Interview: Mehmet Bostan
What factors have contributed to the low domestic savings rate in Turkey, and how might this rate be increased by the new pension law?
MEHMET BOSTAN: As has been widely documented, the savings rate in Turkey has remained low despite steady income growth in the middle class. The rate has actually dropped in recent years, from 24% in 1998 to 14% in 2010. There are many reasons for this trend. First, Turkish culture has become more consumption-oriented amid global economic integration. Second, the general public has remained largely unaware of pension products. Some locals have had negative perceptions of pension providers due to certain unscrupulous business practices in the industry prior to the 2000s. Third, saving had been deterred by Turkey’s legacy of high inflation, economic crises and stock market volatility.
In turn, the low savings rate has elevated risks for individuals and families who cannot fully rely on the social security system for financial support. This phenomenon has exacerbated many of the nation’s economic weaknesses. For instance, the low savings rate has prevented banks from acquiring the funding to provide the large-scale commercial lending that Turkish businesses need to grow. Moreover, low savings make it hard for banks to support long-term capital-intensive projects, and this is all the more pressing given the wide range of costly infrastructure development schemes the government has planned for the coming years.
Furthermore, the low savings rate has accelerated Turkey’s current account deficit by forcing domestic borrowers to be dependent on foreign capital inflows, therefore increasing the vulnerability of the financial system to sudden reversals.
The new pension regulations, which took effect in January 2013, are a step in the right direction. As it was based on a tax incentive, the previous system only attracted white collar workers that made large annual tax contributions. The new system, wherein the direct state contribution of 25% was introduced to make participation more evenly distributed throughout society. Among the new groups we expect to sign up for the programme include housewives, small business owners and young professionals. Among all groups we expect improved consistency, because these state contributions are only made fully available after 10 years of paying into the system. In the past, about one-third of contributors were leaving the system early.
What opportunities will the new regulations create for private pension providers?
BOSTAN: The new rules were formed in partnership with the private sector, which offered many suggestions for reforms that were ultimately incorporated into the final legislation. In and of itself, this public-private collaboration bodes well for the insurance sector because it demonstrates that the authorities are aware of the industry’s contribution to the economy.
Still, some of the changes represent new challenges for the industry. For example, the government has lowered the maximum management fees that pension funds can charge from 8% to 2%. This will mean larger net returns for contributors, but for the pension fund industry it represents a trade-off. Though pension revenues per person will be reduced, over the long term more individuals will enter the system and the total number of contributions will reach a much larger scale.
Early signs in the market are quite encouraging. The pace of contributions so far in 2013 and the amount of interest we are seeing from different segments of society has far exceeded our expectations. In the wake of the pension law, some analysts are projecting 25-30% growth per year in the domestic pension market.
In 2013 we expect the private pension fund industry’s total funds to increase from around TL20bn (€8.6bn) to about TL30bn (€12.95bn), and we expect the number of contributors to grow by 500,000 to 600,000, from 3.1m at year-end 2012. By 2023, we expect total contributors to reach roughly 10m and total funds to reach approximately TL400bn (€172.7bn), both of which are relatively conservative estimates.
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