Marion James, Istanbul
Back in May Deputy Prime Minister Mehmet Şimşek announced draft provisions for mandatory private pensions as part of the BES system. Following criticism from trade unions and reservations expressed by employer confederations it seems that the government are rethinking their plans.
The press is reporting that the initial plans have been temporarily shelved. They anticipate a revision being announced in the autumn, and in the meantime expect the government to consult more widely with unions, employers and the insurance sector.
The draft system was to be mandatory for all employers (whether state or private) with more than 250 employees. Individual BES pension accounts would be opened for each individual aged under 45, and the system would work as follows:
* Each month 100 TL would be deducted from the employee’s salary and paid into their individual fund
* No mandatory contribution from employers
* There would be some level of state contribution, although it is not clear as to whether this would be at the 25% given for voluntary membership of BES.
* After six months the employee would be able to leave the BES system and also withdraw their fund including accumulated investment return, if they wish.
* Insurance companies would only be able to charge the fund management charge (FİG). No charges can be levelled for entry fees (giriş aidatı) or on contributions (YGK).
The government is to be commended for attempting to increase Turkey’s woefully low savings ratio. It is estimated that about 3 million employees work for large employers, meaning that potentially the BES system could increase its coverage of the population by nearly 50%.
However a flat rate of contribution seems somewhat inequitable, and only making the contribution mandatory for 6 months will do little to increase the Funds Under Management in the System.
In short, a system with mandatory entry but voluntary exit cannot be described as a mandatory way to increase long-term or medium-term savings.
Trade union leaders quickly seized on the difficulty of expecting the average employee to contribute 100 TL a month. Ergün Atalay, the General Secretary of Türk-İş, claimed such a high level of mandatory deduction from salaries would “condemn workers to starvation”. He pointed out that 50% of employees in Turkey earn only the minimum wage (about 1,300 TL per month). This is already 300 TL a month short of the government’s calculation of the 1,600 TL needed for a family to survive. Reducing the take home pay by a further 100 TL would be unacceptable, he said.
Employers were less fierce in their criticism, presumably because there was no mandatory employer contribution in the proposal. They did however object to fact that the reduction in take home pay could upset the delicate balance in the employment market and lead to calls for wage increases. This would mean that they would in effect be paying the contribution for the employee, and then also be responsible for the extra income tax and social security thus due. They have asked for the revised draft to include some form of tax relief on employer contributions.
I can also see little in the existing proposals to commend them to insurance companies. It is fair to assume that the majority of employees will not only stop contributing after six months, but they will also cash in their funds.
The only recompense for the insurance company for all the administrative work in setting up new BES accounts, administering monthly payroll contributions and then paying surrender values to each employee will be a meagre six months’ worth of fund charge on a fund which will start at about 100 TL and rise to not much over 600 TL. Even the most optimistic estimate can be only a paltry 4-5 TL per employee over the six month period!
Definitely time for a rethink. All of these problems could be solved by:
1. Making the contribution depend on the employees’ salary rather than a flat rate for all whether factory manager or lowly conveyor-belt worker.
2. Recognising that in fact the cost of this will be met by employers through an increase to salaries and changing the structure to be a mandatory employer contribution (with tax-deductibility).
3. Giving employees a tax advantage or a 25% state contribution if they wish to make voluntary contributions of their own.
4. Extending the minimum period of membership to 10 years, thus making a real contribution to the savings ratio and also enabling sufficient funds to build up for the fund-management charge to actually compensate insurance companies for the cost of running such plans.