Planning for pensions: New reforms have incentivised personal savings

A landmark reform of Turkey’s private pensions sector is the centrepiece of the government’s plan to boost the country’s declining national savings rate. To draw more people into the pensions system, the government began matching 25% of personal contributions to private pensions, subject to certain limits, in early 2013. Early results indicate the incentive is working. Pensions firms added over 200,000 subscribers in the first two months of the year, according to government data. Though a small portion of Turkey’s roughly 75m people, it is a remarkable acceleration for the sector, representing annualised growth of about 40%. Turkey only introduced private pensions in 2003 and had 3.1m subscribers by the end of 2012, according to government data. The two-month result suggested Turkey’s pensions system could reach some 4.3m by the end of 2013.

Reforming Behaviours

Didem Gordon, the CEO of Ashmore Asset Management, which manages pension funds, said the positive effects of the reform would likely be seen in a few years. She and other economists, bankers and pension industry executives who spoke to OBG all praised the pension reform and predicted it would usher a transformation of how Turks invest.

Decades of high inflation resulted in a culture of saving with short-term deposits, or outside the financial system, in real estate, foreign currency or gold. Emre Gunerman, the deputy-general manager of Avivasa, told OBG, “As the country has become more integrated into the global economy, Turkish citizens have become consumption-oriented. Rising incomes have not been set aside, but mostly used for the purchase of goods and services.” Lower inflation and a decline of real interest rates on bank deposits has opened an opportunity to develop non-bank savings. Mehmet Bostan, the general manager of Vakıf Emeklilik, a local pensions provider, told OBG that private pensions are set to “contribute to the development of capital markets and encourage many segments of the economy to list there”.

The logic behind the reform was that the tax incentives Turkey previously relied upon to make retirement savings attractive were not relevant to large segments of the population. The private pension system grew rapidly in 2003-13, but subscribers were predominantly white-collar professionals in higher-income brackets. Given a persistent problem with tax evasion, many owners and senior employees in difficult-to-track sectors, like retail trade, were not being reached. Bostan told OBG that Turkey’s housewives, who are sometimes more inclined than their husbands to save, are also regarded as a prime market for the new system. Gordon said the average size of contributions would likely decline as less wealthy individuals join the system, and because the government contribution is capped to the minimum wage. No such trend materialised in early 2013, as contributions grew at roughly the same 40% annualised pace of subscribers. Total pension assets as of March 1 2013, were TL21.5bn (€9.2bn).

To combat a tendency under the old system for people to withdraw early, the government restricts early withdrawals of its contributions. People who withdraw after less than three years contributing will get no matching payments, and even those contributing 10 years or longer will lose 40% of matching payments by withdrawing before retirement. The government also caps its monthly matching payments at the minimum wage, which is adjusted regularly for inflation and stood at €429 as of the beginning of 2013. The government also introduced caps on funds’ expense ratios, which vary by asset class and according to Gordon are close to Western pension industry standards.

Strategies For Saving

Pension firms are offering many strategies, from conservative domestic sovereign bond funds to riskier equity funds, as well as alternatives like gold, Islamic bonds and sharia-compliant equities. Gordon said investment management of pensions would become performance-oriented, providing opportunities for asset managers to excel. One concern is that brokerage fees are limited by the caps on expense ratios. Gordon said she hopes this can be changed so that managers will focus on performance.