Showing its potential

Since its launch in October 2003, the individual pension system, or second pillar, of Turkey's pension system has grown rapidly. In the first year of the system approximately 256,000 people joined. Four years on, some 1.2m Turkish residents have a private pension plan.

At present eleven pension companies operate in the country. Three of these (Basak, Fortis and Aviva) are under full foreign ownership. The total accumulation of funds, which in the end of 2003 was approximately €25.5m, has grown to over €1.8bn.

"Turkey's potential in pensions is much higher than what these figures express. We view advantages such as the young age of our population and the rapid and high growth potential of the financial system as immense opportunities for the progress of the pension system," says Halil Çanakçı, undersecretary of the treasury, in the 2006 report of Turkey's Pensions Monitoring Centre (EGM). "In the last four years the Turkish economy achieved an average growth of 7.8%. This rate is the highest level of growth realised within the OECD zone," he adds.

Erhan Adalı, president and CEO of €241m Garanti Pension and Life, agrees. "The system has enormous potential to grow," he says. "People in Turkey, the majority of whom are relatively young, are becoming more inclined to plan ahead. Demographics and the popularity of pension planning are having a very positive affect on pension companies."

Even though private pension saving has grown rapidly since the establishment of the system, group plans still form only 25% of all contracts. Group plans offered by employers in Turkey can, in fact, be counted as third pillar individual savings because the employee still makes an individual contract with the pension provider. If one observes the market with this consideration in mind, there exists only one second pillar collective fund - namely Oyak, the armed forces pension fund.

According to EGM at the end of 2006 individual schemes formed 82% of all pension contracts. Schemes sponsored mutually by the employer and the employee formed 3% of all contracts, employee sponsored group plans 13%, and employer sponsored plans 2%.

"The market share of collective plans has remained small because the system in Turkey was launched primarily as an individual system. Only later companies have become interested in offering pension plans as an additional recruitment tool," says Adalı.

According to Adalı, the situation is likely to change. "In the past two years, the share of group plans has been on steady increase. Multi-national companies, which in their operations abroad offer pension plans as part of the recruitment package, are becoming increasingly interested in offering pension plans for their employees in Turkey."

At present market leaders in the group pension plan market are Garanti, Anadolu Hayat Emeklilik and Vakıf Emeklilik. Ak Emeklilik and Oyak Emeklilik are also strong in collective sales.

The Turkish pension industry is currently waiting for the introduction of several laws that are expected to boost the market. The most important of these is the law on vesting rights, which is pending only the approval of the parliament.

"Today, if an employer contributes to the pension plan of its employee, and the employee decides to exit the plan, the employer gets none of his contributions back. The new legislation will enable the employer to get his share back. This will undoubtedly lead to a very strong growth in the group pension plans market," Adalı explains.

However, with the current political stalemate in the presidential election and the general election on the 22 July, it is unlikely that the vesting rights issue will move forward soon.

Gökhan Dereli, general manager at Oyak Emeklilik, a chairman of the EGM and a registered actuary of the Turkish treasury, points out that although not fully supported by the EU regulations, vesting rights will most likely be included in Turkish legislation to encourage employers to contribute to group pension schemes. He adds that the proposed law on transfer of assets from associations and charities to pension funds will also boost the pension market in the future. Oyak Emeklilik is the pension scheme that Oyak, the army pension fund, launched in 2003. The company also offers pension plans to
civilians.

"Another change, which is likewise pending approval of parliament, is the law on associations and charities," Dereli says. "The law will enable these entities, which today have notable actuarial deficits, to transfer their assets in pension funds. When this law is adopted, it will lead to a significant inflow of assets into pension funds."

n the other hand, Dereli has some doubts about the future of the Turkish second pillar. "It is rather unlikely that group pension plans will play a major role in the Turkish pension sector. In ten years, the system is likely to look more like a third pillar network than a second pillar dominated market," he says.

"Many employers in Turkey evade paying full social security contributions for their employees. Furthermore, trade unions are relatively weak compared to the past. How is it possible to expect sensational growth of the second pillar in a country where trade unions are weak and where not all employers comprehend the importance of social security planning?" Dereli asks.

Although private pension savings are still in their infancy in Turkey, regarding the issue of transparency the country's eleven pension companies are definitely leaders in the pensions markets of south-eastern Europe.

Bülent Yagli, head of pension funds at Yapı Kredi asset management, explains that pension funds in Turkey are required to report on their activities and assets to the EGM on a daily basis. "Fund returns are also listed on the internet and the information is updated every day. In Turkey, there is no debate on the transparency of pension investments, because it has been a requirement for all pension companies to be as transparent as possible from the time the system was first launched," he says.

Dereli agrees. "Turkish pension companies are required to be fully transparent and disclose information regularly, not only to the EGM but also to the government, the treasury and a number of independent auditors. Also the SPK audits companies. Based on the fact that Turkish pension contributors can follow the development of their savings on a daily basis, it is obvious that the Turkish system is one of the most transparent pensions systems in the world," he concludes.