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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:

  • Preface

  • Acknowledgements

  • What Is a Tontine?

  • Why Study Tontines?

  • Longevity-Risk Pooling

  • A (Very) Brief History of Tontines

  • Are Tontines Legal?

  • Literature

  • The Fair Tontine Principle

  • Fair vs. Equitable

  • Mortality Rates

  • Forfeiture Allocation

  • Risk Pool Ownership Constraint

  • Tontines Compared with Traditional Investment Portfolios

  • Tontines Compared with Income Annuities

  • Tontine Payouts

  • Structured Payouts

  • Tontine Accounting Illustrated

  • Tontine Structures

  • Additional Topics

  • Conclusion

  • References