The demise of Bonus Bonds – the end of an error
The announcement on the 26th of August that the Bonus Bonds Scheme would immediately stop taking new investments and completely close on 31st October came as a surprise for many retail investors.
The scheme, which was established by the Government to encourage savings in 1970, was originally run as part of the Post Office. In 1989, when ANZ Bank purchased the Post Bank, the Bonus Bonds operation moved into private ownership.
As at 31st of March this year , there were just over 3.12 billion of $1 bonds on issue. That works out at around $625 for every New Zealander. The closure will be a significant financial event for many people.
Based on the current prize pool, and the number of bonds on issue , the average return worked out at 1.09% p.a. However, the key feature of Bonus Bonds is that this return is not distributed equally, with random chance being the arbitrator of your return.
The holder of a $20 bond had a 1 in 160 million chance of winning a 1-million-dollar prize. When you consider that the chances of being struck by lightning in your lifetime is estimated at 1 in 12,000, you can see how remote the probability of winning the 'big one' in Bonus Bonds was. To call Bonus Bonds an 'investment' was always a stretch – perhaps a better description was 'lotto' but without the weekly capital loss being the cost of tickets.
Bond holders have been offered two choices:
1. They can redeem their bonds at face value before the end of this month through the usual withdrawal procedure.
2. They can continue to hold their bonds and participate in the regular draws that are scheduled for this month. The prize draws will stop from 31st October and the wind-up process will commence. The administrator is suggesting that the wind-up procedure could take at least 12 months.
It will be interesting to see what proportion of bond holders actively choose to (or by default) continue to hold their bonds beyond 31st October and enter the wind-up procedure.
As of 31st March, each $1.00 bond was secured by assets of $1.02, so entering into the wind-up procedure could generate a slightly better outcome as the remaining bond holders will share in the reserves. However, this could also work against bond holders if the costs of winding-up the scheme are higher than expected. The administrator has explained2 that a final pay-out below $1 per bond is not expected but is possible for those who enter the wind-up process.
The question that I am being asked is "what should I do with the capital?" To answer this meaningfully, it requires personalised advice, as every situation is different. However, as a general starting point, I suggest that bond holders ask themselves, "what function do these bonds serve in my life?" Was it:
1. Pure gambling entertainment? If this is the case, then pick your 'vice' and have fun, but don't expect to win!
2. Part of an emergency fund or even a funeral expense fund? If this is still the function, then easy access and capital stability may be the priority.
3. As a savings vehicle for short or medium term goals? In this case, a regular saving programme into a diversified PIE investment might be a suitable alternative.
4. As part of a long term savings strategy? In this case, I would recommend seeking advice to see what mix of investments is consistent with your views on risk and time horizon.
And finally, a personal confession. A $100 bond gifted to me by a relative in 1980, that I never quite got around to cashing up, is now worth $140. While I waited for the1-million-dollar prize, my return has been 1.13% p.a. over that 30-year period and, in inflation adjusted terms, my original $100 of capital is now worth $29. Clearly it is not just plumbers that have the odd 'leaky tap'!
The scheme, which was established by the Government to encourage savings in 1970, was originally run as part of the Post Office. In 1989, when ANZ Bank purchased the Post Bank, the Bonus Bonds operation moved into private ownership.
As at 31st of March this year , there were just over 3.12 billion of $1 bonds on issue. That works out at around $625 for every New Zealander. The closure will be a significant financial event for many people.
Based on the current prize pool, and the number of bonds on issue , the average return worked out at 1.09% p.a. However, the key feature of Bonus Bonds is that this return is not distributed equally, with random chance being the arbitrator of your return.
The holder of a $20 bond had a 1 in 160 million chance of winning a 1-million-dollar prize. When you consider that the chances of being struck by lightning in your lifetime is estimated at 1 in 12,000, you can see how remote the probability of winning the 'big one' in Bonus Bonds was. To call Bonus Bonds an 'investment' was always a stretch – perhaps a better description was 'lotto' but without the weekly capital loss being the cost of tickets.
Bond holders have been offered two choices:
1. They can redeem their bonds at face value before the end of this month through the usual withdrawal procedure.
2. They can continue to hold their bonds and participate in the regular draws that are scheduled for this month. The prize draws will stop from 31st October and the wind-up process will commence. The administrator is suggesting that the wind-up procedure could take at least 12 months.
It will be interesting to see what proportion of bond holders actively choose to (or by default) continue to hold their bonds beyond 31st October and enter the wind-up procedure.
As of 31st March, each $1.00 bond was secured by assets of $1.02, so entering into the wind-up procedure could generate a slightly better outcome as the remaining bond holders will share in the reserves. However, this could also work against bond holders if the costs of winding-up the scheme are higher than expected. The administrator has explained2 that a final pay-out below $1 per bond is not expected but is possible for those who enter the wind-up process.
The question that I am being asked is "what should I do with the capital?" To answer this meaningfully, it requires personalised advice, as every situation is different. However, as a general starting point, I suggest that bond holders ask themselves, "what function do these bonds serve in my life?" Was it:
1. Pure gambling entertainment? If this is the case, then pick your 'vice' and have fun, but don't expect to win!
2. Part of an emergency fund or even a funeral expense fund? If this is still the function, then easy access and capital stability may be the priority.
3. As a savings vehicle for short or medium term goals? In this case, a regular saving programme into a diversified PIE investment might be a suitable alternative.
4. As part of a long term savings strategy? In this case, I would recommend seeking advice to see what mix of investments is consistent with your views on risk and time horizon.
And finally, a personal confession. A $100 bond gifted to me by a relative in 1980, that I never quite got around to cashing up, is now worth $140. While I waited for the1-million-dollar prize, my return has been 1.13% p.a. over that 30-year period and, in inflation adjusted terms, my original $100 of capital is now worth $29. Clearly it is not just plumbers that have the odd 'leaky tap'!
1. ANZIS stops new investment in Bonus Bonds and moves to wind up scheme, Media announcement, 26 August 2020, bonusbonds.co.nz.
2. Bonus Bonds: Your questions answered, n.d., anz.co.nz.
2. Bonus Bonds: Your questions answered, n.d., anz.co.nz.
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While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
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First published in the Otago Daily Times on 12 October 2020, as 'Demise of 50-year-old scheme could be called the end of an error.'
