This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 ISTANBUL 001676 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN PGOV TU
SUBJECT: REACTION MUTED TO NEW PENSION OPPORTUNITIES 
 
 
 ¶1.  Sensitive but Unclassified.  Not for internet 
distribution. 
 
 
¶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 
Summary. 
 
 
¶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 
perform. 
 
 
¶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. 
ARNETT