Risk-sharing Pensions

TONTINES Tontines: A Practitioner’s Guide to Mortality-Pooled Investments, notes that their previous success did not last long because, “the products fell Back to the future victim to misappropriation and fraud on the part of tontine issuers”. After this their popularity faded, Tontines were wildly popular in the 18th and 19th centuries but they never completely but their status su ered at the hands of fraudulent life disappeared. As the report states, tontines still exist in France as a insurers. Natalie Tuck explores whether tontines have a place niche product, and Fullmer within a modern European pensions system highlights the Swedish pension system as being “explicitly WRITTEN BY NATALIE TUCK tontine-like”. “Moreover, a slow trend toward acceptance of such longevity pooling s a retirement product, rest of their lives. Whenever someone arrangements has arisen over the tontines are a rare sight in the in that group dies, the remaining past few decades. European Union A21st century but references members benefit from a share of member states now allow tontine to their existence remain in many the deceased member’s assets. offerings under the Second European a mid-20th century murder novel. “Tontines had their heyday in Life Insurance Directive of 1990,” The likes of Agatha Christie, P.G the late 19th century and gradually the report notes. Wodehouse, Robert Louis Stevenson became mired in scandal and and even The Simpsons have all corruption,” Irwin Mitchell pensions A role to play made use of the tontine in the name partner, Penny Cogher, notes. “There Set against a diminishing number of entertainment. Such references are is a Russian roulette aspect to the of defined benefit (DB) schemes in caricature-like, based on a bygone pure tontine concept – that the final Europe, tontines are being “seriously era, but the age-old product is about survivor of the tontine is the winner re-examined to see if they could to make a comeback. who collects all,” which explains have a role to play as a new The concept of a retirement tontine their popularity with crime novelists. retirement product”, Cogher says. is simple; a group of people pool A report by CFA Institute Expanding on this, Heriot-Watt their assets together and receive a Research Foundation’s Richard University associate professor and sum of money paid to them for the Fullmer, published in 2019, director of the Risk Insight Lab,

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Catherine Donnelly, highlights the individual DC insured annuity and a tontine looks like income main choices facing UK savers in 40 per cent higher than the average drawdown. However, you would defined contribution (DC) schemes pension from a DB scheme. adjust what you’re paying people in currently – income drawdown or One of the backers of risk-sharing line with experienced mortality in a life annuity. products is TontineTrust CEO, Dean the tontine pool, as well as with “I definitely think people should McClelland, who believes these investment returns.” She adds that be buying life annuities, but they’re products, such as CDC schemes and because of the pooled aspect of the not buying them for various reasons. tontines, will “take over the whole investment, the tontine should be With income drawdown, you are industry” because the current DC able to have a very low risk taking a huge risk as you could run option is “just a savings account”. investment strategy and still have a out of money very easily. If you “It’s not a pension, it’s not very good chance of paying a stable, invest in a tontine or a pooled deserving of the name. Our lifelong income. annuity fund, then you are pooling traditional understanding of what mortality risk, which is the same a pension is, is that it pays you an A gap in the market principle underpinning a life annuity. income for life in retirement, and Tontines are offered as a niche This allows you to significantly that’s what people want,” he adds. product in France, but with the reduce your risk of running out of introduction of legislation for Pan- money in retirement compared to European Personal Pension Products income drawdown,” she states. “OUR TRADITIONAL (PEPPs) imminent, other players are University of Leeds professor, Iain using it as an opportunity to bring Clacher, says that a tontine-type UNDERSTANDING OF WHAT A tontines back into the foreground. structure is something that “could be PENSION IS, IS THAT IT PAYS McClelland’s TontineTrust is part of the mix” of products alongside YOU AN INCOME FOR LIFE hoping to launch its product in the existing retirement solutions, but he next few months, before applying does not believe that it’s going to be IN RETIREMENT, AND THAT’S for PEPP accreditation next year. the only product that emerges. WHAT PEOPLE WANT” His firm recently partnered with “A tontine may well be suitable Dutch consultants Westerbrink to for a portion of the population, but help fulfil that ambition. In contrast other products will be more suitable The concept with traditional CDC schemes, for others. It’s about trying to have In regards to the way a tontine which see all members of different that mix in the marketplace so works, Donnelly says, it should look ages and genders in one scheme, there’s a greater diversity of products very much like a life annuity, in that TontineTrust will segregate men and and so people are given more choice, it is providing people with a stable women into separate groups and will and hopefully this leads to people income, but you are pooling split people into similar age groups. getting the right product they need mortality risk rather than having it “It is very similar [to a CDC for their retirement,” he says. transferred to an insurer. She says it scheme] except that we don’t mix In terms of other products, is cheaper than buying a life annuity age groups…in a tontine you are in tontines are very similar to collective because it does not provide any separate pool, your money is kept defined contribution (CDC) guarantees, such as investment and with all the other people in your age schemes – some would even argue longevity risk, which is why a group,” McClelland states. they are two of the same kind. These premium is paid for an annuity. He is patent pending the product schemes are currently seen in the “A pure pooled annuity fund around the world and has trademarked Netherlands, and the UK is in the doesn’t guarantee you those things tontine pension products in Europe. process of legislating for CDC. so it’s less expensive but it should Initially, Europeans will be mixed Compared with the current still give you the main benefit of a with people from other countries but ‘income for life’ options in the market, life annuity, which is this pooling of the company is creating an research puts CDC on top. Cogher mortality risk, and you can add algorithm that will switch references a report published by guarantees to it if you like,” people to the most Willis Towers Watson in October Donnelly notes. appropriate pool, as they for the UK, which found that with “There are many ways of grow in size. a typical CDC, the pension provided constructing these tontines but the McClelland adds would be 70 per cent higher than an method of withdrawing income from that pools will also

