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Indexed annuity bonds – a market failure to create the ideal pension investment?
| Content Provider | Semantic Scholar |
|---|---|
| Author | Asher, Anthony L. |
| Copyright Year | 2018 |
| Abstract | The ageing population creates a growing need for investments to back income streams in retirement. Most of the investment instruments used by superannuation funds expose retirees to significant investment risks. Volatile assets need to be sold at unpredictable prices to fund consumption. It is however possible to create indexed annuity bonds (IABs) backed by the depreciation flows from physical assets such as infrastructure to provide income to pensioners. Depreciation flows in Australia are considerably larger than private and public pension payments together and have a similar average term. Appropriately structured using alternative inflation linkages and adding a link to longevity, IABs could provide returns greater than those available from “risk free” government bonds with less volatility than the current alternatives. One reason why IABs have not been actively developed is that investment market participants have no incentive to develop “bottom drawer” investments, which would yield lower revenue streams. By their training and interests, market participants become focussed on the development of liquidity and so fail to recognise the risks that maturity transformation and market volatility presents to the economy and more particularly to pension incomes. All hedging strategies developed to address the risk are not only complex and costly, but they merely redistribute rather than reduce risk. While the dangers of excess liquidity are not commonly discussed, it is widely recognised that many markets participants, such as the rating agencies, also face conflicts of interest. Little has been done about this until the recent Mifid II reforms in Europe. These issues suggest that superannuation trustees exert greater control of the investment process. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://cepar.edu.au/sites/default/files/1-Asher.pdf |
| Alternate Webpage(s) | https://www.pc.gov.au/__data/assets/pdf_file/0005/230099/subdr151-superannuation-assessment-attachment.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
