The Actuaries Institute says that it believes there might be a positive opportunity for the government to enhance the depth of the fixed interest markets in Australia through the issuance of bonds with maturities falling in the years ranging from 2031 to 2051 (and possibly beyond).
In a letter to Ms Neena Pai, assistant secretary of the Budget Policy Branch of the Treasury, the Institute – which has held meetings too with Treasury on the subject – suggests there could be significant demand for assets that support the decumulation phase of superannuation.
In response, the Treasury requested further input on two key points which could inform their deliberations. These key points were:
More detail of the nature of the proposed security to be fit for purpose for the retiree market (a large potential segment of demand); and
An estimate of the level of demand for the proposed security given the demand for traditional long dated bonds is low.
The proposed security
At present, Australia does not have substantial depth in its bond market beyond 10 year securities, notes the Institute. The Treasury has issued traditional Treasury notes, Treasury bonds and a small amount of Treasury indexed bonds. Of these, there is a lack of maturities in the years from 2033 to 2051.
The Institute proposes that serial bonds be considered to fill the maturity gaps in the market between 2031 to 2051. Serial bonds are an established process and have been used across the world by various government, semi-government and other institutions.
The Institute's letter reads, “One possible set of serial bond securities would provide a packaged bundle of inflation linked, zero coupon bonds with varying, sequential annual maturities. The major benefit is that it would provide a breadth of maturities across the 2031 to 2051 period through the issue of only several securities, rather than the issue of 20 individual, traditional bonds. This would improve the breadth of the long dated fixed interest market in Australia and improve the depth of the market with full coverage of all maturity years from 2021 to 2051 (and beyond with subsequent new issues).
“This would support the development of retirement income products, which focus on wealth management. This type of security could also be used as source of funding for recent government spending initiatives to stimulate the economy.”
The Institute says that the ageing population, general improvements in longevity, and increasing funds at retirement are all likely to see the average duration of investment assets required by retirees to increase further over future years. That is, the identified duration mismatch may increase (if current circumstances persist).
The development of Retirement Bonds, using the serial bond approach to bundle long dated zero coupon bonds, provides a decumulation asset class that is appropriate and is ‘fit for purpose’ to support the decumulation phase of superannuation and retirement income streams more broadly by providing an appropriate income pattern for retirees. Using combinations of Retirement Bonds maturity coverage can be provided across all years from 2025 to 2051 or further, says the Institute.