Turkey: Pensions growth ahead
Reform to channel severance payments to the workplace supplementary pensions would mean exponential growth for the Turkish pension sector, writes Reeta Paakkinen
The Turkish private pensions system is expected to experience notable growth after new incentives to boost domestic savings were introduced last year. At the end of 2012, Turkey’s domestic savings rate stood at 11.5% of gross domestic product, while assets invested in private pension funds made up 1.4% of GDP, the third lowest figure among OECD countries in 2011. At present, 17 companies manage assets worth TRY22.4bn (€9.53bn) for 3.5m pension savers. This, in a country of 75m people, half of whom are less than 30 years old, indicates massive growth potential.
The new pension law came into force on 1 January 2013. It replaces the previous tax-deduction structure and encourages participants to make higher contributions to the system. Before 2013, the government granted a tax deduction up to 10% of gross income or minimum wage to private pensions.
From January, the government matches 25% of individual contributions up to a gross monthly salary of TRY978 (€416). Participants will have access to government contributions through a gradual vesting system – 15% after the first three years, 35% after six years, 60% after 10 years and 100% at retirement at the age of 56. Tax levied on exit is applied to net returns as opposed to accumulated value as previously.
The asset volume and number of participants in the system is likely to grow significantly over 2013 as news of the upcoming incentive has attracted many new savers to the system, says Taylan Türkölmez, CEO of TRY2.56bn (€3.3bn) Yapı Kredi Emeklilik.
“Although the law became effective in January and first state contributions were made in late April, even the news about the new arrangement increased public awareness and the number of new entrants to the system over the second half of last year,” Türkölmez says.
“Total assets in the system are likely to reach TRY25bn (€10.6bn) by the end of 2013.”
In 2012, the number of pension policies sold increased by 27% compared with the previous year. Over the first quarter of 2013, the number of participants in the private pensions system increased by 271% compared with the first quarter of 2012.
Cemal Onaran, managing director of TRY3.64bn (€1.55bn) Garanti Pension, notes that consumers were less likely to commit to the system before the reform, because of the tax regime. “People are now more likely to commit to their savings as tax levied on exit is applied only on net returns,” Onaran says.
Currently, Turkey’s private pensions system is by and large a third-pillar system with contributions being mainly individual and voluntary but many in the industry would like the government to actively support the development of a second pillar. At present, only a limited number of firms offer their employees second pillar pension plans, and according to Turkey’s Pension Monitoring Centre (EGM), 74% of all pension plans in Turkey are individual plans, with the remaining 26% being group plans.
Garanti’s Onaran thinks the second pillar in Turkey would become more established if the government were to enforce its introduction throughout the private sector. “Another way to make the second pillar grow would be to direct severance payments to the private pensions system. That would make the total assets in the system exceed TRY400bn [€170bn] by 2023,” he noted.
Türkölmez of Yapi Kredi Emeklilik agrees and points at the high cost of employment as a factor that impedes second pillar development. “The government did attempt to reduce severance payments and replace them with a defined contribution system in a bid to increase firms’ competitiveness, but this sparked a fierce debate even before the draft legislation was published. We expect that eventually the government will transfer severance payments to the pension system,” he says.
The Turkish social security system is financed by contributions from employers and employees and returns from these contributions. Employees contribute 15% of their salary to the social security fund, up to a monthly earnings ceiling (TRY6,360 in May 2013), while employers contribute between 19.5% and 25%.
Employees, employers and the state are required to make a compulsory contribution to the unemployment insurance plan at the rates of 1%, 2% and 1%, respectively.
In addition to the social security contributions, employees also bare the cost of severance pay. An employee whose employment contract is terminated by the employer must receive severance pay, to be calculated based on the employees’ seniority at the work place.
At present there are 17 pension companies in the market, of which the four leading providers – Garanti, Anadolu, Yapı Kredi and Avivasa – have a combined market share of 66% in terms of participants and 74% in terms of assets under management. Recently Allianz acquired Yapı Kredi Insurance and Pension, and industry players expect more initial public offerings, mergers and acquisitions to take place. “The pension landscape in Turkey is becoming increasingly competitive. There will be more deals ahead but Garanti is not making any such plans,” Onaran says.
Jetse de Vries of ING Emeklilik, which ING Group acquired from the Turkish Armed Forces Pension Fund OYAK for €110m in 2008, says many foreign firms are very keen to enter the Turkish market. “There is a lot of interest in entering the pension business in Turkey as there is so much growth potential here and European economies are not doing well at the moment. But in order to play effectively in this market a new entrant should have a bank channel for selling its policies. Without it, getting a foothold here is very difficult,” de Vries says.
Another factor that makes operating in the Turkish market more challenging than before, even for local established firms, is the drop in management fees pension firms have been allowed to charge since 1 January 2013.
“The fees we can charge from customers dropped from 3.6% to 1.9% in the beginning of this year,” says de Vries. “If the government reduces management fees further, that will be a risky situation for the market as pension firms need to pay commissions to the investment managers and intermediaries. It already takes a pension company approximately seven years to make ends meet.”
Türkölmez agrees on the importance of bank distribution channels and the challenge lower management fees pose. “Turkey has a very young population, more than half of the people here are younger than 30 years. This means great growth prospects and makes Turkey one of the most attractive consumer markets in Europe for offering financial services,” he says. “But approximately two-thirds of pension business is bank-originated so it is challenging to operate here without a bank partner. The new fee margins also make it very hard to make profit in the sector without an effective distribution channel.
Although some new players are planning to enter the market, consolidation will be unavoidable,” Türkölmez says.
A young population means massive growth potential for the local pensions industry and no immediate concerns of a shortage of future tax payers. Turkey’s government has, however already opted for a long-term strategy in order to avoid any potential problems arising from ageing population. Turkey’s prime minister, Recep Tayyip Erdoğan, has been calling on families to have at least three children in order to ward off a future pensions problem and ensure that Turkey’s economy ranks among the 10 largest in the world by 2023. His comments have raised eyebrows among some of the ruling party’s critics, who believe the promotion larger families is a Trojan horse for the promotion of a more conservative lifestyle.
“However, it is true that, in order to prevent a similar demographic challenge facing northern Europe, Turkey needs to maintain a young population,” concludes de Vries.