RendA+, an innovative bond instrument in Brazil, is serving as a relatively safe asset for defined contribution pension plans and lowering retirement risk, especially for those without a workplace pension plan.

At a 2019 retirement security conference held in Brazil, Arun Muralidhar, chairman and chief investment officer at AlphaEngine Global Investment Solutions, proposed the introduction of a low-cost, low-risk, simple and liquid bond innovation. Globally, the country was uniquely positioned to introduce the bond because it has successfully created a liquid, efficient and long maturity market linked to IPCA — the Brazilian consumer price index.

People can buy the bond directly from Tesouro Direto, the government’s exchange platform, through a simple application that asks for their date of retirement and their target retirement income based in current U.S. dollars. “Through that, essentially, what [Brazil has] done is address the issue of financial illiteracy, where many people can’t answer more complex questions about retirement,” says Muralidhar, noting the bond can be purchased for as little as US$5 at a time. “So if you’re an Uber driver and you get a tip, you can actually take that tip and buy a little piece of retirement income.”

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Benefiting Brazil

The key advantages of the bond are low cost and liquidity, says Nelson Gonçalves Junior, product manager of wealth and retirement solutions for Brazil at Aon, noting it can be partially or totally withdrawn any time after the initial 60 days, is simple to understand and is accessible to poor and minority populations.

RendA+ by the numbers

R$1.3 billion The amount RendA+ reached in accumulated purchases in the first 5.5 months since its launch

10,800 The number of new investors the bond has attracted, representing 17% of total investors

• 38% The percentage of investors who own the bond that have a portfolio indexed only to inflation

• 34% The percentage of women investing in the bond, compared to 64% of men

Source: Tesouro Nacional Market Insights’ September 2023 report

In Brazil, he adds, most retirees have insufficient assets to maintain their standard of living. “From our social retirement system, roughly 90 per cent of Brazilians receive a lifetime income of one minimum wage and the average income of all beneficiaries is near two minimum wages. The Brazilian treasury allows any person to buy low-cost and liquid bonds with different maturities, which are paid fully in a single payment — principal plus interest.”

The bond, introduced in January 2023, offers an accessible financial instrument to anyone who worries about retirement and who likely won’t be covered by the social retirement system, notes Gonçalves Junior. Currently, eight different maturities are available from 2030 to 2065 with IPCA plus six per cent per year, on average.

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The government has been incredibly transparent about the initiative, which helps to reassure individuals, notes Muralidhar.

Every month, participants can receive an update on who’s buying, how much they’re buying and the type of bond. Because it’s a voluntary mechanism, individuals who aren’t covered by a workplace pension plan can produce retirement income by simply buying a bond.

“Within the first 5.5 months, 62,000 [Brazilians] bought the bond purely on a voluntary basis,” he says. “And, more importantly, they’ve managed to raise R$1.3 billion, which is a pretty significant number.”

Roughly 12,000 people who had never bought a security through the Tesouro Direto purchased the bond when it was introduced, which was marked by a campaign involving social media influencers to help reach a younger audience.

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With women half as likely to participate, according to Muralidhar, the government intends to increasingly target that population. “One of the questions we’re focused on is, ‘How can we boost the number of women buying these instruments?’ Because, typically, women have lots of other challenges; [for example], when they have children, they leave the workforce and, if they come back, they have lower income. So we’re actually having a good discussion about how to address some of the challenges women face in retirement through this instrument as well.”

The Canadian perspective

If Canada was to introduce a similar bond, Muralidhar believes it could ensure a safe retirement for pension plan members without high fees or being locked into a complex annuity.

It could also support the federal government’s efforts to finance green infrastructure. “What better way to do that then issue a bond that can help build [facilities like] solar farms? This will have a payoff profile many years in the future after having made the capital expenditure now. The cash flows of this bond are incredibly synergistic to the spending needs of countries, so it’s basically countries investing in themselves and becoming more self-reliant.”

However, the bond’s theoretical introduction in Canada could be challenged by governments taking a narrow point of view, he adds. “Typically, ministries say it’s expensive to issue inflation-linked debt, . . . but if they don’t give you the instrument to hedge yourself out then you’re bearing the risk. What seems expensive now [will actually prevent] more expense for the country because there will be many people retiring poor. From a macro point of view, it’s actually cheaper for Canada to have this instrument than to not have it.”

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Sadie Janes is an associate editor at Benefits Canada and the Canadian Investment Review.