TURKEY - Turkey should develop its capital markets by reviewing conflicts of interest issues arising from bank ownership of most non-bank intermediaries, such as pension funds and insurance companies, according to the latest report from the Organisation for Economic Cooperation and Development.
A systemic reform should be carried out to implement, in the medium term, a balanced three-pillar pension system, added the OECD.
In April 2001, the government took a first step in this direction by adopting a law on individual retirement schemes that introduced the possibility for workers to build a voluntary contribution-defined private pension pillar.
The European Commission deemed the 1999 reform insufficient to ensure financial sustainability of the Turkish pension system.
In order to set up and operate a pension fund, financial institutionshave to ask for a licence from both the Treasury and the Capital MarketsBoard.
The Treasury and the Board also have the task of supervising andauditing the whole sector and each single investment fund, respectively.
Either workers or firms on behalf of their employees can contribute tothe funds. In order to make these investments more attractive,contributions to the funds enjoy tax deductibility up to a certainlimit.
Up to now, some former life insurance companies have applied to theTreasury for operating as pension funds but no new financial institutionhas applied yet.
The OECD said that the risk is that the rise of pension funds will occur at the expense of a decline in the life insurance business. The hoped-for strengthening of private provisions for the elderly income would then be limited.
A barrier for the rise of a more developed private pillar is recognisedin the low income of most of the population that is largely liquidityconstrained.
A more effective functioning of pension funds would requirea larger availability of long-term instruments in the domestic financialmarket.
The authorities are confident that the lack of long-term publicbonds will be compensated by better prospects for the development of the corporate bond market.
However, the process could take a long time whereas the need for developing the private pension pillar and reducing pressure on the public system appears all the more compelling.
One way to speed-up the transition towards a more balanced pensionsystem, said the OECD, could be to provide social security contributionreductions to existing companies and workers in the underground economy agreeing to operate in the formal sector and to pay contributions to private pension funds.
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