Turkey has been incrementally applying for new implementations on the grounds of mitigate the current account deficit. New Individual Retirement System is one of the most efficient way for this new austerity plan. In the scope of this revolution, Turkish government became an investor by 25% direct contribution to the personal savings whereas government incentive was limited with income tax advantages for Turkish individuals previously. New Individual Retirement Law in Turkey which was adopted in 2012 stimulated the global pension funds for new structures in Turkey. In line with this systematic developments, 20% increase in the size of total pension funds is highly expected with supportive legislation by Capital Markets Board of Turkey ("CMB").
Setting Up A Pension Fund Scheme in Turkey
- As a preliminary step, a company which is intend to set a pension fund shall grant permission by 'Undersecretariat of the Treasury' for the purpose of open up a retirement company.
- Following the company framework, a retirement entity shall apply for approval to Capital Markets Board of Turkey in connection with incorporation of pension fund. There are some prerequisites shall be met prior to application:
- At least one portfolio management agreement with a portfolio manager and a custody agreement with a custodian shall be signed.
- House regulations of the pension funds must be declared on Public Disclosure Platform and Trade Registry Gazette.
- Accounting and legal documentation system shall be established which provides operational structure between investors and fund managers.
- Funds are required to prepare daily, semi annual and annual reports which are brought forward to custodian party.
- Portfolio managers are obliged to provide detailed information about their participants including their contact addresses and proportion of their participation.
- In accordance with Capital Markets Board regulations on establishment of pension funds, three different funds shall be set up independently of pension funds. The minimum amount for the each fund must be at least 5% paid-in capital of the company.
Limitations on Portfolio Management of Pension Funds in Turkey
- Maximum amount for the money and capital markets investment is 10% of total fund assets. However, this percentage can be mount up to 25% of fund assets provided that capital market instrument is issued by asset leasing companies.
- Fund is not capable of investing on any money or capital market instruments more than 5% of total fund assets on condition that it exceeds 40% of pension fund portfolio. This requirement is not obligatory for government bonds and some domestic borrowing instruments.
- Fund portfolio shall include some exchange traded instruments of capital markets.
- Pension funds may invest up to 20% of their portfolio to venture capital investment trusts. Maximum investment percentage for pension funds to a single private equity or venture capital investment trust is 5% of their portfolio assets.
- Pension funds are not allowed to acquire more 20% of voting rights in any type of joint venture.
Expert Opinion: Future Predictions for Turkish Pension Funds Market
Next year, essential amendments are foreseen in pension investment funds market in Turkey which will be implemented by Capital Markets Board of Turkey. Last decade indicated that pensions fund provided average 6% return to their investors. 70% of fund portfolio was invested in state bonds and treasury bills. In this regard, hotly-debated issue is low returns on pension funds which are mostly resulted by deductions. While, burning question is how to benefit from pension funds as a short term investment in Turkey, some regulations loomed on the horizon. This regulation which is related to performance based pension fund deduction will take place in 2014. In line with this new opportunity, retirement companies will able to make higher deductions from booming pension funds. Current deduction range is between 1.09% and 2.28% depend on fund return. After new regulations, the pension funds will yield higher gains when they prefer to invest in riskier capital markets instruments instead of treasury bills and government bonds. On the other hand, retirement companies may deal with changing their pension fund portfolio management company in case that they perform lower return from their strategies. Negative significant effects of this regulation will be directly perceived by on-going portfolio managers that they focus on risk averse investments. It seems that 2014 will be a remarkable benchmark for pension fund portfolio management companies in the eyes of potential participants in local Turkey market. A new opportunity for foreign pension funds will arise to benefit from new CMB bylaw.