Cablegate: Reaction Muted to New Pension Opportunities

Published: Wed 12 Nov 2003 06:21 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
1. Sensitive but Unclassified. Not for internet
2. (SBU) Summary: Turkey's new private pension system was
unveiled with much fanfare at the end of October, with
optimistic prognosticators predicting that up to 10 million
Turks will enroll over the next decade. Initially six
companies are offering private pension plans, with another
six waiting to be licensed. Boosters trumpet the system as
one that will enable workers to maintain their standard of
living in retirement, while also providing an important
source of long-term financing for Turkish economic
development. Sceptics argue, however, that the new system
differs little from previously existing private pensions that
were offered by life insurance companies, and that with only
a modest increase in incentives for participation the system
will be hard pressed to achieve its ambitious goals. End
3. (U) High-profile Rollout: Turkey's new and improved
private pension system received a high profile rollout last
week, with industry executives reporting extensive interest
from the public. Designed to supplement Turkey's existing
public social security net, the system enables workers to put
money in a variety of funds linked to different investment
vehicles, including the stock market and government
securities. Initially, six companies (Ak, Anadolu, Garanti,
Oyak and Yapi Kredi Emeklilik) are licensed to participate in
the system, all affiliated with major Turkish banks and
insurance companies. An additional six companies, including
firms affiliated with the Dogan and Koc groups expect to
receive their licenses in the next few weeks. Each firm
offers between 5 and 9 different funds, and requires a
minimum monthly contribution that can be as little as 25
dollars or 40 million TL.
4. (U) Rules/Incentives: In contrast to previously existing
private pensions in Turkey, which were offered by life
insurance companies, the new plan gives enhanced flexibility
in some areas, but takes away in others. Contributors will
now be able to switch their investments between participating
companies and within each company among its various
investment funds. But contributors must also pay into the
system for at least 10 years and reach the age of 56 before
they are able to take money out without penalty, in contrast
to the existing scheme where only the ten year rule applies.
Beyond the fifteen percent tax that participants will face on
early withdrawal, sceptics also note that the new system's
incentives, while enhanced from the previous system, remain
modest. The maximum tax credit on contributions is 10
percent of a contributor's income (to a maximum of Turkey's
minimum wage, currently 180 USD/month), up from 5 percent
under the old system. In place of the 10 percent tax on
benefits under the old system for those meeting the age and
contribution thresholds, the rate is cut to 5 percent.
Investment advisors nonetheless argue that workers who invest
10 percent of their income for 20 years will be able to
maintain their standard of living in retirement, though of
course there are no guarantees for how the various funds will
5. (SBU) Outlook: Publicly, at least, fund organizers predict
that 8 to 10 million workers, or between a third and a half
of those officially registered as workers in the Turkish
economy will elect to participate in the system in the next
10 years. Ak Emeklilik, which is affiliated with AK Bank,
Turkey's leading financial insitution, has publicly targeted
a 10 percent market share, with 50,000 clients and 300
million USD in assets in the first year alone. Privately,
however, other industry executives predict that industry's
takeoff will be more gradual. Garanti Emeklilik Chairman
Aclan Acar, for instance, noted that his firm will not hire
new staff or open special branches, but will instead simply
use existing bank and insurance company offices to sell the
product. He noted that his son, a financial analyst, had
reviewed the advantages and disadvantages of the system, and
concluded that despite the incentives, investing in a mutual
fund is more advantageous, given its flexibility and the
absence of penalties for early withdrawal. Without further
incentives, Acar predicted, enrollments will likely lag
behind industry expectations, so that he expects that without
changes enrollments will only reach 2 million or so, rather
than the hoped-for 10 million.
6. (SBU) Comment: Despite the caveats, the new retirement
scheme does offer the potential to draw some additional
resources into Turkish financial markets. In a country where
most bank liabilities are extremely short term, and mismatch
even with year-long government securities, any longer term
instruments are a welcome development. But rapid growth in
the sector is likely to be constrained not just by the
relatively modest incentives the new system offers, but also
by the continuing lag in real wage growth, which leaves most
Turkish workers with relatively little savings to devote to
such purposes. End comment.
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