ISE REVIEW

Abstract
Proposing far-reaching reforms to pension systems, the World Bank has recently suggested that the existing pay-as-you-go systems in many rich as well as poor countries should be replaced by fully funded, mandatory, preferably private pensions, as the main pillars of the new system. It argues that these reforms will not only benefit pensioners but also enhance savings, and promote capital formation and economic development. This paper provides a critical examination of the Bank’s theses and concludes that it has adopted a one-sided view of the relationships between the key critical variables. The proposed reform may therefore neither protect the old nor achieve faster economic growth.

Abstract
Private pension funds have been major institutional investors in most countries of the Western hemisphere. The countries providing fiscal incentives and tax shelter to pension savings are also those having large pension fund assets in the economy. In these countries, privately managed, fully or partially funded pension funds play a market-maker role in the capital market, take place in the demand side of the privatization process, help to the mobilisation of work force in business circles, and ease the burden of demographic change on the budget, in addition to their basic function of providing retirement benefits in old age. Taxation regime of retirement savings shapes the dimensions, functions, legal infrastructure and the investment areas of private pension funds. Taxation can also be a useful tool in the development of the domestic financial markets, the promotion of financial innovations and instruments, and establishment of fundamentals of market economy, where necessary. This paper aims to show that inappropriate taxation of private pension savings will restrict not only the accumulation of funds but also the possible positive effects of those funds on the capital market, as well as other sections of the economy. It is also suggested in that, private pension funds can reach such scales sufficient to perform these expected functions, by providing tax exemption to contributions, tax-free environment to investment returns and by taxing only the benefits. Finally, countries suffering from improper functioning of a PAYG type social security system, and planning to design funded private pensions as a “voluntary” second pillar, should give ultimate priority to the taxation aspect of this reform.

Abstract
The move towards funded system and the associated growth of pension funds' financial assets has made the financial market aspects of retirement income systems a key policy area. The expansion of a funded pension sector requires the existence of a sophisticated financial market infrastructure. More generally, the importance of pension assets for financial markets may not been given enough policy attention in some countries, which has often focused more on the reform of public pension systems as a means of addressing fiscal problems associated with ageing populations. This paper focuses therefore on the main financial policy challenges arising from the rapid growth of pension fund assets. Several key issues arise: how demographic developments affect the case for greater reliance on advance-funded systems; the macroeconomic implications of a major growth in their importance, including the impact on international capital flows; and the implications for retirees who rely to a major extent on income from advance-funded systems, as opposed to other sources of income. Against this backdrop, policy makers will need to assess the policy implications of: the likelihood that governments may find themselves “bailing out” pension institutions that are unable to meet their obligations; the way in which investment policies of funds should be regulated, and the role of risk management and risk accounting. Moreover, the growing reliance on private pension schemes calls for an assessment of the adequacy of the regulatory framework, while an effective supervisory oversight of the financial situation of pension funds is indispensable for the development of sound private systems. Finally, the implications for the financial markets themselves of the accumulation of vast amounts of savings by pension funds that will need to be invested in financial markets means that financial policy makers need to understand the investment and trading strategies of pension funds and other institutions involved in the provision of retirement income.

Prospects for Private Pension Systems and their Relation to the Stock Market in Turkey
Mahir Fisunoglu

Abstract
The pay-as-you- go pension system is one of the most costly program funded by the Turkish government in the recent years. The Treasury has supported the system with increasing rates since 1992. The total support accounted for one-fourth of the budget deficit in 1995 and one-third in 1996 and 1997. These deficits are almost the same amount as investment expenditures undertaken by the government. Despite this alarming situation, social security and social services in general are at low and insufficient levels. Neither people nor the government is pleased with the existing system. Even based on conservative assumptions, the cost shows a clear tendency to increase in the future, both in absolute terms and as a percentage of GDP. Indeed, should the present system continue with the existing premiums (21.5 percent for Sosyal Sigortalar Kurumu -SSK "Social Security Administration", 35 percent for Emekli Sandýðý "Pension Fund" and 20 percent for Bað-Kur "Self-Employers Security Administration"), these three systems will have a total deficit/GDP ratio of 2.7 percent in 2000, 3.45 percent in 2005, 4.31 percent in 2010, 5.58 percent in 2020, 6.98 percent in 2030, and 10 percent of GDP in 2050 on the basis of 1995 prices. The goal of this study is twofold: i) A short analysis of the existing pension system in Turkey, and ii) investigating the possibility of the private pension system on a complete or partial basis. Nevertheless, it should not be seen as an offer for a completely new system.

