Pension reform set to unlock Turkey's fund management industry

* State contributions seen boosting private pensions

* Regulation will open up sector to new players

* Private pensions a new business in Turkey

ISTANBUL, March 6 (Reuters) - Turkey could see half a million new private pension contributors this year thanks to changes in regulation, boosting a nascent fund management industry and luring global portfolios.

The country of 75 million has seen an unprecedented rise in prosperity over the past decade, with per capita income almost tripling in nominal terms, but its savings rate is low, with many Turks still scarred by the hyperinflation of the mid-1990s.

That reluctance to save, combined with a closed system dominated by bank-owned fund managers and insurers, has meant Turkey's pension industry has remained small and largely impenetrable to foreign asset management firms.

But since the start of the year, the Turkish state has been making limited contributions to private pension schemes in a bid to boost domestic saving, leading to a sharp increase in the numbers of people participating.

Almost 120,000 people joined private pension schemes in January alone, a four-fold increase from a year earlier.

The government is also considering legislation to encourage pension funds, most of them units of major banks, to invest 30 percent of their assets with outside fund managers rather than relying on in-house expertise at their parent bank.

The changes have already caught the eye of foreign asset management firms.

Helsinki-based Taaleritehdas East Asset Management, which manages around 3 billion euros ($3.9 bln), set up a Turkish unit - Taaleri Portfoy Yonetimi AS - to tap the growth potential resulting from the expected liberalisation.

"It's crucial to enter the business a little early, gain a place in the sector and catch the trend. We have an advantage as we are one of the first movers," Ismail Erdem, head of Taaleri Portfoy Yonetimi in Istanbul, said in a telephone interview.

IN ITS INFANCY

Some 500,000 contributors are expected to join private pension plans this year, industry experts say, boosting it to a 30 billion lira ($17 billion) industry with around 3.7 million contributors, from around 21 billion lira now.

By comparison, Turkey's mutual fund industry has $32.9 billion of total assets under management as of the end of January, managed by some 35 portfolio management firms.

The mutual fund to gross domestic product (GDP) ratio is around 2 percent in Turkey, one of the lowest among emerging markets peers. The government hopes that is about to change, with pension funds a major driver of the growth.

"The Turkish pension market is an infant industry, just 10 years old and growing at a great pace," said Mehmet Bostan, the head of the Pension Monitoring Centre (EGM) and Chief Executive Officer of Vakif Emeklilik, a pension company.

"The average growth rate of total funds in the system between 2005 and 2012 was more than 85 percent. It's expected to grow further with the new regulations, especially the state contributions. This market has a huge potential," he said.

Savings fell to historic lows of 12 percent of national output in 2010 from around 17 percent in 2002-2008, according to World Bank data, and boosting domestic saving has become a major policy goal for the government, with pensions one of its tools.

FOREIGN DEALS

It is hoped the regulatory changes will draw in newcomers.

"Portfolio management firms will be on the radar of foreign companies. I think they are more likely to buy stakes in Turkish portfolio managers than start from scratch," said Gur Cagdas, head of Turkey's Institutional Investor Managers Association.

"Foreign companies could be more interested in portfolio management companies owned by banks because of their well-established distribution channels," Cagdas said.

He expected the draft law on the use of outside fund managers to be passed later this year as part of wider reforms to the pension industry. Fund management charges will also be reduced in a further bid to entice savers.

Deputy Prime Minister Ali Babacan said last month that the state had set aside 1.25 billion lira in funding for the pension system and further transfers could be made if the need arose.

"We took important steps to reduce costs and fees, from now on it will be important for the companies to gain from demand," Babacan said.

Turkey's existing private pension laws were approved by parliament in 2001 in what was then seen as a major step to reducing the burden on state social security and improving welfare levels.

The system went into effect in October 2003, with just six pension companies at the time. There are now 17 private pension companies in Turkey. ($1 = 0.7702 euros) ($1 = 1.7973 Turkish liras)

(Writing by Seda Sezer; Editing by Nick Tattersall)