Nuovalo’s Richard Fullmer joined host Stefan Lundbergh for the February broadcast of Pioneering Pensions to discuss the merits and practical implementation of longevity risk pooling in defined contribution (DC) plans.
Mr. Lundbergh opened the episode with a reference to Squid Game, the popular Korean television series, and drawing on its resemblance to an old-fashioned tontine scheme. Mr. Fullmer followed with a discussion of what tontines are, and noted the important differences between old-style tontines and modern tontines. Nuovalo believes that modern tontines should be actuarially fair to all investors at all times. This fair tontine principle is quite powerful in that it opens up a surprisingly wide range of potential product designs.
“This sort of risk pooling is not taught in any actuarial science course that I am familiar with. It has nothing to do with insurance or defined benefits. There are no liabilities, only a pot of assets… Now, I think we should stop thinking of this as a product and start thinking about it as a principle.” ~ Richard Fullmer
Mr. Lundbergh introduced the concept of Collective Defined Contribution (CDC) plans, which the Netherlands is moving away from just as the United Kingdom begins to move toward them. He mused that CDC stands for Complicated Defined Contribution because it sets long-term targets that depend on a number of uncertain assumptions that plan sponsors and actuaries have a poor track record of forecasting. Conversely, he noted the relative simplicity of modern tontine risk pooling, which is far less reliant on such assumptions because modern tontines automatically self-adjust to reflect actual experience rather than assumed experience.
The two then discussed the practical implementation of modern tontine longevity risk sharing within, for example, master trusts in the UK. This was followed by a discussion of questions from the audience.
A replay of the episode can be found at the Pioneering Pensions website.