Thought Leadership

Insights and analysis of the latest news and trends affecting the insurance, risk and employee benefits industries

Turkey’s Auto-Enrolment Opt-Outs Soar

If auto-enrolment (AE) is the big idea nudging a reluctant world into retirement saving, its attractions are not lost on Turkish policymakers. Otomatik Kalinin Sistemi (OKS), launched a two-year staged roll-out to employers from January 2017. Despite tax incentives, however, enrolled employees have voted with their feet. More than half opted-out in 2017 and total membership actually fell in 2018.

So, where’s it gone wrong?

There are several reasons, principal among them is the absence of a mandatory employer contribution. The Turkish authorities should perhaps have made the UK’s 2001 Stakeholder pension venture their case study. It too omitted a mandatory employer contribution and failed to boost flagging Pillar II cover. Employees’ reason that if their employer is not putting its hand in its pocket then why should they? Modest take-up among even group medical plans, typically the most valued employee benefit, is not uncommon where no employer contribution is made.  

Another significant issue is a stretched consumer. Turkey may be an EU neighbour, but it is not yet 'Europe'. Average income in Turkey is low in comparison with more than 20% living below the poverty line. Low female workforce participation also means many households are reliant on a single wage. Some have made ends meet by tapping into the wave of cheap credit in recent years. Often this is short-term debt, and this has left significant numbers struggling following a currency collapse in 2018 and a tripling of interest rates to 24% in 2018. For many low earning employees, a further flat 3% gross salary deduction on top of the 14% already paid to social security, was the proverbial straw breaking the camel’s back.

Market immaturity is a factor also. Turkey’s epic history stretches back millennia, but its private pension history is brief and financial literacy is weak. This rush to mass market private pensions was “not communicated well”, comments one observer. Personal pensions were legislated in 2001 and AE in 2016. A two-year staged rollout and a 3% contribution are in stark contrast to the UK’s more cautious “boil-the-frog” strategy with staging over more than four years and employee contributions starting at 1% and gradually increasing over time.

Lack of trust is also cited, with modest returns from pension funds, and while AE tax incentives catch the eye, the devil is in the detail. In most instances, government tax credits are clawed back in part or in full, where participants fail to continue to retirement age (56). With retirement a remote concept for young workers with more immediate priorities, this proposition was not good enough.

With a relatively young population, Turkey has a little time to get this right. Rule changes announced at the end of 2018, suggest it may take a while. Opt-outs are to be re-enrolled within three years.

“We don’t like investment and we don’t like being told what to do. We like to live in the moment.” comments one. These tweaks hardly temper such sentiment. Time for Turkish policymakers to revisit the text on behavioural economics?