Participation in the Individual Retirement Account may be automatic

Published 03.04.2016 20:25

Mehmet Şimşek, deputy prime minister in charge of the economy, announced that the government is working on a system that will make participation in the Individual Retirement Account (IRA) automatic to increase saving in Turkey. He added that they plan to offer the draft to Parliament for their approval soon.

The IRAs are being offered to individuals to ensure they will have the same living standards during retirement. Workers can open a bank account and can decide on the monthly amount they would like to save. Since the system also aims to increase individuals' savings, the government offered citizens the ability to contribute up to 25 percent of their payments in 2013. If a worker decides to save TL 100 ($35.43) per month in the IRA, TL 25 will be paid to the bank by the government on behalf of the employee. While 3 million people were using the IRA in 2013, it became 6 million people as of March.

Şimşek also said automatic participation, which is a practice of the occupational special pension plans, is based on the principle that individuals can automatically join a pension plan when they start working for the first time or change jobs and that they are enabled to exit the plan in accordance with some conditions.

According to Şimşek, the government initiated a pilot scheme in 2014 in order to measure the impacts of automatic participation practices on employees. A total of seven employers and 604 employees joined the pilot scheme from the provinces of Bursa, Istanbul and Tekirdağ. As a part of the pilot project, employees were included in the IRA by their employers by means of an insurance company and they were given the opportunity to exit the system within 60 days in accordance with the individual pension legislations. Merely four out of 604 workers exercised this right at the end of the process, while 99 percent of employees preferred to remain in the system.

Şimşek said the IRA practice is successfully implemented in many countries, with the United Kingdom, the United States and New Zealand taking the lead. He stressed that automatic participation, whose pilot scheme ended in success, can be used to expand the comprehensiveness of the IRAs in Turkey. He added that the number of IRA participants is expected to rapidly rise, and more individuals are expected to benefit from the system thanks to automatic participation. Moreover, the fund size in the system, which stood at TL 51 last month when state subsidies are added, are expected to gain momentum and contribute significantly to the rise of domestic savings with automatic participation, he said.

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