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Regulation: Countdown to auto-enrolment

Turkey is introducing auto-enrolment for private pensions this year, although full details are still to be announced, writes Reeta Paakkinen 

At a glance

• Turkey is reforming its private pensions system, including the introduction of auto-enrolment, in a bid to boost savings.
• Halal funds are those that invest according to Islamic principles.
• Employer-sponsored group plans are gaining in popularity.

Turkey’s government is planning to expand the country’s private pensions system and boost private saving by introducing an auto-enrolment system to its private pensions sector, the country’s deputy prime minister in charge of the economy, Mehmet Şimşek announced in April. 

It is not yet certain how much new entrants to the private pensions system would be expected to contribute from their salaries. However, the new system is likely to cover both those starting employment for the first time in their life as well as those starting to save privately for their pensions for the first time. According to Şimşek, who says he hopes to see the new system in place soon, the draft law on auto-enrolment will be presented to the government shortly. 

“The aim of the expansion of the system is to encourage citizens to increase their savings and the overall savings ratio of Turkey. We are also currently discussing what will happen to the state contribution of those pension savers who withdraw from the system after some time,” Şimşek says. He adds that the new system will be similar to the auto-enrolment systems in the UK, New Zealand and the US.

Turkey’s private pensions system was launched in 2003, and currently consists of 19 companies managing TRY47bn (€14.7bn) for 6.24m savers. Since the 25% state contribution was introduced in 2013, some three million new participants have joined the system.  

An auto-enrolment system for new entrants to the labour market, once implemented, would bring about strong growth in the assets in the system, as well as the number of people saving for private pensions in a country where the median age of the 78.7m population is only 31 years. Currently less than 8% of Turkey’s residents have invested in a private pension plan.

Cemal Onaran, managing director of Turkey’s €2.3bn Garanti Pension welcomes the plan to introduce auto-enrolment. “Indeed, Turkey’s main economic challenges are the current-account deficit and low savings ratio. The government aims to raise the savings rate by promoting and encouraging individual pensions system. Some remarkable changes in the pension legislation were made in 2013,” he says. 

“Conditions of auto-enrolment, which we expect to be in force at the latest in 2017, are not definite yet. However, we have some estimations what is to come. It is that the auto-enrolment will be available for employees under 45 years old who start to work in a new job. The system will not be employer-sponsored but government contributions will continue to be paid for the employees’ contributions,” Onaran says.

The country’s current account deficit stood at about 4.1% of GDP in February. According to the International Monetary Fund (IMF), Turkey’s savings rate is considerably below the global average.

The Turkish Finance Ministry is reportedly also considering whether it would be beneficial to manage all assets of new entrants to the system under the same roof. It may introduce the so-called mega-fund structure where those entering the system as new participants would have a choice of six or seven ‘mega funds’ with different risk profiles. These vehicles could be investing in inflation indices, equities, liquid assets, halal funds and infrastructure. 

Halal funds are investment vehicles that follow Islamic principles on investments – that is, they are structured in accordance to sharia rules. Halal funds can be managed as mutual funds, exchange-traded funds or hedge funds. The assets of participants – those automatically enrolled to the system, as well as those entering the system for the first time – could then be managed by a single asset management company, which would be chosen through a tendering process. 

Another development that seems to be slowly changing the structure of the Turkish private pensions landscape is the growing popularity of employer-sponsored group plans. The Turkish private pension system is still, by and large, a third-pillar structure that is voluntary. 

At present, there is no second pillar in Turkey and employer-sponsored plans made up only 27.8% of all plans in 2015. However, the share of employer-sponsored group contracts has been steadily increasing in recent years. “We expect that, with the radical legislative changes and introduction of the auto-enrolment, the number of participants in private pension system will grow notably,” says Onaran.

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