The Turkish pension funds industry has been expanding steadily since 2003, when the government introduced sweeping social security reforms. In 2006, pension funds in Turkey increased their asset volume by 130% to €1.56bn, while pulling in an average return of 11% on their investment.

Gür Çasdas, chief executive officer at Garanti Asset Management, believes that the industry will continue to grow rapidly. "The coverage ratio of the labour force is still relatively low because the Turkish private pensions industry was formed as recently as 2003. We expect the market to reach $10bn (€7.4bn) by year 2010."

Bülent Yagli, head of pension funds at Yapı Kredi Asset Management, said that competition for new clients is fierce. "The asset allocations of different management companies are actually quite similar, so asset managers are trying to compete using other incentives. The sector is currently doing very well because there are significant tax advantages for pension investors," he declares. "The Turkish asset management industry will continue to experience strong growth, particularly as returns normalise and the inflation rate becomes more stable. We expect pension assets to reach €7bn by 2010," he adds.

Sarper Evren, head of finance at the Oyak Emeklilik pension insurance company, with €113m in assets under management, agrees that the industry will experience solid growth, but is concerned that the market remains sensitive to political developments. "We expect pension assets to grow and amount to 1% of the Turkish gross national product at the beginning of 2008. However, the development of the pensions industry in Turkey is sensitive to political developments. In 2007, the main issue affecting the industry will be the general elections scheduled for 22 July. The outcome of the elections will largely decide the issues on top of the political agenda," he explains.

Political developments are important because the young Turkish asset management industry is closely regulated by the Turkish Treasury, the Capital Markets Board (CMB) and the ministry of finance. The existing regulatory framework was put in place in 2002, when parliament adopted the private pensions and savings system bill.

The Treasury is the main regulatory authority; it supervises the establishment of new pension funds and sets the technical limits governing asset allocation. The CMB is responsible for regulating the activities of the asset management companies. The ministry of finance oversees the taxation of the system. At present, tax advantages are available for contributors at all stages. All contributions are tax deductible, and the pensions investments themselves are exempted from tax. Redemptions at retirement are also tax-free.

The regulations governing the Turkish market are relatively strict by European standards. New pension funds must be established through pension providers and managed by asset management companies. The regulations stipulate that foreign assets cannot constitute more than 15% of a pension fund portfolio. The minimum allocation to domestic bonds is set at 30%. "These limits seek to keep investment risk under control. They are also designed to help with the government's borrowing policy and to increase confidence in the system," explains Çasdas.

As a result, investment strategies have remained conservative. Bonds take the largest share with an allocation of 72.6%. Overnight loans make up 14.9%, equities 8.6%, stock exchange money markets 0.1%, foreign securities 0.7% and other investments 3.2%. Turkish pension funds tend not to invest in cash, deposits, hedge funds or property at the present time.

More than half of the 94 investment funds on offer are lira-denominated bond investments (52% of offerings). Balanced funds, consisting of equities and fixed income instruments, make up 22% of the available fund offerings. 12% are money market funds. Foreign security funds have remained relatively unpopular.

"The market is closely regulated. Introducing new asset classes into the system is not really discussed at the moment because everyone agrees that it will take time for the industry to mature," says Yaglı.

Despite the youth of the market, annual returns have largely been solid. The overall return for 2006 was slightly above 11%. Equities yielded 3.3%, lira-denominated bonds 10.14%, foreign bonds 11.1% and international funds 12.6%.

"We expect the popularity of balanced and equity funds to grow faster than that of money market funds in the next few years, as real interest rates go down in Turkey. If there are also legislative and regulatory changes, there may be increased investment into foreign securities in the future," says Çasdas. "It is very likely that we shall see a relaxation of the strict investment limitations as the system matures."


iven the robust expectation of high growth, foreign players have also set their eyes on the Turkish pension asset management industry. Of the 49 asset management companies operating in Turkey, nine are under majority foreign ownership.

The most recent addition to their rank is Finansbank, which is now owned by the National Bank of Greece and which has received permission from the Treasury to establish a pensions company. In addition, a number of foreign investors hold minority stakes in Turkish pension companies. Earlier this year, for example, Dutch pensions management company Eureko bought a minority stake in Garanti Pensions (see box).

Yaglı notes that foreigners often establish partnerships with local pension companies when they enter the Turkish pensions market. He expects partnerships as well as mergers and acquisitions to dominate the Turkish market in the next few years. "Turkish people trust established brands. I expect that instead of the number of companies increasing, the industry will consist of fewer players with more assets in the future."

Çasdas agrees. "This year, several big players such as Ak and Aviva will merge. Because of the high growth potential of the young pensions sector, we shall hear more merger and acquisition news from Turkey later this year."


Mergers and acquisitions

Eureko, the Dutch financial services firm, has bought a 15% share in Garanti Pensions & Life, the €241m Turkish pensions company. The transaction provides Eureko with an option to acquire a further 35% of the unit. Within the same transaction, Eureko will also acquire 80% of Garanti's non-life insurance business Garanti Sigorta.

Erhan Adali, chief executive officer at Garanti said that the Turkish company had decided to enter into a partnership with Eureko because of the latter's expertise in the Dutch second pillar market. "There are many occupational schemes in the Netherlands. Eureko manages many of them and therefore has solid expertise in the second pillar. We expect to gain new ideas and new products from our partner," he says. "But, of course, because there are certain differences between the Dutch and the Turkish pensions systems and therefore not all products of Eureko can be offered for pension savers in Turkey," he added.

At the end of April 2007, Garanti had 18.8% market share of all participants and 11.6% share of all contributions. Before choosing to accept Eureko's offer, Garanti discussed potential cooperation with five other international firms. "We realised that Eureko and Garanti share similar values and goals. Our business models are consistent with each other. For both companies, customer satisfaction is the primary objective. We regard employee satisfaction as an important prerequisite for achieving customer satisfaction.

Together with Eureko, we are confident that we shall increase our market share," explained Adali. "The synergy between Eureko and Garanti will become evident in practice after the concluding ceremony in late June."

Earlier this year, The National Bank of Greece (NBG) announced it is establishing a pension insurance company in Turkey through its majority ownership of Turkey's Finansbank. "The Turkish economy represents the biggest opportunity in the broader region of south-eastern Europe and the eastern Mediterranean," states the 2007-2009 business plans of the NBG Group.

In addition, Aviva and Ak Emeklilik are reportedly planning to start co-operating on pensions.