Risk management and capital adequacy of annuity plans in Turkish private pension system

An annuity plan is an insurance product that insured make a lump sum payment or series of regular payments and, in return, obtains regular payments for a certain period of time in the future or whole life starting from a certain time. Annuity plans are generally preferred for retirement period. Employees want to convert a lump sum of money which they save up during their working life into guaranteed income for a time period or the rest of life. Annuity Regulation came into effect on 01.04.2015 (Official Gazette No. 29313) in Turkish Insurance Sector. According to regulation, there were local restrictions for annuity plans such as guaranteed interest rate, mortality table, discount rate, required capital (RC) etc. Thus, annuity plans can be designed in real terms for the first time by the virtue of this regulation. Annuity plans are divided into two groups, one for participants under the age of 56 who leave Private Pension System (PPS) voluntarily before retirement and one for participants above the age of 56 who retire from PPS based on the regulation and technical principles are specified for both groups in the regulation. Annuity plans have an important place in both PPS and insurance system for increasing insurance awareness, product range, customer loyalty and customer satisfaction. However, pension and life insurance companies face with challenges due to legal restrictions, economic and non-economic (like demographic etc.) uncertainties while preparing annuity plans. This dissertation focuses on pension company's liability in case of selling annuity plans to participants over age 56 who retire from PPS under local regulation and an international regulation which is Solvency II directives. In addition, Solvency Capital Requirement (SCR) is calculated considering Turkish economic indicators. Various scenario analyses will be made based on economic and non-economic variables and results are utilized.