The New South Wales government has launched annuity bonds targeting Australia's self-managed superannuation fund (SMSF) and retail sectors.
NSW Treasury Corporation head of funding Tim Hext said the Waratah Annuity Bonds "are a retail version of the indexed annuity bonds on offer to the wholesale market and are aimed at the SMSF and retail markets".
Hext said the bonds had three key features that would appeal to risk-averse retirees.
First, investors would receive 1 per cent of their initial investment every month (the base annuity payment) for a fixed period of 111 months (nine years and three months).
Principal would be repaid over the life of the annuity bond, not on maturity as with traditional bonds.
Hext gave the example of a retiree who invested $200,000. The investor would receive $2000 a month for 111 months, at the end of which payments would end because both the principal and the interest had been paid.
He likened the bonds to a fixed-interest home mortgage in which the principal and interest were paid over a set time, at the end of which the mortgage was discharged.
The other factors appealing to retirees were the NSW government guarantee, which managed the counter-party risk, and the inflation-linking, which ensured payments increased to reflect increases in the consumer price index over the life of the annuity bond.
"If inflation exceeds 1 per cent, then monthly payments rise, but if inflation falls, then payments will not drop below the 1 per cent 'high-water mark'," Hext said.
Private annuity provider Challenger Life welcomed the release of the government-backed bonds.
"We're unsure of their likely popularity due to the low yield compared to private sector annuities, but welcome any measure by either state or federal governments to increase awareness and uptake of annuity products," Challenger Life chief executive Richard Howes said.
"Australia remains an undeveloped market by OECD (Organisation for Economic Co-operation and Development) standards, so Waratah Bonds and other measures such as the superannuation roundtable's review of deferred lifetime annuities are positive signs that both levels of government understand the need for greater innovation in today's retirement product market."
Howes said Challenger's Liquid Lifetime annuity was issued by an A-rated, Australian Prudential Regulation Authority-regulated life company and would pay at least 5 per cent interest, and was inflation-linked.
"It will make monthly payments for as long as you live," he said.
"So it fully manages longevity risk as well as inflation and market risk. The Waratah Bond does not manage longevity risk."
Hext agreed the Waratah bonds did not manage longevity risk, and added there were similarities between the NSW annuity bonds and the private market's annuity plans.
"Challenger's annuity plan is more flexible, but the private products had different risks and costs," he said.
"Challenger is writing an annuity plan, whereas this [the annuity bonds] is a NSW debt instrument."
As reported in InvestorDaily's sister publication, SMSF, the NSW government announced its intention to release inflation-linked annuity bonds last year.
