The long-trailed reform of the social security system in Turkey finally got under way last month when the government sent six out of seven bills to parliament. One of these provides for the introduction of a long-awaited private pension system, the others restructure operations in social security institutions. The bills continue the reforms begun last August when the government passed a social security reform bill, raising the retirement age to 58 for women and 60 for men.
The draft private pension bill submitted to the Turkish parliament last month has a key role in the broad reform of Turkey’s overloaded social security system and the financial sector is eagerly awaiting its passage. Once it clears parliament, the bill will allow people over 18 to enter the system, regardless of their employment situation. Individuals who enrol by 2005 will be able to retire at 56, provided that they have paid premiums for at least 10 years. Entrants after 2005 will retire at 60.
The five other bills are aimed at overhauling social security institutions. These bills entail the separation of health and insurance services delivered by the Social Security Agency (SSK), restructuring of the security authority for the self-employed (Bag-Kur) and gathering of all social security institutions under a single roof.
There are around 12m workers, public servants and non-payroll self-employed people registered with Turkey’s state-run social security institution and two other retirement funds.
Under pressure from the international community the government approved an overhaul of the social security system in 1999 to prevent it from collapsing under the weight of spiralling pension costs.
By completing the second phase of the reform, which is among Turkey’s commitments to the International Monetary Fund (IMF) under a three-year stand-by deal worth $4bn, the government aims to curb mounting social security deficits which are projected to reach TL3.6 quadrillion (e6.4bn)this year, up from last year’s TL2.8 quadrillion. In the first quarter of the year, however, transfers to social security have totalled TL1.1 quadril-lion. The government forecast the reform would add $600m to state coffers in 2000 and lay the groundwork for the system to break even by 2020.
Meanwhile, banks, brokers and life insurers are preparing to compete for a share of the trillions of lira that will flow into pension funds and on into the capital markets as workers begin to save for their own retirement. Financial experts say the bill will need refining as it makes its way through parliament, and that tax incentives in particular will be essential to encourage large-scale participation.
“Some fine-tuning is needed, but overall, the law will fill a vacuum in Turkey’s social security system,” says Cagatay Ergenekon, manager at the Istanbul Stock Exchange’s Foundation, who helped draft the bill with experts from the labour ministry, Treasury and Capital Markets Board. Ergenekon said effective supervision could be made through the use of on-line technology as it was crucial for the system’s success and protection of people’s savings for retirement. He added that he felt that the level of tax exemption on private pension funds would determine the extent of participation in the system.
Analysts say questions remain because of a lack of detail in the bill about the tax breaks, portfolio investments, commissions and supervision in the private pension system. “Tax advantages for participants are not clear and this must be defined by the law rather than follow-up regulations,” says Erman Dincel, assistant general manager at brokerage INVESTA.
The government, however, remains confident that it has got the balance right in the new legislation. Labour minister Yasar Okuyan said some 2m people with social security coverage could take part in the new private pension system in the first year and some $10bn could accumulate in the pension funds in four years. While the government is concerned about the active-passive ratio among the current pension schemes and across the country as a whole, the new legislation is mainly driven by the reformist zeal sweeping the country.
The new president has called for modernisation measures, and “earthquake diplomacy” is still pushing along Turkey’s EU application.
Speaking in London in March Okuyan said, “It is the stated aim of the government to spread the social security and health systems to the whole population, providing efficient systems whose financial resources are certain.”
The bill envisages private pension companies being set up, subject to Turkey’s insurance law. Pension companies will collect funds and hand over their management to portfolio management firms. Life insurers can set up their own pension fund companies and transfer relevant funds to them within two years. More than 5m people are already insured by some 20 private life insurance firms, which have collected $1.5bn to 2bn worth of premiums so far.
Employees who pay contributions for a minimum of 10 years will receive either a regular pension or a lump sum after retirement. They will also maintain their current social security coverage. The door is also left open for unregistered labour to join the pension schemes. Participants may opt to keep their savings in more than one investment fund belonging to the same company and/or transfer them to another pension company. On retirement, participants may decide to retrieve their savings en masse, or receive them in instalments during their lifetime.
Voluntary participants and employers, the latter’s involvement being discretionary, will deposit their contributions in pension funds managed by pension companies. Pension companies are required to be technically and administratively capable of competing with other financial institutions and of serving at least 100,000 participants within two years. It is anticipated that as few as four or five licences will be issued, and those to companies with a minimum capital of $35m. This may hinder any newcomers to the market. The new legislation also prevents this capital being used to support, for example, other subsidiaries. It will be predominantly invested in T-bills, the profits from which are likely to be offset by corporation tax, making the new companies very long-payback projects.
A proposed private pension coordination board will define the policy terms under the private pension system, decide on licenses, insolvency, mergers and transfers of pension companies.
Current life and individual accident insurers must meet the requirements of the bill in order to manage pension funds, nevertheless insurers are seen as having some advantages over their rivals.
“Life insurance companies have proved themselves technically. We are more organised and experienced in collecting money through our marketing channels,” says Guray Velioglu, general manager of Halk Yasam, a leading life insurance firm.
Cevdet Asay, managing director of TEB Private Capital, a subsidiary of Turkish Economy Bank, feels that the lack of detail on tax exemptions needs to be dealt with quickly. “Although there is no detail in the bill, I am sure the concessions will be generous. This will put life insurers at a disadvantage if they do not obtain a licence, as their tax advantages will be significantly less than those of the new pension funds.”