Annex I. Key Aspects of the New Auto Enrollment System
Automatic participation. Salaried employees under 45 years of age and registered with the Social Security Institution (SGK) will be included in a pension plan through a pension contract arranged by the employer. The pension company that the employer may choose must be amongst the one approved by the Undersecretariat of Treasury.
Contributions. Participants’ contribution amount will be 3 percent of their earning subject to Social Security Insurance (SSI) contributions. Such earnings have a lower limit of has its own upper and lower limits by law. The lower limit is the monthly gross minimum wage (TRY1,647 for 2016), and the upper limit at 6.5 times Gross Monthly Minimum Wage (TRY10,705.5). The Council of Ministers is authorized to double the contribution rate or lower it to 1 percent, or determine it to a fixed amount. The employee may request the employer to make a deduction in an amount greater than the amount specified in the pension contract for automatic enrollment.
Matching. The Government will provide state subsidy for employees amounting to 25 percent of employees’ paid contributions to private pension account. In case the employee stays in the plan, the government provides another one-off subsidy of TRY1,000.00. Employer’s matching contribution is not an option within the auto enrollment system.
Opting out. Participant employees may opt out from the system within 2 months of participation. In this case the accumulated amount of contributions and investment income, if any, will be refunded within 10 days.
Portability. Full portability is ensured by having individual accounts linked to the national ID number. In the event of workplace change, employee’s accumulated savings and retirement time basis gained in the system will be transferred to pension contract of the new workplace, if the new workplace has a pension plan. In case the new workplace does not have a pension plan, employees may continue to pay contribution to the contract arranged in previous workplace upon request.
Retirement benefits. Upon retirement, the employee has the choice of receiving their savings in a one-lump sum or as a monthly annuity over the course of several years. If the employee chooses to receive their pension in annuities exceeding 10 years, the state will provide an extra 5 percent contribution of a private pension customer’s total savings.
Fees. Pension companies cannot charge any fees on participants of auto-enrollment plans other than fund management fees. These will be capped.
Roll out. The plan is to start implementing the new system starting with large employers in January 2017.
Pending issues at the time of writing. Enrollment of an employee to a pension plan by way of their employer; the criteria to be taken into consideration by the employer when choosing the company and pension plan; the funds in which contributions will be invested; the contract to be entered into by the employer with the company; the right to withdrawal; enrollment of an employee to a pension plan by the employer in cases where the employee changes their workplace; transfer of accumulated savings in cases where the employee changes their workplace; payment to the related pension plan upon the request of the employee whose employment relationship has been terminated; pausing contribution payments; abandonment of the system; payment of Government contributions and other principles and procedures governing the enforcement of the new provisions are yet to be defined by the Undersecretariat of Treasury.
Annex II. The Flexible System of Global Models
The Flexible System of Global Models (FSGM) is a semi-structural model combining both micro-founded and reduced-form formulations of various economic sectors. Real GDP in the model is determined by the sum of its demand components in the short run, and the level of potential output in the long run. What follows is a brief overview1 of the components of aggregate demand, potential output, the price block, commodities, and finally monetary and fiscal policy.
Annex III. Model Simulations of Scenarios 1 and 4
Andrle, M., Blagrave, P., Espaillat, P., Honjo, K., Hunt, B., Kortelainen, M., Lalonde, R., Laxton, D., Movroeidi, E., Muir, D., Mursula, S., and Snudden, S., 2015, “The Flexible System of Global Models (FSGM)”. IMF Working Paper No. WP/15/64.
Calderón-Colín, R., Domínguez, E. E., and Schwartz, M.J., 2008, “Consumer Confusion: The Choice of AFORE in Mexico”. IMF Working Paper No. WP/08/177.
Impavido, G., 2013, “Pension Funds” Chpt 47 In: Gerard Caprio (ed.) “Handbook of Key Global Financial Markets, Institutions, and Infrastructure”, Vol. 1, pp. 523–32. (Oxford: Elsevier Inc. Pub.).
Impavido, G., Lasagabaster, E., and García-Huitrón, M., 2010 “New Policies for Mandatory Defined Contribution Pensions – Industrial Organization and Investment Products”. (The World Bank Pub.).
Prepared by Gregorio Impavido.
A larger set of features is summarized in in Annex I. This fuller set of information is used also in the next section.
We distinguish in this note between pension firms (the corporate entity) which operates a pension plan (the legal contract) by, inter alia, managing pension funds (the accumulated cash balances). For a more detailed private pension taxonomy, see Impavido (2013).
Private pensions are referred to as “quasi-market”. They are “markets” because services (although not necessarily all) are provided by competitive independent, often specialized—entities. They are also “quasi” because they differ from a conventional market on both the demand and supply side. On the demand side, consumption is typically mandatory generating a captive clientele. On the supply side, providers do not necessarily maximize profits and their governance structure includes both private and public sector firms, as well as for profit and mutual associations. A quasi-market may also emerge in the absence of formal compulsion if incentives for participation lead to the creation of a de facto captive clientele, as in the case of Turkey.
This is the key rationale for the strong popular discontent with the pension industry in Chile in these days. In Chile, 6 pension fuds manage assets amounting to 73 percent of 2015 GDP and charge fee rates around 75bpsThis yields, gross revenues in the neighborhood of 50bps of GDP that have generated popular discontent as deemed excessive.
Choice does not need to be over providers, it could be over investment options provided by asset managers procured by the public board.
The difference in fee bases between the two segments can be substantial as undecided participants have also low contribution density. When Mexico switched in 2008 to asset-based only revenues, the inequality between the two segments increased dramatically. The average balance per participant in the allocated segment was US$30 compared to ten times that in the quasi-market.
We did not increase the labor force by the 1.9 percent assumed growth rate. Hence, our calculations underestimate the growth in the wage mass, albeit this omission contributes very little.
We use “wage” and “earnings” interchangeably for this work.
In November 2016, this was brought to 7.5 the minimum wage. The increase in the contribution base would approximately add an additional 10bps in GDP to the increase in aggregate savings calculated in this note.
This assumes no impact on quantities and excludes any impact on wages above the 2016 minimum wage. Although these impacts work in opposite directions, it is expected that our simplification underestimates the overall impact on the wage mass.
The authorities count 14 million individuals under scenario 1 with an average wage between TL2,300 for public workers and TL2,500 for private workers. The difference between our estimated covered participants could be explained by the fact that we excluded around 2 million individuals with earnings below the minimum wage and that we excluded individuals with zero reported net earnings. This could also explain why the authorities have also a lower average wage.
We assume that due to inertia, individuals do not opt out. Authorities assume a positive opt out rate that lowers, other things equal, their estimates on aggregate savings.
We projected aggregate savings under scenario 1 using the authorities’ assumptions for covered workforce reported in footnote 13, a gross rate of return of 7 percent and an opt out rate of 8 percent (also authorities’ assumptions). With these assumptions aggregate savings grow more quickly than our scenario 1 in the short term as more people are covered over time and the government transfer plays a larger role. Over the long time, aggregate savings grow less than in our scenario 1 as the gross rate of return is lower and (more critically) the covered population shrinks: the opt out rate is much higher than the growth rate of the labor force.
All statements should be interpreted as “deviation from the baseline”.
This, inter alia, has the effect of reducing the impact of rational expectations on nominal variables that, as a consequence, adjust much more gradually.
This assumption is standard for all EMs in the FSGM.