Retirement investment products are failing too many investors, according to a group of researchers, but there may be a better way.

Most retirement investors seek both income and capital preservation, says Lionel Martellini, director of EDHEC Business School and its Risk Institute, but current asset classes and products are giving these investors too little of either.

Martellini, along with Nobel laureate Robert C. Merton and Arun Muralidhar, an associate professor of finance at George Washington University, proposes “retirement bonds” that would help investors replicate income and replace part or all of their traditional bond portfolios as a solution.

The researchers believe that current retirement products like target-date products, balanced funds and annuities do not fit the actual needs of individuals, and that asset managers should take a more objective or goals-based approach to creating retirement investments. Accordingly, they are attempting to take the best attributes of these vehicles and meld them into a new security.

“Annuities are opaque, costly and mostly irreversible unless you’re willing to pay high surrender charges,” says Martellini. “If an investor is still relatively young, they don’t know what their life has in store for them, and they won’t want to use annuities as much as we may think they should. On the other hand, annuities do a good job taking out longevity risk.”

With relatively few investors and advisors relying on annuities to create stable sources of retirement income, investors have to accept significant market risk to generate the income or returns needed to fund their retirements.

At the same time, a global pension crisis is being exacerbated by a slowdown in demographic growth. The number of workers funding pensions and pension-like social security schemes continues to decline in proportion to the number of retirees drawing income. This imbalance is putting pressure on sovereign governments, municipalities and businesses and fueling a global transition to corporate-sponsored defined contribution plans.

“Existing products often offered as default options in the retirement context have no ability to secure retirement goals,” says Martellini. “They can’t generate a fixed level of income in retirement. The investor is buying a lottery ticket, and if they’re lucky, markets will do well and they’ll enjoy good performance, but the negotiating power of their wealth in retirement is completely out of their control.”

Martellini and his colleagues coined the phrase “flexicurity” to define the ideal investment solution for retirees. At heart, most retirement investors want security and a guaranteed stream of income, but they also want the flexibility to adjust their investments and their potential income stream over time. For the retirement-focused portfolio, goals like outperforming other investments or reaching a target asset level are more aspirational than essential.

Products like annuities offer secure sources of income with little flexibility. Other products like bonds and target-date funds offer flexibility with little security.

“There’s no absolute meaning for the concept of a safe asset; it’s very investor and goal specific,” says Martellini. “If I need $100 in 10 years, I should buy a 10-year discounted bond. If I need $10 a year for 20 years, 10 years from now, the safe asset is not the 10-year pure discount bond. It’s a retirement bond-matching portfolio.”

Retirement bonds would act like a normal bond through the first 20 years of retirement to cover the income needs of most retirees. If a retiree died during this 20-year period, the capital would pass to his or her heirs.

The retirement bond would not pay back the principal; instead, after 20 years, it would become more like a deferred annuity paying a stable, secure income—but investors would get more bang for their buck. Martellini says the retirement bonds could be offered as transparent, low-cost products that are easier to get out of than a typical income annuity.

“These bonds are very different,” he says. “They would be efficient at protecting not capital, but the power of capital at the retirement date in terms of replacement income.”

Someone five years from retirement today, a 61-year-old, would be buying 2023 retirement bonds. The bonds would start paying cash in 2023, and continue paying for 20 years.

Retirement bonds would be available in denominations producing a set amount of income, acting as an easy building block for savers most interested in creating an income strategy for their later years. In other words, if our 2023 retiree needed to replicate $100,000 in income and a retirement bond paid $10 annually, he or she would eventually need to buy 10,000 2023 retirement bonds to cover income needs for 20 years.

Asset managers and investment banks already have the tools to make sure retirement bonds are priced fairly, Martellini says. “For 2028 bonds, you would take the present value of cash flows and discount them to 30 years out,” he says. “What I would call a fair value for a retirement bond portfolio would be a value consistent with the price of a traditional bond. If you go to an investment bank and ask them for a price quote for manufacturing this product and doing the work for you, they’ll be able to give you quotes because it’s a straightforward thing to replicate those cash flows.”

If launched, the new retirement bonds could be offered in lieu of bonds or annuities to investors. A retirement planning client could potentially have two portfolios, one built from retirement bonds that would act more like a deferred annuity, and another built from traditional and alternative assets focused on long-term performance.

The retirement bonds could also be incorporated into defined contribution plans as part of a target-date like product—as participants near their retirement, a larger portion of their contributions would be invested in retirement bonds. “They can also improve dynamic asset allocation strategies like absolute return funds,” Martellini says. “Retirement bonds allow us to switch absolute return risk protection in a manner customized to the needs of the individuals. This turns products into solutions.”

He and his colleagues have left several questions unanswered in their research—about yield stability, bond supply and inflation protection—arguing that issuers should be able to weigh in on those characteristics. Theoretically, retirement bonds would be linked to inflation or consumption.

Similar solutions could be designed for other long-term investment goals, like funding a child’s education, says Martellini.

Retirement bonds would be beneficial to issuers, creating a long-term funding solution without the maturity and refunding concerns surrounding traditional bonds. Multiyear and multidecade projects like infrastructure repair and environmental cleanup could have a guaranteed, stable funding source.

“When we hold money for a mortgage and home purchase, the schedule for repayment isn’t simply interest and principal, but a combined, constant number that aggregates some interest and some principal,” says Martellini. “It’s simple for everyone. We’re advocating for the same thing: It would be useful for issuers.”

Pensions would also be able to use retirement bonds to hedge expected drawdowns over time. Institutional asset managers and investment banks already offer similar strategies to pension plans.

Similar strategies are also available to ultra-high-net-worth investors, says Martellini, but with advancements in technology, there’s no reason asset managers couldn’t make them available to the mass market. “Asset managers could offer us proxies for retirement bonds using available instruments, presumably, and if and when retirement bonds are actually issued, it will be less costly because there won’t be a need for any financial engineering or manufacturing of those cash flows,” he says. “The idea would be for asset managers to do the job themselves. The largest ones are already equipped to launch these products.”

While such products may ultimately be issued by governments and other large public institutions, Martellini thinks the world’s pension and retirement problems are too severe to wait for policy makers to take action. Thus, he and his colleagues have started their lobbying with asset managers.

“Eventually, someone will announce a retirement bond, but it will probably take a while before it happens,” says Martellini. “I don’t think we want to wait; the wait has already been too long. For too many years we have been faced with useless, meaningless products when we all need meaningful investment solutions.”