world.”