Individual Tontine Accounts
This research, in collaboration with Michael J. Sabin, endeavors to explore and expand the boundaries of fair tontine design by applying the fair-tontine principle to the concept of brokerage accounts that are perpetually open to new members, in which individuals are freely allowed to invest in virtually any investment of their choosing, to trade in their accounts as they wish, and to choose from a wide array of payout methods.
An individual tontine account (ITA) is similar to a conventional investment brokerage account, but with the added feature of mortality pooling through participation in an open-ended fair tontine. In showing them to be fair to all participants, we envision ITAs as complementary to individual retirement accounts (IRAs), allowing retirees to derive extra income from savings without taking additional investment risk and to obtain lifetime income at a lower cost than with insurance products. ITAs represent an efficient new solution in addressing retirement needs and may help address the “annuity puzzle” by providing a more transparent, lower-cost alternative to insurance-based products.
Tontine Bond Ladders
In collaboration with Michael J. Sabin, we show how structured payouts can be achieved using tontines. This capability is perhaps surprising given that the periodic tontine gains (i.e., mortality credits) of a tontine are reinvested, and investment practitioners are taught that reinvested investment income leads to reinvestment risk. Yet, tontine gains have special properties that make them different than investment income in this respect.
Tontines are useful vehicles for providing retirement income. Their payouts, however, will necessarily vary as a function of investment returns and the mortality experience of the membership pool. Retirees who place a high value on income stability will desire to minimize the variability of these payouts. This can be accomplished via a large membership pool to minimize the effect of mortality experience volatility and by using immunizing cash-flow matching techniques to minimize the effect of investment volatility. A structured bond ladder can achieve this quite effectively.
CFA Institute
Research Foundation Brief
Tontines: A Practitioner’s Guide to Mortality-Pooled Investments, by Richard K. Fullmer (July, 2019), is a first of its kind primer on tontine portfolios.
Funded and published by the CFA Institute Research Foundation, this research brief discusses the issues and guides the reader through the principles and possibilities of fair tontine design. "If most of what you know about tontines came from a fictional novel, a film, a newspaper article, or an episode of The Simpsons," this text will provide much enlightenment.
Table of Contents:
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Preface
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Acknowledgements
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What Is a Tontine?
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Why Study Tontines?
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Longevity-Risk Pooling
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A (Very) Brief History of Tontines
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Are Tontines Legal?
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Literature
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The Fair Tontine Principle
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Fair vs. Equitable
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Mortality Rates
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Forfeiture Allocation
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Risk Pool Ownership Constraint
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Tontines Compared with Traditional Investment Portfolios
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Tontines Compared with Income Annuities
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Tontine Payouts
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Structured Payouts
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Tontine Accounting Illustrated
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Tontine Structures
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Additional Topics
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Conclusion
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References
State-sponsored Pensions for Private Sector Workers
The Case for Pooled Annuities and Tontines
This paper, written for the Wharton Pension Research Council and co-authored with professor Jonathan Barry Forman, explains how state governments could create new low-cost lifetime assurance funds to help provide retirement income security for millions of private-sector workers who currently lack pension coverage. Basically, an assurance fund operates like a mutual fund held within a defined contribution plan, but with the added features of mortality pooling and fully-funded lifetime payouts. As we envision them, assurance funds would be offered as annuity-like investment options on the new investment platforms being created by states like Oregon, California, and Maryland that offer their citizens the opportunity to participate in state-sponsored retirement savings plans. Adding an assurance fund could effectively turn these retirement savings plans into lifetime pensions. To ensure their sustainability, assurance funds would operate under a strict budget constraint and be organized as either tontines or pooled annuities.
Tontines and Collective Annuities: Lessons from an International Survey
This paper, a collaboration of John A. Turner of the Pension Policy Center, Richard Fullmer of Nuova Longevità Research and Nuovalo Ltd, and the late Jonathan Barry Forman of the University of Oklahoma College of Law, has been published in the New York University Review of Employee Benefits and Executive Compensation - 2021 § 4. We review pension plans in different countries that have tontine-type risk-sharing arrangements in either the accumulation or decumulation phases.
A Sustainable, Variable Lifetime Retirement Income Solution for the Chilean Pension System
There is a need in pension systems to significantly improve the level and stability of pension payments as pensioners age. Solutions to address increased longevity and longevity risk should be not limited to increasing the take-up rate of annuities – explicit guarantees are costly in a low-interest rate environment, and lock-in of savings may not be in line with members' preferences. Our proposal is to develop a Sustainable, Variable Lifetime Retirement Income Solution in a more flexible and cost-efficient way. Recent developments favoring flexible products that are more suited to satisfy the needs and preferences of members are key for improving the pay-out phase. In this respect, we believe our tontine design proposal is a superior alternative for the Chilean Pension System. Tontine-like arrangements offer a unique value proposition to address the global retirement challenge. Our retirement income proposal provides clear transparency and investment flexibility with higher expected income streams. It does not involve higher costs since there are no explicit guarantees and provides a means to offer longevity insurance even if insurers are unwilling to supply it. Several proposals are analyzed, including deferred pension arrangements and tontine-like solutions combined with existing pay-out products. Our proposal does not distort the annuity market; on the contrary, it complements it, and it is in line with the transition of many countries to include tontine-like longevity-risk sharing and collective elements in their defined-contribution designs.
This paper is a collaboration with Olga Fuentes of the Chilean Superintendencia de Pensiones and Manuel Garcia-Huitron of Nuovalo.