Bond option for retirees

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THE increasing cost of living has affected Malaysians from all walks of life with the main concern being inadequate retirement savings. Even those who have funds for investments have not been spared.

Based on Employees Provident Fund (EPF) data, over 90,000 members out of 8.5 million in 2023 could be termed as potential investors seeking replacement income, as they had more than RM1mil in their retirement savings accounts.

Malaysia’s current replacement income rate of 30% – the percentage of retirees’ annual income when they were working – is inadequate. The figure reflects the low-wage structure and is far lower than the 70% recommended by financial planners to have a sustainable retirement income.

Other planners have suggested that the replacement income rate could be as low as 65% for those in higher income brackets. The replacement rate for those receiving a government pension is 60%.

Most people who can usually invest in dividend stocks, unit trusts or property that provides rental income. Many are not aware that they can also invest directly into corporate bonds or sukuk. Those who have bonds or sukuk usually invest through unit trusts or exchange-traded funds. This is because until relatively recently, retail investors were not able to invest directly in corporate bonds or sukuk.

Education and awareness remain outstanding issues for these investments.

Whitman Independent Advisors Sdn Bhd founder Yap Ming Hui points out that the low replacement income rate underscores the need for a more strategic approach to retirement planning. “While the EPF and other government-linked investment companies’ funds provide a strong foundation, they often fall short of addressing inflation and rising living costs,” he says.

“Diversifying income sources, such as the bond market, can help retirees build a more sustainable financial future.

“However, truly addressing these gaps requires a shift beyond traditional savings. It calls for a proactive and tailored approach.

“This process, often referred to as retirement optimisation, focuses on balancing different income sources and investment options to ensure financial stability and resilience against challenges like inflation or market volatility. Such an approach can give retirees greater security and peace of mind,” Yap adds.

“It is best to have a mix of investment instruments. Some income-generating assets may be safer but yield lower returns, while others may involve higher volatility but have the potential to deliver inflation-beating returns. Therefore, an ideal portfolio should cater to different risk appetites and income characteristics,” he says.

Retail investors in bonds and sukuk

Retail participation in corporate bonds and sukuk only became possible in 2018 after the Securities Commission released guidelines allowing retail investors to participate.

Initially priced at RM5mil, with some odd lots for high-net-worth individuals (HNWIs) at RM250,000, it was lowered to RM1,000 as a minimum investment amount. Even at such affordable levels, the investing public still prefers equities.

Corporate bonds and sukuk can be a better alternative for retirees seeking better interest or profit rates than what fixed deposits (FDs) offer. FD rates of Malaysian banks average 2.3% to 3.3% for six months and 2.35% to 3.45% for one year in 2024, according to data from StashAway Malaysia, an investment platform.

Compare this with Exsim Capital Resources Bhd’s four-year tenure paying out 5% every six months and a yield-to-call (YTC) of 4.45%. The YTC is the return the investor will get if held until the call date, at which point the issuer may redeem the bond.

Another avenue to exposure in bonds and sukuk directly is through exchange traded bonds and sukuk (ETBS) that are listed on Bursa Malaysia’s Main Market. This has been available to retail investors since 2013 with a minimum investment of RM1,000 per board lot of 10 units but has not gained much traction. There are only two issuers so far, both government-related entities.

For now, retail investors cannot invest directly into government bonds and sukuk although the government had plans to list Malaysian Government Securities (MGS) as part of the ETBS offering. Again, the main issue is the high entry barriers as lots are priced at RM10mil, while MGS are also offered to HNWIs for RM250,000.

While the direct investment in MGS and other government bonds or sukuk remains closed to retail investors, the positive response from both institutional and retail investors for the two-year Sukuk Prihatin offered in August 2020 with a tax-exempt profit rate of 2% a year paid out on a quarterly basis indicates that there is interest in such investments. The minimum investment amount for retail investors was RM500.

Another example is Bank Negara savings bonds, of which the periodically issued Merdeka Savings Bonds require investors to be above 55 and retired.

