A personal savings plan that provides income tax advantages to individuals saving money for retirement purposes, an individual retirement system -- otherwise known as the Bireysel Emeklilik Sistemi (BES) in Turkey -- was introduced to Turkish customers in 2003 and has seen a steady rise in the number of contributors and size of total assets with promising performance ever since. As one of the fastest growing investment tools in Turkey, its current dynamism makes BES a very prominent product with a bright future.
Bostan says the current share of individual pension funds in Turkey's gross domestic product (GDP) stands at a poor 2 percent, while this number is 68 percent on a weighted average in other Organization for Economic Cooperation and Development (OECD) countries. “We have a long way to go. ... But this actually means that Turkey's individual pension market has strong growth potential in the years to come,” he said. The Vakıf Emeklilik head believes the share of individual retirement funds in Turkey's GDP could reach 20 percent by 2023. “Looking at the current potential, I think this is a modest target. Turkey is growing fast, as is the BES,” he adds, recalling that the BES achieved a growth rate of 133 percent in the total size of funds in 2010 over the preceding year, despite aftershocks of the global credit crunch in 2009.
The BES in Turkey currently has TL 12.3 billion in total fund volume and 2.3 million customers. Bostan argues that the system could enjoy around 300,000 new participants, while BES funds in Turkey could reach TL 15 billion ($9.6 billion) by the end of 2011. He says the number of BES customers in Turkey could grow to as many as 40 million, highlighting that the country's large young population will play a prominent role in achieving such a target. One of the driving forces behind the impressive performance of the BES is the tireless efforts by individual retirement sector representatives helping drive further expansion. All the players in the market contribute to a mutual pool where BES promotions are carried out and financed.
One of world's best individual retirement systems
As he continues to give encouraging figures for the system, Bostan notes that Turkey has one of the best individual retirement systems in the world. Underlining that the best examples abroad were combined in Turkey to establish a well-organized, well-functioning and transparent system for Turkish customers, he says, “BES has relatively fewer risks and works very well for the time being … [and] this is predominantly due to the fact that it is being strictly monitored.”
The Finance Ministry's Undersecretariat of the Treasury is responsible for regulation of the individual retirement market in Turkey, while the BES is overseen by the Insurance Supervisory Board (SDK).
Bostan says the system is still in its infancy in Turkey; nevertheless, Turkey leads OECD countries in terms of return on invested capital for individual retirement funds. Hence, he argues the BES attracts both foreign and domestic investors and hints that foreign companies will maintain their interest in Turkey and new players could enter the market.
One of the drawbacks Bostan mentions about the BES is that profitability remains below desired levels. “To compensate for this, companies are focusing on ‘hybrid products' such as life insurance. ... Admittedly, there is also demand for these products, for instance life insurance, and providers have realized this interest and started offering a diversified range of products in a bid to boost profitability,” he says. Bostan adds that these could help increase profitability, “but these extra products would not replace the BES in the long run,” he comments.
More awareness needed on tax incentives
The BES allows customers to take an income tax deduction on the funds they personally contribute to the system. Contributions are deducted from monthly income tax by up to 10 percent of gross monthly salary. If a customer paying 20 percent income tax contributes TL 1,000 annually to a pension plan, TL 200 is deducted from his/her annual income tax as part of exclusive tax incentives offered by the state for the BES. As encouraging as the incentive may look, recent research has shown that only a small share of BES customers make use of tax incentives. Bostan says tax incentives can only become known to more people by increased promotion and advertising. “Companies do not hide these incentives; instead it is to their advantage to attract more people. But, still, people are not well informed about the tax incentives. We should intensify our efforts to increase advertising,” he notes.
Bostan says BES customers need to let their company's human resources department know about their involvement in the system to be able to get a reduction in the amount of tax the company deducts from their income.
When it comes to increasing interest from participation banks to the BES, Bostan says Vakıf Emeklilik partners with Kuveyt Türk to offer interest-free retirement solutions for its customers.
“We see it as a good thing for the market that customers who are sensitive about interest earnings can also participate in the BES. We started working with Kuveyt Türk in the final quarter of last year, and this will help increase our sphere of influence,” he says. Recalling that companies are required to obtain operating licenses from the Pension Monitoring Center (EGM) before they can sell individual retirement products, he says they are currently working to license all Kuveyt Türk employees.
Another recent development that benefited both customers and companies was the introduction of Turkey's first national mortality statistics in November of last year. Based on earlier statistics that were compiled with data from other countries with similarities to Turkey in terms of demographics such as aging, the average life span in Turkey was 74 years. This number increased to 78 in statistics released last November.
Bostan adds that some companies that used to pay retirement contributions in cash to individuals instead of paying through payroll have revised their insurance programs following these latest statistics. “They saw that contributing to a pension scheme instead of paying it as in cash-in-hand would be to their benefit … and this is actually good for the individual who can have a life-long salary guarantee after retirement.”
Targeting best services in market
Vakıf Emeklilik, which was around before the BES was introduced, is celebrating 20 years in Turkey.
Mentioning their performance last year, Vakıf Emeklilik head Mehmet Bostan says they increased their fund volume by 30 percent and added 38,884 new customers to Vakıf Emeklilik's BES. He notes that they will intensify their drive to increase revenue and offer a relatively more profitable system with competitive rates of return for customers. Bostan has faith that they will see an increase in the number of customers thanks to diversified products -- in addition to individual retirement packages -- such as personal accident insurance. He says they will also work to offer more effective after-sales services by extending call center and online services beyond current levels. “We are considering introducing new products before June. This will be a morale booster for the company,” he says. In summing up the company's objectives, Bostan adds that it is not necessarily their priority to become the largest company in the market, but rather, the most innovative one offering the best service and earnings returns for customers.
In this path to success Bostan believes Vakıf Emeklilik is deeply indebted to their parent company, Vakıfbank. “We carry out studies at nine regional headquarters and we also have representatives in Vakıfbank branches selling our products across Turkey,” he explains. The company derives its strength from Vakıfbank, which he identifies as “a reliable source to promote products.” Vakıfbank offers vast opportunities for Vakıf Emeklilik as we are keen to reach as many customers as possible,” he says.
Bostan cites a number of advantages that BES offers to customers:
1- As the BES encourages customers to save, it will increase their quality of life after retirement.
2- The BES offers tax incentives for both customers and companies.
3- The BES complements social security services and is a reliable retirement fund.
4- The BES provides a relatively more efficient and transparent saving mechanism.
5- It has relatively fewer risks than life insurance thanks to strict public monitoring
6- Customers are also able to benefit from a diverse range of products, such as life insurance.
7- It also contributes to the increased use of capital market tools as customers will have more opportunity to use their savings in different areas of investment.
8- The BES's strong growth potential and the cut-throat competition in the market renders the BES an attractive investment tool for customers.
