A Look at Government Securities as Long-Term Pension Option

Retail investors looking forward to long-term pensions can invest in central government securities (G-Secs) that mature 20, 30, 40, or 50 years later. In this case, the repayments are guaranteed by the sovereign, and the entity paying the pension (the government) will outlive the individual. 

Generally, what makes G-Secs provide a particularly respectable deal for pension-seeking investors due to the following three reasons:

First, buying G-Secs in primary auctions has become relatively easy for retail investors after the launch of the Reserve Bank of India’s (RBI’s) Retail Direct Gilt (RDG) platform. 

After an investor opens an account, they get weekly email notifications of upcoming G-Sec auctions, with the maturity date and indicative yield details. An investor can bid at a cutoff yield (decided by the RBI), and allotment is assured unless the apex bank decides to cancel the auction, which could be a rare instance. An individual can invest a minimum of Rs 10,000 in each auction with a maximum of Rs 2 crore.

Second, the government recently decided to issue more long-dated G-Secs with maturities of 30, 40, and 50 years, which can be accessed through the RBI retail platform. Insurance companies (insurers) offering annuity products buy and hold the same long-dated G-Secs while promising an individual a pension.

Third, this is an ideal period to lock into long-dated debt. Currently, long-term G-Sec yields stand at an attractive 7.4-7.5% having spiked more than 150 basis points (bps) from sub-6% during the phase of Covid-19. The recent auctions by the central bank offered 15-year G-Secs at an indicative yield of 7.39%, 30-year ones at 7.48%, 40-year at 7.52%, and 50-year at 7.49%.

As an investor buys long-dated G-Secs, they expose themselves to interest rate risk. In case the market interest rates witness a spike after an individual buys them, the market price of the bonds can fall below face value. However, this is only an opportunity loss. 

At the same time, in case the individual holds the G-Secs to maturity, they will get back the principal as promised. If interest rates in the country witnessed a dip over time, long-dated G-Secs can also experience price appreciation in secondary markets. The RBI RDG platform provides for the nomination of beneficiaries to receive interest and principal repayments in case of the death of an investor. 

In the case of the early death of an investor in G-Secs, the principal can be claimed by nominees only at maturity while interest payments continue.