The New South Wales Government wants to enter the annuity market by selling new capital-guaranteed debt securities, known as Waratah Annuity Bonds, to wealthy retail investors.
The bonds, issued by government debt agency NSW Treasury Corporation (TCorp) to raise capital for infrastructure projects, will provide investors with monthly payments that rise with inflation.
Each payment will be 1 per cent of the original investment, or principal, adjusted for any rise in the consumer price index (CPI). Payments will not fall in value if the CPI falls.
Annuity bonds are common in wholesale markets. However the NSW Government aims to sell them to retiring or retired retail investors, such as trustees of self-managed superannuation funds (SMSFs), says Tim Hext, head of balance sheet and funding at TCorp.
“It’s our first serious foray into retail,” Hext says. “This is definitely a retirement product and suits high-balance funds.”
The NSW Government, which announced the new bonds on March 29, will compete with annuity providers such as Challenger Financial Services for retiree customers.
Annuities guarantee income in return for an initial investment but the bonds are debt instruments that simultaneously pay principal and inflation-linked income.
TCorp aims to attract investors in coming weeks to launch the first issue of the new bonds on June 30. Subsequent issues will be made each quarter.
“Our hope is that as baby boomers reach retirement, they will at least be aware that there is a government-guaranteed inflation-protection option.”
Bond payments to people aged over 60 years are not taxed because the Australian Tax Office sees the securities as supporting allocated pensions from a super fund. However payments to younger people are taxed at 15 per cent.
Bonds with payment streams linked to inflation perform well in periods of so-called stagflation, when inflation exacerbates stagnant economic growth.
The gross domestic product of UK fell 0.3 per cent in the fourth quarter of 2011 and the union faces a CPI of 3.4 per cent, pointing to the risk of entering a stagflationary period, according to Hext.
“I hope we never reach that point in Australia but it would be a brave person to say that we’ve got no risk.”
There is no secondary market for the new bonds but TCorp will provide regular buy-back opportunities to enable investors redeem capital if necessary.
“Because your principal declines over time, your buy-back level also declines.”