Christine St Anne: With economic uncertainty and falling interest rates, investors are continuing to look for alternative investments. Today, I'm joined by TCorp's Tim Hext to talk to us about the New South Wales government's new annuity bond.
Tim Hext: Thank you, Christine, and thanks for having me.
St Anne: So Tim, can you give us an insight into this new annuity bond?
Hext: Certainly. Well, the way the Annuity Bond came about is we had a discussion after the New South Wales Treasurer Mike Baird was elected; he had this vision that they wanted retail investors to play a much bigger part in financing New South Wales, and particularly infrastructure we need.
Really what the annuity bond is about, it is about saying when people reach retirement, how do they change as investors and clearly, in the pre-retirement stage everyone is concerned of wealth accumulation. Obviously, they are still contributing; plus they're looking for asset growth, but in retirement phase people change. Obviously, when they're drawing down their money, there is a much greater emphasis on safety and security, which is something as a government, clearly we provide.
They're also generally looking for high cash flow and finally, they're looking for inflation protection. How do they protect their cash flows against a rising cost of living? So we try to come up with the product. Now, the annuity bond itself is a reflection of the product we have always offered to wholesale investors, which is called an Indexed Annuity Bond. So, we decided we'll take that similar product and offer to retail investors for the first time.
St Anne: How do the interest rates compare with the popular term deposits?
Hext: Well, in our fixed rate program, we have a three and 10-year bond and currently they're about - it's 3.5% for the three-year and it's 4.25% for the 10-year. Now, clearly, in the three-year space, it's very hard to compete with bank term deposits; there's two reasons for that. Clearly, bank term deposits do enjoy a government guarantee, federal government guarantee up to $250,000; but secondly, most people when they're investing for fairly short time periods, credit concern anyway is not probably in front of their mind.
In the 10-year space, there is a lot less competition from bank term deposits and also having the government backing does provide some value. So, those rates are lower than the banks depending on where banks are at that time and that's all got to do with the banks needing to attract retail deposits.
An annuity bond, it's a different product. So the actual return is different and if I could just take a minute to explain it, because the basic concepts, you do need a little bit of understanding. With annuity bond you invest a principal upfront and you actually get back that principal along with interest for the life of the bond. So, in other words, at the end you have nothing left. You do not get a repayment of your principal.
As a result, two thinks happen; firstly, your cash flows every month are significantly higher than they are when you're only getting your interest which is important to retirees; but the second thing about them is that the rate of return we offer is an effective rate of return rather than an actual interest payment, because you get principal and interest in your payment every month.
So the way we work, is you invest a certain amount, let's say, $100,000; you get 1% of that amount back every month, every month you get 1%. So on $100,000, you get $1,000 per month and you get that for a certain number of months. Now, the return is affected by - you always get 1%, but when the returns are high, you get more payments and when the returns are lower, you get less payments. The current series we have on offer as of June gives you 111 payments. So, you get 1% back, which is the first 100 payments, plus you get an extra 11 payments. Now, that effectively equates to a 2.3% return but, and here is the important thing, you also get inflation on top of that. Our cash flows are linked to inflation. For example, if you're getting $1,000 a month and inflation in that month is 1%, you'll get $1,010 the next month because they move up with inflation. So your effective return is 2.3%, which is that extra 11 payments, plus whatever inflation is.
St Anne: Tim, as you know, they are other providers that are also providing annuities. How does this product compare to those products?
Hext: We’re actually raising debt. So, when you invest in New South Wales - the Waratah bonds, that money is being taken and been invested in infrastructure through Restart New South Wales which the government has set up. That infrastructure could be anywhere from railways to hospitals to schools et cetera, et cetera. So, the money actually is debt therefore your risk is to the New South Wales government and we’ll make that payment obviously in line with that, and we're not trying to provide a commercial return on the other side. So, it’s a different product.
The advantage the annuity plans have over us is that they are far more flexible. When you go to annuity plan provider, you choose your term, you choose whether you want your capital back at the end or not, you choose whether you want inflation protection or not. They are very bespoke products. Ours is actually a actual bond which will have a term, as I discussed previously, and a rate, said as previously. So, it’s less flexible in those terms, but it is a piece of debt as opposed to a plan. The actual return you get does change. I am not aware of the actual return you have for providers, but what I will say is as a government, our rates of return we can offer in that space are much closer to the rates commercial providers offer than we are in sort of very short-term, classic-term deposits.
St Anne: Tim, how does an annuity bond fit in a retiree's portfolio?
Hext: What we really are trying to do is come up with a product for retirees, which makes them feel more safe and secure in retirement. Really, the emphasis of the whole superannuation industry has always been on asset growth; what's going to give us the highest return. So, classically, when people are into retirement now, they got a lot of exposure to equities, plus they have a lot of exposure to term deposits.
Now, term deposits will clearly - the return will move up and down with interest rates as we've seen in recent times. Equities, as everybody is aware from the last five years, are very volatile, and both of those may not necessarily be ideally suited to invest in a retirement phase. There obviously is space for both. Our product says, it's a very simple idea. You work out what cash flow you need for your standard of living and then you invest that appropriate amount into our annuity.
To give you a very simple example, if you decide for a - I think is defined as a modest standard of living in retirement, which might be, say, $30,000 per year for a couple, you can work out that to get $30,000 a year, you need cash flows of around close to $2,400, $2,500 per month, and therefore you can work on how much you need to invest on annuity. You can then be certain that you’ll be getting that payment, and you can be certain that payment will move up with inflation.
So, effectively what you're doing is you're shutting down your exposure to investment markets and guaranteeing yourself an income for the next nine years or nine years and three months or whatever term it is. What we then suggest people to do is they take the excess funds they have left over and then they can invest them in growth assets for the following period, but they're less concerned about what's happening to those returns for the next nine years and three months. So, it's really about giving people certainty, safety and security in their retirement, which I think we can all agree is something that a lot of retirees, particularly after the experience of last five years, would highly value.
St Anne: Tim, that there are New South Wales annuity bonds, are these bonds available to investors all over Australia?
Hext: They're open to everyone in Australia. At present, you can only apply direct through Link Market Services; who is our Registry. We are hoping, as we mentioned previously, to get them on platforms, because we're aware that investors - a lot of investors choose to go through platforms. So, they're open to anyone in Australia, yeah, and the inflation that your return is based off is an Australian-wide CPI or inflation.
St Anne: Tim, thanks so much for your time today.
Hext: That's been a pleasure, Christine. Thank you.