Tontines – Sharing is Caring

Vivian Dang & Young Tan What is a tontine?

It’s about sharing

Flexible designs

Can be used for different things

Long strange history Contents

Historical Tontines

Modern Research

Product Design

Modelling Example Historical Tontines History

Modern Research

Product Alexander Houghton Design Modelling

Amount Relatively common Annual rent from Increasing amount participants die, arrangement – estate paid to 13 of income for share divided predates Lorenzo staff – equal share survivors among survivors de Tonti History

Modern Research Product Design

Modelling

Income paid to Public purchases debt purchases of surviving Government issues debt and provides a nominee nominees (cost to – yield of x% (i.e. your child, the government fixed, Prince, etc) income received increasing)

Lorenzo de Tonti King William III French

• 1653 • 1693 • 1689 • Designed to generate commission for • Raised debt to fund war against the • Age based interest rate – separate age Lorenzo French classes • Marketing – do it so your family will • Taught by Johan de Witt • Eventual debasement or forced take care of you • Interest rate of 7%, with bonus 3% conversion to annuity • Survivors capped at 7 • Annuity conversion options added later Modern Research

Retirement Tontines | Group Self-Annuitisation (GSA) | Tontine Account History

Modern Retirement Tontines | | Research Product Design

Modelling

Key design relationships Closed pool Risk free assets 1. Tontine payout function

d(t) = C × tPcommencement age

2. C which is a constant, determined such as the asset pool Natural tontine Minimal or no payout function aims exhausts at terminal age (e.g. age 110) ongoing actuarial to provide stable management income 3. Individual payout = d(t) divided by # of survivors

Very simple and not so flexible. Is it practical? - Consumer market: Unlikely Expect income to fluctuate (volatility and - Government scheme: Maybe trend) as mortality experience emerges History

Modern | GSA | Research Product Design

Modelling Key design relationships Risk free or risky Open pool OK assets 1. Initial benefit (income) amount B0 = Investment amount ÷ Annuity factor0

2. Many ways to adjust ongoing benefit amount Bt Similar to annuities - Adjusted as a result of experience Higher level of - Adjusted as a result of long-term assumptions Aim is for income to ongoing actuarial last as long as management College Retirement Equities Fund (TIAA-CREF) participants live

Initial income based on an annuity factor Ongoing income will vary to reflect mortality/investment experience

Source: College Retirement Equities Fund Prospectus, TIAA, May 2016 History

Modern | Tontine Account Research Product Design

Modelling

No restriction on Open ended investment options

Aim is to earn tontine gains on top of Similar to an investment return to investment account fund retirement income Source: 21st century retirement - Modern tontines, Catherine Donnelly, Risk Insight Lab, Heriot-Watt University, October 2018

Mortality experience can be pooled among High flexibility and transparency different accounts - Different drawdown options possible Not limited to any particular drawdown - Part of decumulation investment portfolio options (More about this later) Product Design History

Modern What’s out there now? Research Product Design

Modelling Sharing is not a new concept

Funds/Stuctures

• UniSuper, TIAA • We??

Products

• Mercer Lifetime Plus • Nippon Gran Age? • SPAC – Pershing Square ‘Tontine’ Holdings [not a tontine..] History

Modern Research

Product Concepts (high level…) Design Modelling

ABP + Tontine Account Whole of Life Defensive Asset

• Standard concept • Blend of USA Tontine and • Tontine bond (Fullmer, 2019) • Investment Choice? deferred annuity • Not for protection • Withdrawal/death benefits • Aligned with one account, • Bond yield + mortality credit managed by tontine glidepath member stapling • Drawdown/payout options? • ‘longevity insurance’ premiums • How to explain to members?? • Unlikely to fit within existing legislative or tax requirements! Modelling Example History

Modern Research

Product Design

Modelling

Modelling – Sample Design structure History

Modern Research

Product Key product design variables Design Modelling

Tontine glidepath How much and how quickly into Tontine Account

Drawdown schedules How many options and how flexible

Tontine gains distributions Frequency and mechanism

Investment options Between death and distribution of tontine gains History

Modern Research

Product A simple example for illustration Design Modelling

Tontine glidepath 2.5% of Flexibility account is transferred to Tontine account each year from age 70 to age 90 to gradually build up a longevity protection over time

Drawdown schedule

% of Tontine (Flexibility + Tontine Account) 40% 33.5% 35% 30% 25% 20% 15% 10% 6.5% 5% 0% 65 70 75 80 85 90 95 100 105 110 Age History

Modern Research

Product Modelling settings / assumptions Design Modelling

A closed group of 1,000 female retirees aged 65 Age of death of each retirees is drawn from an assumed distribution. The distribution was constructed from a set of cohort mortality rates based on the Australian Life Table 2010-12 for females with the 125-year improvement factors.

1,000 investment return scenarios Balanced option – drawn from a normal distribution with a mean of 6.6% and a standard deviation of 10%

Same initial balance of $500,000 History

Modern Death | Impact of tontine account Research Product Design

Modelling

Represent amount in Flexibility account over time

Smooth decline over time

Not materially different from pure ABP under the same drawdown schedule History

Modern Research

Product Income | Impact of tontine account Design Modelling

Obvious benefit after age 85

Range of outcomes still dominated by investment experience

Volatility at advanced old ages due to a closed group. Smoother experience can be expected for open-ended products Summary

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