The central bank issued these bonds regularly over 2004 to 2005 with a two-year tenure and a 5% profit margin.

In 2009, they were again offered with the same eligibility criterion on a three-year tenure and a 5% profit margin. The minimum investment amount was RM1,000, with a maximum of RM50,000 per investor.

According to the Bond+Sukuk Information Exchange (BIX), an information platform, Singapore allows retail investors to bid for government bonds in the primary market and they can also purchase Singaporean Government Bonds through the secondary market.

Indonesia first issued a retail government bond, Obligasi Negara Ritel Indonesia, in 2006, which was distributed through banks and securities firms.

Democratising the bond market

In spite of efforts to educate the investing public and liberalising the corporate bond and sukuk markets, participation has not been at the desired level.

Information can easily be accessed through BIX and AsianBondsOnline, a platform operated by the Asian Development Bank. The Bank Negara and Bond Pricing Agency Malaysia websites also provide information, as do RAM Holdings Bhd and Malaysian Rating Corp Bhd (Marc).

Some of the key issues in democratising the bond/sukuk market further is that banks, which are the distributors in the over-the-counter sales, get the lion’s share of these issuances that they then sell to institutional or HNWI clients. There is no interest whatsoever by banks to distribute to the mass market because of costs, with the only distributor to this segment of investors being iFast Capital Sdn Bhd, which then brings into question the fee structure, that is, cost to retail investors.

According to Marc, democratising the bond market would require the development of the entire ecosystem and this would depend on the support of multiple stakeholders.

“A key challenge faced by banks is the thinning profit margins in the institutional market due to its wholesale nature, which has led to a strong motivation to raise the relative share of profits gained from the retail market.

“This creates a circular issue: the quest for larger profit margins by banks may deter retail investors who bear the brunt of these costs, thereby constraining market liquidity in the retail segment.

“At the same time, banks need reasonable profit margins to provide essential services such as underwriting and market-making for bonds. The cost is essentially a barrier to bond market democratisation, highlighting the necessity for regulators to be neutral arbiters in developing the ecosystem.

“Therefore, the key is to reduce information costs on all fronts. First, digital platforms need to cater to retail market needs, and much can be learned from advanced markets, investment aggregators and fintech providers in this space.

“Templates to adopt already exist, hence regulators could coordinate cross-border, cross-organisation learning and consider setting up reporting best practices for the bond market, across all ecosystem stakeholders such as banks,” Marc says.

It adds that another challenge to market democratisation stems from credit risk management parameters which is intertwined with information costs.

Institutional investors, who are the primary facilitators of market liquidity, are often restricted by investment mandates from transacting in higher-risk, higher-return bonds.

Some of these investment mandates are often self-imposed by credit risk management parameters which have become entrenched conventions rather than proportionate responses to actual credit costs; for example, in Malaysia, the historical cumulative default rate in the bond market is merely above 1%.

“Furthermore, when downgrades occur below a threshold even though default is not imminent, the credit risk management parameters may require forced selling rather than allowing the opportunity to purchase these bonds at higher yields, unlike the equities market where investors have the opportunity to buy on weakness.

“Regulators could encourage innovation in credit risk management through market education programmes and replicate competencies from advanced markets that have many high-yield bond funds”.

Marc says that emerging markets such as Thailand are examples of market inclusivity, as more than half its corporate bond issuances fall within the A and BBB rating categories with retail participants forming the largest investor group, ahead of institutions.

“Thailand’s regulatory bodies and market associations run regular campaigns to educate retail investors about bonds.

“Meanwhile, Indonesia is an example of a market which is more open to lower-rated issuances, with a healthy number of single-A and BBB issuances in its domestic market alongside sophisticated bonds such as collateralised debt obligations,” it adds.

Source: Bond option for retirees (2024, 28 December).by FINTAN NG. Retrieved from https://www.thestar.com.my/business/business-news/2024/12/28/bond-option-for-retirees

Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile. The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

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Bond option for retirees

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