50-53_Tontines_feature-vs4.indd 3 23/10/2020 13:11:01 be capped in size at 10,000 because time,” she says. Clacher says. he wants members to get the feeling She also thinks that more research For McClelland, he says the that they can win, in terms of their needs to be done within academia biggest part will be explaining that longevity, which he thinks will on the scientific basis of having payments can vary depending on encourage them to take better care a very low risk fund for the people investment performance, and that of their health. involved. A paper Donnelly recently “tontines are for life, not just for Another entrepreneur, Nobuntu published with a co-author, Thomas Christmas”, the idea that once you CEO, Tyron Fouche, has launched Bernhardt, proved mathematically invest in a tontine, that’s it. “Those a tontine in South Africa, which has that when the pool is left with just are the main things that we have to recently been through a fintech a small number of participants, there get people to understand, if you’re regulatory sandbox to receive is a lot of volatility in payments. in, you’re in it for life.” regulatory certainty. However, he “This is because when someone has also formed a new venture called dies in a tontine you share out the Room for guarantees? Nuova Longevita with a group of funds with everyone else, and you One of the factors that makes global tontine research experts, want to do this is an actuarially fair tontines cheaper than a life annuity including Richard Fullmer and way. When people age, they are is the lack of guarantees. A tontine in Pascal Winter, which is specifically highly likely to die... This makes the its purest form cannot guarantee that targeting the European market. income withdrawn from the tontine income will always rise, or indeed “Our approach is business to very volatile as the membership stay stable. Neither do they pay out business to consumer (B2B2C), so any bequests as a result of a member we will help existing asset managers dying, or a spouse’s pension. and insurers launch tontine products “IN MY VIEW, THE TONTINE McClelland does not see this an to their customer base. These are SHOULD BE PAYING AN issue, as he believes the industry clients who want to offer their has this idea wrong: “I think they INCOME IN RETIREMENT customers higher yield through an perceive that what everybody wants alternative investment,” he says. UNTIL YOU DIE” is for the parent to live frugally in Like McClelland, he sees the retirement and pass away at 90 and opportunity that tontines have in becomes very old.” pass on some money to their kids. solving “many of the limitations of On the flip side, Donnelly believes “With a tontine you can traditional life annuities”. He also more work needs to be done on immediately go and purchase the plans to structure the product within systematic longevity risk – the lifetime income that you want now the PEPP and Solvency II legislation. chance of people living longer than for a fraction of the cost than if you “Because as a team we have expected. There is academic research bought an annuity, which means written papers on the topic of ongoing on these issues currently; you have cash leftover. You can tontines and have successfully Donnelly will start an Actuarial give that cash to the kids now, which implemented them, we [Nobuntu] Research Centre project in January, means they can go buy a house, start are optimistic that we have a good funded by the Institute and Faculty a business, they don’t need to sit value proposition to asset managers of Actuaries, looking at systematic there waiting for you to kick the and insurers in Europe.” longevity risk and other risks, such bucket [to die].” as investment risks. And if people join a tontine and Fine-tuning Communication will also be subsequently receive news of a Like most retirement products, a challenge when it comes to terminal illness? “They are only there are pros and cons, and a launching a tontine, something the going to put in the amount of money tontine is not without its drawbacks. experts agree on. “As with all new that they deem necessary to take care Not least, Donnelly has pensions products, your challenge of them for the rest of their lives,” he reservations about the name tontine, is going to be making sure people says, “if they join, and subsequently and prefers pooled annuity fund, as know what they’re buying and get bad news, then they don’t need she says people think that tontines making sure that products, all of the money and they’ve already taken are illegal and the last survivor gets them not just tontines, start to do care of the kids. That’s the quid pro everything. “Yes, there were tontines something around providing people quo, that’s what keeps it fair.” like that in the past but this is not with adequate retirement incomes, A 21st century tontine, however, is what is being proposed at the current which is clearly quite a challenge,” in its infancy and Donnelly is

