As the pension sector in Turkey prepares for upcoming regulatory changes, moves are under way in the private sector to transfer the pension departments of banks into more independent segments. Both of these developments are promising, given that they may lead to an increase in the domestic savings rate, which is currently low.
The upcoming pension reforms, which will take effect at the beginning of 2013, will include the government matching contributions, as well as the allowance of transfers from defined benefit plans to defined contribution plans without tax incurrence, which should provide more favourable tax treatment for retirement distributions. Employees will be able to claim a tax deduction of up to 15% on pension contributions, and the government will give a 25% match on employee contributions up to the national minimum wage – currently TL799.5 ($445.6) – both for employer-sponsored retirement plans and for individual-established retirement plans.
“The new government matching scheme will make pensions far more attractive to savers,” Mehmet Bostan, the general manager of Turkey-based pension firm Vakıf Emeklilik and chairman of the Pension Monitoring Agency, told OBG. “However, the new rules will reduce the individual penalty for exiting the pension system. In turn, this may lead to some lapsed contracts.”
The purpose of the new regulations is to increase the amount of money saved by Turks. Despite the country’s growing economy, savings have not continued at the same rate, with the IMF highlighting the issue in a recent statement on the country’s economic outlook.
“Turkey's low domestic savings make it heavily dependent on capital inflows and increase the amplitude of business cycles,” the IMF said in a statement at the end of September. “The authorities have correctly identified increasing savings as the key medium-term priority. They have recently undertaken several reforms in this area; in particular, the private pension reform, aimed at widening coverage and improving progressivity, is an important step to strengthen incentives for private savings.”
Despite this increased government support for boosting savings, many in the industry feel it will still be some time before savings levels in Turkey can actually see a solid rise.
“The pension segment is receiving robust and unprecedented support from the government because the lack of domestic savings is an issue of national significance,” Alim Telci, the general manager of Halk Portföy, told OBG. “Nevertheless, pension penetration will not rise very quickly, as Turkish consumers are heavily indebted and face rising prices, even though their incomes have grown.”
Apart from government regulatory changes, a number of other developments may help transform Turkey’s pension system. Yapı Kredi Bankası (YKB), one of the country’s largest banks, is reportedly considering spinning off its pension unit from its overall insurance brand, Yapı Kredi Sigorta (YKS), which YKB is trying to sell.
YKS, which is estimated to be worth some TL1.6bn ($891.7m), has proven to be slightly overpriced for external investors to bid on, with that price largely being attributed to the pension unit within YKS.
YKB is not the only bank using the pension segment as a way to increase overall company profitability. Oyak, the Turkish army’s pension fund, recently tried to use its revenue to purchase the Gemlik Liman port – the country’s 10th-largest port – which is valued at $350m-400m.
While Yıldırım Holding, a Turkish industrial group, ultimately outbid Oyak, the contest was considered very close, serving as further evidence of the burgeoning strength of the Turkish pension market.
Not every deal seems so clear-cut, however. The Turkish treasury is planning to purchase a majority stake in Vakıflar Bankası (Vakıfbank) to remove uncertainties regarding ownership, as the bank is majority-owned by an autonomous state-run body known as the Directorate of Foundations. The bank’s pension fund will also have the option to sell its 16% stake to the treasury, which may give cause for concern.
“The possible sale of 16% pension-fund stake to the treasury may create overhang in the short term,” said Cihan Saraoğlu, an analyst at Ekspres Invest, an Istanbul-based brokerage.
That said, overall the pension segment is likely to benefit from new government regulations that will come into effect at the beginning of next year. This, combined with the increasing strength of private players, suggests that the segment will play an expanded role in the future of the Turkish economy.