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Magellan looks to booming retirement market, launches FuturePay

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Magellan Financial Group (ASX: MFG) last week released its long-awaited new retirement product, called FuturePay. The product launch comes at an important time for the investment and superannuation industry in general, which has seen very little innovation or new product releases focused on delivering more sustainable retirement incomes.

So, what is Magellan FuturePay?

The product seeks to address the challenges faced by many retirees, particularly those looking to establish a retirement income; that is, replacing pay cheques with consistent income regardless of market performance.

Magellan says FuturePay, which commenced trading at 12pm on June 2, aims to deliver investors with a predictable monthly income that grows with inflation, is driven by returns and capital growth, and has a focus on downside protection.

The fund itself will trade under code FPAY on the Chi-X exchange. FuturePay will look to invest in a portfolio of high-quality, low-volatility companies listed on securities exchanges around the world, that can deliver attractive, risk-adjusted returns over the medium to long term. The primary function of FuturePay will be to incorporate a “reserving strategy,” which provides investors with a predictable monthly income that grows with inflation.

The key details are:

  • $2.03c distribution per unit at inception 
  • 4.25 per cent yield 
  • Distribution – Goes Ex at the end of each month
  • Paid on 15th of every month

It’s a unique product for those looking for a viable alternative when reaching retirement. Instead of launching an annuity and taking on the longevity risk associated with this option, Magellan clearly wanted to create a product that has capital growth upside but also allows ready access to savings —something annuities cannot do. FuturePay offers a predicable monthly income that grows with inflation by investing in low-volatility but high-quality companies. The distribution is a fixed dollar amount, $2.03 per unit.

How does it work?

The fund is based on a reserving strategy using a “support trust.” The fund will pool together and regularly allocate reserves that will act as a buffer and provide income support in adverse markets, thereby avoiding the need to sell assets, and smoothing-out the ride.

Magellan has set aside $50 million to be incrementally added to the support trust as new units are issued. It has committed a reserve facility equal to 2 per cent of FuturePay, capped at $100 million, to provide additional support during poor market conditions.

When markets rise, FuturePay will put aside a percentage of its outperformance into the support trust. When markets fall, the support trust will supplement income to help achieve the target monthly.

What happens when an investor redeemds?

If an investor decides to redeem units in FuturePay, they take the value of investment portfolio and leave behind the value of benefit provided by support trust – it’s mutualisation. Treating reserves in this way leads to material efficiency – the structure doesn’t need as much in reserve. The value of the benefit provided by the support trust will be retained by remaining investors, so it is very much an investment suited for long-term patient investors.

  • Optimised and disciplined reserving strategy increases effectiveness.
  • FuturePay – Can be access via application, or on the Chi-X exchange, using the code FPAY.
  • Being listed on Chi-x has added value.

In summary, FuturePay is a viable alternative for retirees to consider instead of an annuity. It brings together a product, within retirement, that builds up a predictable known income together with a capital growth element. It has low volatility, driven by returns and capital growth with a focus on downside protection that is underpinned by a reserving strategy and income support together with a daily access to your capital. With a starting yield of 4.25 per cent, it’s the first of what will likely be many innovations in the sector focused on retirees.

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