Bonds will tempt self-managed super funds: Treasury
In an attempt to give people a greater opportunity to invest in fixed-income assets, the government plans to make it simpler and cheaper for big companies to sell corporate bonds to retail investors.
With Parliament now assessing the proposed legislation, Dr Richard Sandlant, from Treasury's retail investor division, said on Monday that the products would be particularly appealing to older investors and trustees in the rapidly growing self-managed super sector.
Bonds pay investors a fixed return and are typically more stable than shares - which are the biggest asset in most superannuation portfolios.
Debt securities accounted for only 0.7 per cent of self-managed super funds' assets, he said, citing figures from the Tax Office.
"Australians are relatively active equity investors but would benefit from being able to diversify into longer-term, lower risk and less volatile income streams," Dr Sandlant said at a parliamentary hearing.
"With Australians living longer, simple corporate bonds provide an appropriate alternative to managing longevity risk, which is of particular interest to SMSF trustees."
The government's push to bolster the corporate bond market comes after experts, including former Treasury boss Ken Henry, raised the alarm over the heavy weighting to shares in the $1.5 trillion super system.
The changes involve lowering the disclosure requirements for companies issuing corporate bonds and easing the liability on directors, but Dr Sandlant argued investors would still have adequate legal rights.
In an attempt to limit the changes to lower-risk products, it is likely that only the biggest 200 companies will be able to issue bonds with the benefit of the new rules.
The rules also will only apply to bonds with a face value of $1000 or less.
The draft legislation is before Parliament and currently the subject of an inquiry by the parliamentary joint committee on corporations and financial services.
It comes as the Australian Securities Exchange prepares to begin trading in Commonwealth government bonds in coming months - seen as a vital first step to establishing a larger retail corporate bond market.
Banks and other big issuers of bonds have backed the changes, which are also intended to lower the nation's reliance on volatile wholesale funding markets.
Frequently Asked Questions about this Article…
The government is proposing laws to make it simpler and cheaper for big companies to sell corporate bonds to retail investors. Key elements include lowering disclosure requirements for issuers, easing directors' liability, and limiting the new rules to certain lower-risk bonds — such as issues from the biggest 200 companies and bonds with a face value of $1,000 or less. The draft legislation is currently before Parliament.
Treasury says SMSFs are likely to be among the biggest buyers of corporate bonds under the new rules. Corporate bonds could appeal to SMSF trustees and older investors because they offer fixed returns and can help diversify portfolios that are currently heavily weighted to shares. The article notes debt securities make up only about 0.7% of SMSF assets today, so this could increase fixed-income exposure.
Corporate bonds typically pay a fixed return and are usually less volatile than shares, so they can provide a steadier income stream. Treasury advisers say bonds can help retirees and trustees manage longevity risk and diversify away from the heavy equity exposure that many super funds currently have.
To limit risk, the changes are likely to apply only to the biggest 200 companies. That means most smaller companies would not be able to take advantage of the easier retail issuance rules under this proposal.
The proposed rules would apply only to bonds with a face value of $1,000 or less, targeting smaller-denomination corporate bonds intended for retail investors.
The proposal does involve lowering some disclosure requirements and easing directors' liability for issuers. However, Treasury's retail investor division — represented by Dr Richard Sandlant in the article — argues that investors would still retain adequate legal rights under the new framework.
The reforms are designed to bolster the fledgling retail corporate debt market by making it simpler and cheaper for large companies to issue bonds to individuals. The Australian Securities Exchange is also preparing to begin trading Commonwealth government bonds in the coming months, which is seen as a key step toward establishing a larger retail bond market. Banks and major issuers have supported the changes, which could also reduce reliance on volatile wholesale funding markets.
The draft legislation is before Parliament and is the subject of an inquiry by the parliamentary joint committee on corporations and financial services. Parliament will need to consider the inquiry's findings before the rules can be finalised and implemented.
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