There are three main observations:

• The pay-as-you- go system is diverted toward bankruptcy system, (i.e., an incapability to supply the promised benefits out of its own resources).
• A new system of private Pension Saving Accounts (PSA) is superior to the present system, both for workers and society as a whole.
• A gradual transfer of the system from the present system to PSA is possible.

In order to elaborate observation (a) above, a critical analysis of the present system is necessary. There are a number of exogenous parameters, such as population projections, the growth rates of employment, GDP, and real wages. A conclusion has been reached that the present system is not viable, in particular, with regard to maintaining contributions and benefits. As wages and salaries increase, contributions made by the active participants have also increased. Moreover, higher wages and contributions mean bigger pensions in the future. The possibility of the Turkish pension system to carry this heavy burden is questionable. Alternatively, it is possible to make adjustments to the present pension system and to reduce deficit, which will require higher contributions from the existing members, extension of the retirement age, including workers who are not in the system or lowering benefits for future pensioners. These adjustments are unlikely to reduce the deficit and to slow down the rate of increase.

Abstract
Based on a numerical application that employs social and economic parameters of the Turkish economy, this study attempts to demonstrate that the current collapse in the Turkish social security system is not unavoidable. The present social security system in Turkey is based on the defined benefit model of pension provision. On the other hand, recent proposals for reform in the social security system are based on a multipillar system, where one of the alternatives is a defined contribution pension scheme. Utilizing a defined contribution model and Turkish parameters, this study reaches the following findings: first, based on Turkish parameters, the level of retirement pension is very sensitive to the retirement age. Second, the pension rates to be paid to retirees are very sensitive to the real rate of returns realized by pension fund investments. And finally, under a defined contribution model, where current parameters of the Turkish economy are used, reasonable levels of pension are found to be within reach.

An Inquiry on the Evidence of Comovements among Various Stock Market Returns
Kamuran Malatyali

Abstract
This paper analyses possible comovements among major financial market returns for the period between January 1986 and June 1997. The basic findings of this paper are; among the developed country stock exchanges only the US-UK appears to have a common movement in the long run; stock exchanges of Mexico and the Philippines reflect a “pivotal” character since their returns tend to cointegrate with a number of market returns representing different level of development and regional characteristics; markets of the same regions such as the Latin Region or the Far East Region show a comovement of returns while this is not true for Greece and Turkish stock exchanges; further investigation related with the Japanese stock exchange should be carried on since the results pertaining to Japan might be an indication of international portfolios were used to be hedged on this market. This paper is important because it applies the state-of-the-art namely Dynamic Ordinary Least Squares over the returns of various stock markets and because it investigates the long run returns of the Istanbul Stock Exchange in relation with a number of stock markets.

The Bid-Ask Spread and its Determinants for Stocks Traded on the Istanbul Stock Exchange
Zeynep Önder & Nuray Güner

Abstract
This paper examines the bid-ask spread and its determinants in the Istanbul Stock Exchange (ISE). The sample of 198 stocks is analysed for a period from June 1996 to May 1997. The proportional spread is found to be an important part of the transaction costs compared to the brokerage fees in Turkey. Even though there is no market maker in the ISE, the change in the proportional spread across volume and market value quintiles are similar to that observed in the markets with market makers. A negative relationship between measure of volume and proportional spread is observed. The spread in the afternoon session is found to be significantly higher than that in the morning session. Public’s inelastic demand to trade near the closure and information-related trading at the end of the day are considered to be explanations for the observed higher spread at the end of the day.

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