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“A TONTINE MAY BE BETTER VALUE NOW, BUT NOBODY KNOWS WHAT WILL HAPPEN TO THE ECONOMY OVER THE NEXT 40 50 YEARS”

the tontine] while they were alive,” Donnelly says. “The longevity credits are proportional to your chance of dying – the more unlikely you are to die, the smaller they will be,” she adds. working on how tontines could have management but in the long term he “In my view, the tontine should be more choices built within them, wants to get everybody saving. paying an income in retirement until such as spouse’s pensions or “Everybody is trying to figure out you die, that’s what it’s for. You bequests. She has already published how to get younger people saving, could have a situation where you a paper with her co-author, Thomas their problem is young people think have people saving for retirement in Bernhardt, on how to include they’re invincible and they are not a DC plan and then you have a a bequest in a tontine. worried about retirement. If we give tontine or pooled annuity for their A member could have two them a pension, which is essentially retirement, so you’re not just being accounts with one of them linked to in a large financial game of The kicked out of the pension scheme the tontine and another in a separate Hunger Games, that invincibility upon retirement.” account. Every time someone else works in their favour,” he says. Clacher also raises the issue of dies in the fund, a fair share of the “You know if you put the money the long-term nature of saving for deceased’s money is paid to each in and take good care of your health, retirement. A tontine may be better survivor’s tontine account and you’re going to collect all the money value now, but nobody knows what nothing to the non-tontine accounts. of the people who don’t do as good a will happen to the economy over the However, these accounts are instantly job as you of taking care of your next 40-50 years. A period with re-balanced to some pre-determined health in retirement. You hold the higher interest rates would push up proportion. When the member dies, winning lottery ticket, you are the the value of annuities making them the non-tontine account is paid to winning lottery ticket. My belief is relatively more attractive, he says. their estate and the tontine account that we can move the needle in terms “The point about any new product goes back into the pool to be shared of getting younger people to start is yes you can compare things, out by the remaining members. Of saving by turning the whole feeling and say in this environment it is course, both of these options, the of the pension upside down.” potentially better, but the trick is bequest and the spouse’s pension, Others, however, are not so to be able to provide an adequate would result in a lower pension paid convinced that the tontine concept income in retirement. This can’t to the member, she notes. can work for the accumulation be irrespective of economic phase. “When you are young you are circumstances because that’s Accumulation aspirations? highly unlikely to die, so I don’t impossible without costly On the face of it, a tontine is purely think it’s a very attractive guarantees, but optimising around a decumulation product, but proposition for somebody young to trying to make sure that you McClelland has aspirations to use have a chance, however small, of deliver good retirement benefits behavioural science to get young losing all of their retirement savings and you give people a people saving into a tontine. Initially, to a tontine pool in exchange for product that is suitable for he says, the TontineTrust will be what would be a minuscule stream their situation is the about “solving decumulation” in of longevity credits [money paid to innovation that the order to get assets under the tontine survivors due to deaths in market needs.” ■

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