The impact of the global slowdown and growing unemployment have had the effect of limiting private pensions to the third pillar and delayed discussion of creating a second pillar, says Reeta Paakkinen

Turbulence in global markets has slowed the growth of the Turkish private pensions sector. The number of members in the system rose from 1.69m in October 2008 to 1.8m in late April 2009, according to Turkey's Pension Monitoring Centre (EGM). Over the same period in 2007, nearly 200,000 new participants joined the system. The figures highlight the limited nature and immaturity of a sector, established in 2003, in a country with a population of 75m.

"There is a remarkable fall in the sales of new policies" says Gökhan Dereli, chief executive officer of the TRY369m (€179m) ING Emeklilik. "New sales are down by some 50% in comparison with earlier periods, and contracts are being increasingly cancelled. We are witnessing a big plummet in the number of contracts but measuring this is still too early."

ING Emeklilik has approximately 153,550 contributors and a market share of 5.5% in terms of assets under management.

The slowdown in world economy has led to soaring unemployment in Turkey, which rose to 15.5% in the three months to end-February, with the number of jobless surging to a worse-than-expected 3.65m in the period, from 2.59m a year earlier, according to the Turkish Statistical Institute (TurkStat). Joblessness among young people jumped to 27.9% from 21.2% a year earlier.

"There are families where both parents have lost their jobs. In situations like that other more immediate expenses like school fees become more important and people cancel their policies," Dereli notes.

The crisis and soaring unemployment is increasingly turning the typically third pillar system into a luxury, says Deniz Yurtseven, managing director of Deniz Emeklilik ve Hayat, which will launch its pension fund operations this summer. "Many multinational corporations, which would usually offer subsidised pension plans to their employees, are no longer doing so as they need to cut down on costs. When companies are cutting costs and unemployment is increasing most employees are happy to simply have  a job."

"Currently our customer base of multinational companies is not expanding," says Taylan Türkölmez, general manager of the TRY1.06bn Yapi Kredi Emeklilik. "These companies are facing other major issues at the moment."

At Yapi Kredi Emeklilik, the drop in new sales has inspired a shift to longer-term planning. "Instead of corporate plans, we are trying to focus on marketing voluntary pension schemes which could later serve as the infrastructure for employer-sponsored schemes," Türkölmez says.

Indeed, individual corporate contracts as a percentage of all pension contracts in Turkey have declined from 25% in April 2008 to 22% in April 2009.

Dereli notes that earlier this year some representatives of the Turkish regulatory authority suggested pension savers should be allowed to partially withdraw their savings from the system to provide cash during the crisis. "We opposed this because it would beat the whole purpose of the system, which is to protect people in the long-term regardless of occasional crises," he adds.

The slowdown in the system's growth is delaying a discussion about the introduction of a second pillar. "The two new pension regulations that Turkey introduced last year will start contributing to the sector's growth with a delay because of the crisis," says Yurtseven. "In a normal financial environment these regulations would give a notable boost to the sector within a shorter time period."

The new regulations are on vesting rights, introduced in the spring of 2008, and on allowing foundations to transfer their members' pension assets to the private pension system, which came into force last August. It is designed to increase the asset volume of the private system significantly over the long term by allowing companies' pension foundations, associations and other funds with pension commitments to transfer their assets into the private pension system entirely or partially.

One of the benefits of the new regulation is an emphasis on transparency. The regulation imposes a system of monitoring of the foundations' actuarial base, requiring regular reporting on finances from January 2009. There are some 250 pension foundations and associations in Turkey with pension commitments, managing total assets of around €4.5-6bn.

However, the regulation has not proved very successful, as the only foundation to transfer its members' assets to the system is that of pension insurance company Basak Emeklilik.

"The new regulation is not really kicking in because it does not actually requiring associations to transfer their assets to the private system," Türkölmez says. "The government should introduce legislation to force associations to join the system, to turn the regulation from theory to practice. Funds are reluctant to transfer assets to the private system because in the process they would lose their autonomy."

Despite the recent drawbacks, new firms are determined to enter the sector. The next to join the market are expected to be Deniz Emeklilik ve Hayat, a subsidiary of Dexia-owned Deniz Bank, and Ray Sigorta, a joint venture of Turkey's Dogan Holding and Vienna Insurance Group.

"We established Deniz Emeklilik to keep up with competition in the market and the other banks that offer private pension funds," says Yurtseven. "This is a rapidly growing market, which has high growth potential and good profits in the medium to long term."

Ray Sigorta general manager Nüzhet Atabek agrees: "We decided to apply for permission to launch private pension funds because there is notable growth potential in private pension funds in Turkey, where pension insurance is growing faster than any other insurance sector."

However, Türkölmez questions the sector's profitability for the several new firms that have recently launched private pensions operations. "There are a lot of newcomers in the pensions market hoping to make profits," he says. "Some 80% of market is with the big players anyway. Previously, companies could break even after five to six years in business but due to the current crisis and stagnation in the market the breakeven point has lengthened to seven years. In these circumstances the investment may be slightly too costly."

But Dereli says the system still offers potential. "The system as such is growing despite the current challenges," he says. "By the end of the year total assets will have reached some TRY9bn."