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Impact Investing

IPE special report May 2018

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Recent legislation has mainly given third pillar pension providers a boost, finds Reeta Paakkinen

The Turkish private pensions system, which will celebrate its fifth birthday in October, is growing rapidly. In late April it had an asset volume of TRY5bn (€2.55bn) and 1.56m participants, with the assets managed by the sector's 10 companies having grown by more than 60% to TRY4.56bn during 2007.

Giray Velioglu, chief executive officer of €388m Yapı Kredi Pension, forecasts that the sector will have 1.8m participants and an asset volume of TRY7bn by the end of this year. "By its tenth anniversary in 2013 the system is likely to have reached 8-9m participants and an asset volume of $15bn [€9.7bn]," he adds.

Although the sector overall has experienced strong growth since its inception - by approximately 133% a year - it is still largely composed of individual plans. Individual plans make some 75% of all contracts and group plans only 25%.

Legislation introducing vesting rights is expected to boost the corporate sector. "The introduction of the vesting rights is a particularly positive development for the sector," says Erhan Adalı, president and CEO of the €328m Garanti Pension. "It was in fact something we, the whole industry, have been waiting four years for. It will lead to a notable growth of group plans in future.

At present group plan clients are mainly multinationals and large Turkish companies, he adds. "But in the future we see notable growth from also smaller domestic firms - employers now have a tremendous tool that they can use in recruitment."

Garanti is currently market leader in the group pension area, with 25% of the 423,561 group pension contracts at the end of April. It has a total market share of 19.5% by participants and 13% by asset volume.

Gökhan Dereli, (pictured right) general manager of the €152m Oyak Emeklilik pension insurance company, the private pensions operation of the €5.5bn Turkish Armed Forces Pension Fund (OYAK), is less convinced about the implications of vesting rights for the overall market. "Introducing vesting into the [pensions] legislation is a positive step but it will not have a major impact on the market because some 40% of employees in Turkey work in informal economy," he says. "In these circumstances vesting rights cannot radically change the market."

Adalı notes there is still considerable potential among those who work in the official economy. "The social security institution, the SSK, has some 9.15m members and if we include public employees and those who pay contributions to the social security organisation for artisans and self-employed, Bag-Kur, the number reaches 15m. However, the private pensions system has only some 1.5m participants."

The Turkish pension sector is regulated by the Turkish treasury, the Capital Markets Board (SPK) and the finance ministry. The existing regulatory framework was put in place in 2002, with the passing of the private pensions and savings system law. New pension funds must be established through pension providers and managed by asset management companies. The Treasury is the main regulatory authority; it supervises the establishment of new pension funds and sets the limits governing asset allocation. The SPK is responsible for regulating the activities of the pension funds while the finance ministry oversees the taxation of the system. At present, tax advantages are available for contributors at all stages. All contributions up to 10% of gross salary or the gross minimum wage are tax deductible, and pension investments themselves are also exempted from tax.

The 10 companies manage 104 funds, each offering several alternatives to its clients. Today, 54% of these funds are lira-denominated bond investments, 12% are overnight loans, 23% are balanced funds consisting of equities and fixed income instruments, 4% are equity funds, 4% government euro-denominated bond funds, 2% funds investing in government bonds and bills and the rest are indexed investments.

Regulations were partially relaxed this year, when a 15% upper limit on foreign assets and a minimum requirement of 30% for domestic bond investments were abolished. The change is expected to be reflected in asset allocation later this year. But pension funds are still barred from investing in derivatives, and so far no pension asset management firm has created a real estate vehicle.

"We are assessing how pension funds could start investing in real estate funds," says Meral Egemen, general manager of €608m AvivaSA Pension, the result of a merger last year of between Aviva and Ak Emeklilik. "There are several interesting real estate funds in Turkey, but we need to assess how they can be tailored to serve as pension investments. Another asset class we are looking at is gold; the industry is discussing a possible gold fund."

"The recent turbulence in global markets and the need to introduce new products for the growing number of participants have also interested us in launching new tools, especially gold funds," agrees Adalı. "We are very close to setting up a gold fund, only some legislative issues are waiting to be resolved. Especially those clients that have a more conservative approach to savings, who would prefer not to earn interest, will appreciate such a fund. Together with other industry players we are also lobbying the SPK to allow the launch of return guaranteed pension funds, which do not exist in Turkey yet. So far the SPK has taken a positive approach on the issue."

Adalı does not consider the Turkish real estate investment landscape mature enough an investment target for pension firms. "It is too early to talk about pension funds investing in property here. Although real estate is a growing sector in Turkey we need to see how the mortgage penetration and the second-hand housing market in Turkey develop. At the moment there are only 10-15 property funds in Turkey anyway. It is also useful to see what happens in property markets globally before making a move."

Despite the market turbulence in the second half of 2007, annual returns for Turkish pension funds were largely sound. The average overall return for 2007 stood at 18.7%.

Equities, overwhelmingly domestic, yielded 34.4%, index funds 40.4%, balanced funds 22.6%, lira-denominated bonds 18.4%, foreign bonds -8.0% and international funds -7.5%.

"From a macro point of view the turbulence in the US markets has had no major effect on the market as the inflow of new customers and contributions in a largely third pillar system depends on purchasing power," says Sarper Evren, (pictured left) head of finance at Oyak Emeklilik. On the asset management side Oyak has made changes to its fund composition to improve returns and hedge risk. "We had a fund investing mainly in dollar and euro bonds, which was not performing particularly well because dollar rates began to be very cheap and the interest rate of euro bonds was not so high. We changed the fund's composition by decreasing the proportion of euro bonds and increasing the share of government bonds in the portfolio. This improved the fund's performance."  

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