Make Savings Bonds even more attractive

IN August last year, The Business Times ran a piece suggesting that a National Savings Plan could help low income earners. It was in response to Prime Minister Lee Hsien Loong's reminder on the importance of retirement planning at his National Day rally.

I wrote it drawing from my long struggle over 50 years to break out of childhood poverty and attain some degree of financial independence. Life is never fair. We are born with differing abilities and into different social levels.

What makes a good government is a continual effort to give every individual opportunities to do well and progress. The move to introduce the Singapore Savings Bonds (SSB) announced last month is part of that effort.

For some time, savers have been paid low interest rates. A quick search showed average yields of around 0.05 per cent per annum. Parking funds in fixed deposits gives better rates, but it means forgoing interest earned in the event of premature withdrawal for emergencies and unforseen needs.

It seems almost certain that the SSB will be heavily oversubscribed for the first few issues. As we wait for more details, a simple public education programme will be good as demand could reach a few hundred thousands.

It's also important as the current low interest rates will likely creep up in the coming years.

Bonds, unlike equities or property, do not offer much capital appreciation. But they do offer very good capital protection, matched to the issuer's financial strength. In this case, the triple-A credit rating of the Singapore government.

Generally, bond yields or the coupon rates are decided at the time the bond is sold. This is why bonds are poor investments when interest rates rise as newer issues come with higher coupons.

If the yields are steady, bondholders will be happy. It's when yields decline when compared to newer issues with higher coupons, that some bondholders may be unhappy.

The SSB, however, gives buyers the golden opportunity to cash out before the maturity date without penalty. Subscription guidelines will dictate if the cash can be recycled easily into newer issues with better coupons when interest rates rise.

We can also expect new and creative alternatives as banks scramble to package attractive options to retain and draw new deposits. It may lead to banks offering better rates with kinder early withdrawal clauses. The end result will be a better deal for most savers!

There are a few ways that can make the SSB more attractive.

First is an option for the "coupon" or "interest" to be added to the principal and rolled over. The coupon may have to be nominally adjusted to reflect this. A simpler alternative is a "bonus" coupon upon maturity.

This compounding factor is a great help towards building a nest egg and encourage holding for the long term. It allows bondholders to set a target for important future financial expenses such as funding a child's university education or upgrading one's house.

The second is to make it very simple to buy and sell. It's likely that this option will be made available through ATMs where you can buy SGS or Singapore Government Securities.

Buying within the offer period and redemption with direct debit/credit arrangements into a designated account makes it very convenient and even the less well educated will find this easy.

Thirdly, while it is essentially a "savings" bond and not tradeable, making it tradeable after the mid-point tenure will raise its market profile.

If the bonds can be listed and sold on the Singapore Exchange after, say, a holding period of five years on a 10-year bond, bondholders will very likely receive a small capital appreciation if the no penalty exit option is retained.

The five-year suggestion is based on the same principle used for reselling HDB flats.

Other factors that affect its market pricing are the prevailing interest rates and when the bond was issued.

A possible listing will offer fund managers and financial institutions the opportunity to build up a small portfolio of coupon yielding SSB that is even better then holding cash.