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New legislation in requiring automatic enrolment in the voluntary funded individual scheme ESPN Flash Report 2017/10

SERDAR SAYAN – EUROPEAN NETWORK MARCH 2017

A new law modifying the Turkish voluntary funded Description pension scheme has Employees have been having access expected remarkable results in terms of come into effect in to an existing supplementary boosting the Turkish people’s propensity January 2017: pension scheme to save, underlining the need for unless they request additional incentives to increase The pension reform process that has to opt out in writing, participation and, hence, contributions. all employees been going on for about 20 years in younger than 45 are Turkey includes enactment of Law No. Additional incentives provided after now automatically 4632 in 2001. This law allows 2012 made purchases of individual assigned to a companies to offer individual pension plans more attractive plans, which has essentially transformed pension plan and There were complicated breaks for the single-component pension system in contribute 3% of pension plan purchases right from the Turkey into a two-component system, their taxable outset, but they were not visible or with one compulsory component (pay- earnings. If understandable to most participants. as-you-go statutory public pension individuals do not Law Number 6327 was enacted in June schemes) and one optional component opt out of this 2012 to further promote ( for) (voluntary funded individual pension automatic purchases of complementary pension schemes). enrolment, the new plans by the working population, by policy will increase The current voluntary funded scheme making the tax benefits and incentives “non-mandatory” enabled all individuals, including those more visible. The law stipulated that the coverage informally employed and those out of the state matches 25% of all annual substantially and labour force, to select a level of contributions (premiums) paid by narrow the savings contributions to the system and pick a individuals to funded pension schemes, gap. portfolio of financial . Those who starting in January 2013 (up to the pay contributions for at least 10 years annual pre-tax total of monthly could collect the initial savings plus the minimum ). This helped increase

LEGAL NOTICE return on their portfolio as early as at 57 contributions somewhat but a further years of age. This option was initially boost was deemed necessary. This document has been thought to have a significant potential to prepared for the European The latest supplementary pension further develop financial markets over Commission. However, it provisions reflects the views only of the following years, and to visibly the authors, and the contribute to the closing of the savings The most recent step taken to address Commission cannot be held responsible for any gap facing the country –revealing itself this need is Law No. 6740, which was use which may be made of most notably through Turkey’s enacted in August 2016 and has come the information contained traditional large current account deficits. into effect in January 2017. Under the therein. Yet, relatively modest rates of new law, all publicly and privately participation in the system have employed and earners prevented it from producing the (covered under articles 4.a and 4.c of

Law No. 5510) who are less than contributions, the total fund size Further reading 45 years of age are automatically of 60.8 billion TRY (€15.2 billion) assigned to an individual pension corresponds to about 2.4% of Pension Monitoring Center (2017). Individual Pension System Annual plan and start contributing at the Turkish GDP as of the end of Progress Reports (2004 to 2015). minimum rate of 3% of their 2015. Available at taxable earnings, unless they If these individuals stay in, rather http://www.egm.org.tr/bes2015grEng request to opt out within two than use their right to opt out, it .htm (accessed on January 26, months of their automatic would provide a substantial boost 2017). enrolment in the plan. In 2015, to the extent of optional (funded) informal employees (18% of all Teksoz, T., and S. Sayan (2002). coverage provision in Turkey. This wage-workers [or, put differently, “Simulation of Benefits and Risks after would also contribute to a further 14% of all paid-]) and the Planned Privatisation of Pension “deepening” of financial markets self-employed (24% of paid- System in Turkey: Is The Expected (i.e. an expansion of the financial Boost to Financial Markets Feasible?” employment) are not required to markets combined with a change Emerging Markets and Trade, enrol, leaving 62% of paid- in the structure of the funds, with 38(5): 23-45, 2002. employment in the scope of the increased longer term new law. The major change On-line news items (Accessed on portfolios) and to the narrowing of brought about by the new law is January 26, 2017): the savings gap in the country. that all wage and salary earners While the government hopes a “90 milyarı çok aşarız” [We will easily younger than 45 will have to opt large enough majority will stay in, surpass 90 billion], Dünya, out of an individual (funded) the early signs indicate a larger http://bit.ly/2j86LSS pension plan, rather than opt in, than expected withdrawal rate. as in the case of workplace “Türkiye, kalkınmasına yakıt olarak Yet, industry analysts expect 10+ pension plans in the UK. BES'i kullanabilir” [Turkey may fuel million new contributors and more her development via individuals' Outlook & than 90 billion TRY (€22.5 billion) pension system], Bloomberg, to be collected in pension http://bit.ly/2kn865n Commentary contributions and returns over the “BES'te 39 bin kişinin 21 bini cayma next decade, due to this This automatic inclusion in the hakkını kullandı” [In the individuals’ automatic inclusion. Given the pension system 21 thousand out of 39 individuals’ (funded) pension magnitude of the so far created thousand contributors opted for a system for wage and salary total fund value of currently withdraw], Bloomberg, earners is likely to significantly enrolled 6.6 million, this http://bit.ly/2j7Ybn5 increase the number of represents a major boost to the participants. It is estimated that privately managed pension BES'te fon büyüklüğü 60 milyarı geçti” [The total fund value of individuals' there are more than 10 million system. It is, however, still too pension system has passed over 60 working individuals who are early to assess the impact of the billion], İş’te Kobi, younger than 45, making up the new legislation. While there is http://bit.ly/2lPHdro target audience to be covered recent news concerning thousands automatically by individual of people (including employees in Author pension plans. This compares the financial services sector) favorably to the number of requesting to drop out of the Serdar Sayan, TOBB University of currently enrolled participants, automatic coverage provided, it is Economics and Technology which stands at about 6.6 million. impossible to judge whether these Together, these have created a exits will continue in bulk numbers total fund value of about 53.4 or not. billion Turkish Liras (TRY) through their contributions over the past

14 years - i.e., around €13.35 billion at the average exchange rate for January 2017. With the addition of 7.4 billion TRY (€1.85 billion) coming from state

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