Australia’s super system can be improved with a new type of retirement bond called a SM bond which incentivises people to incrementally buy retirement annuities starting at the age of 30, according to a recent study by Macquarie University which outlines an alternative model for saving for retirement.
Shauna Ferris, finance lecturer at Macquarie University, noticed that the current system which focused on balances was seriously flawed as the savers were left unsure with an ‘on average’ sufficient retirement balance hard to figure out. Therefore the retirement savers should be encouraged to begin saving much earlier and one of the proposals include the long dated government SM bond system which enables an individual to buy a government-guaranteed retirement income stream, without imposing longevity risks onto the government.
SM bonds are divisible into two components — a survivorship (S) part and a mortality (M) component where the S part must be retained by the originator and M bonds are tradeable. Consequently, the holder of the S part receives the face value of the bond if he or she is alive at maturity and for originators who die prior to the maturity date, the maturity value of the SM bond is assigned to a mortality pool while the holder of the M part of the bond receives the annual bond coupon, and at maturity a pro-rata share of the mortality pool.
Each SM bond is associated with a particular age and might be only purchasable by originators of that age while different age bonds are issued every year for ages 30 to 64 each with a 35 year term. As SM bonds are government-guaranteed, there is minimal default risk for both S and M holders, according to the study.
The benefits of this model also include:
- • Individuals’ access to government guaranteed defined benefit retirement income streams.
- • Governments benefit by reduced exposure to ever increasing demands of the old age pension.
- • Society benefits by having access to a vast supply of long term financing.
- • Markets and investors benefit by having a standardised financial instrument making for superior returns and a platform for development, hedging and pricing of further retirement income products.
