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.”