“Discovery consists of seeing what everybody else has seen, and thinking what nobody else has thought.” ~ Nobel laureat Albert Szent-Györgyi (1893-1986)
We recently read an interesting Christmas Day blog article by Henry Tapper called Pensions not tontines please! To be honest, we found the article rather confusing in that it advocates on the one hand for modern tontines (“if there is one concept we could do with right now, it’s what is described in this video as the Modern Tontine”), but then spends the rest of the article objecting quite strenuously to them. Perhaps he meant to say, “we could do without” rather than “we could do with?” We are not sure.
Antiquated Tontines
Regardless, it bears mentioning that the article appears to focus primarily on the characteristics of antiquated tontines rather than modern tontines. This is a common misstep and perhaps a forgivable one – after all, people have heard about the tontines of the past (and their stained history, so what better than citing an episode of The Simpsons that parodies them… touché!), but they may not be familiar with the concept of modern fair tontines. So, this seems like a good opportunity for us to highlight the differences.
Let’s start with Mr. Tapper’s definition of a tontine. We reproduce his full paragraph here (the bold emphasis is his):
“A tontine is a legal agreement where people make an investment into a trust in return for the right to receive a regular income for as long as they live. When a member passes away, their income is shared with the remaining members causing the surviving members income to rise.”
Correct. But notice what this definition does NOT say. It does not say the arrangement must be in the form of a closed-end pool, that there must be a last survivor, or that the members must all know each other’s identities – all of which are features that he criticizes. This represents a type of straw man fallacy: focusing criticism on the features of some types of tontines and then fallaciously extending the argument more generally to all types. But in the past few years, both academic and practitioner research has studied the boundaries of fair tontine design and found them to be not at all limited to the closed-end designs of the past. For those interested, we provide a non-comprehensive list of the literature here.
Mr. Tapper further attempts to differentiate pensions from tontines, saying that
“while a pension is finite, a pension fund/plan/scheme need not be. Which is why ‘tontine’ is the wrong word to use in association with pensions.”
Modern Tontines
But modern tontines likewise need not be finite. Indeed, modern tontines can be open-ended, accepting new members forever. Moreover, tontine payouts can be structured similarly to traditional defined-benefit (DB) pensions, with the exception that payout levels are not guaranteed. This is the major difference between tontine pensions and DB pensions. Tontine pensions strip away the guarantee while also eliminating all of the guarantee costs, passing the cost savings on to pensioners. For a deeper discussion on the topic of tontine pensions, see here and here.
Semantics Matter
Mr. Tapper does make a good point about semantics. Whether we like it or not, the word “tontine” is often associated with many of the unwanted attributes that his article describes. The founders of Nuovalo have had numerous discussions about what to do about this. Should we take every opportunity to set the record straight that modern tontines need not resemble those of the past? Or should we accept that the term has (sadly) become synonymous in popular culture with its past forms such that debating its academic definition is an effort in marketing futility? I think the right answer for Nuovalo is to do both. We still write academically on the subject of tontines in our research, but…
A Rebranding
We recently decided to significantly reduce the use of the t-word in our branding. We had originally thought that the qualified term “modern tontine” would adequately differentiate the modern form from the antiquated forms of yestercentury. And while we believe that this fight is still worth fighting, the issue remained that the word “tontine” does not describe what we offer.
Nuovalo is an actuarial technology company that specializes in fair longevity risk pooling. We do not offer tontines or any other type of investment product. Rather, we offer longevity risk consulting services and longevity risk pooling administration systems. We offer these services and systems to defined contribution plan sponsors, financial services companies, and governments that wish to offer the benefits of longevity risk pooling without the overhead of insurance guarantees or DB liabilities. Such solutions may go by many names including collective defined contribution (CDC) plans, group self-annuitization (GSA) plans, dynamic pension pools, tontines, and more. A common element in each of these solutions is longevity risk pooling – and that is the part we do.
For this reason, our branding now focuses on phrases such as longevity risk pooling and longevity income solutions because this better describes our business.
Modern Longevity Risk Pooling
As I once wrote in this practitioner’s guide published by the CFA Institute Research Foundation:
“If most of what you know about tontines came from a fictional novel, a film, a newspaper article or an episode of The Simpsons, rest assured that you are not the only one. But this does not have to be the case.”
Nuovalo is modernizing pensions through efficient, low-cost longevity risk pooling. Our platform supports:
Actuarially fair risk sharing, longevity credits, and payouts
100% fully funded pensions
Both closed-end structures and modern open-end structures that accept new entrants in perpetuity in the same way that traditional pensions do
Single-ownership and joint-ownership with a spouse or partner
Mortality rates that can be determined by any number of different factors (not limited to age or age + gender), if desired and as may be governed by law
Any reasonable asset allocation or investment strategy
Both packaged products (as with a fund or trust) and individually managed accounts (such as with robo advisory platforms) that allow investors or their advisors to tailor their own investment strategies
Immediate and deferred payouts
Lifetime payouts, term payouts, and lump sum payouts
Payout trajectories that can be designed to rise, fall, or remain flat in either nominal or real terms
Payouts that can be customized by each individual pensioner, if desired
Statistical analyses and income projections that consider factors such as pool membership size, cohort sizes, individual account balances, investment strategies, payout options, etc.
Payout smoothing (notably, this differentiates tontines from CDCs and similar defined-ambition plans – whereas a CDC plan might allow its funding status to fluctuate within some range, a “pure” tontine must remain fully funded at all times)
Pools that can span across multiple plans and products
Pools that can span nationwide and even across country borders (global risk pools)
Transparent pricing and accounting
And in the future, immutable ledgers
And to the extent that any provider or regulator is worried that such risk pools, in Mr. Tapper’s words, once “created a moral hazard which tempted the community to put harm in each other’s way,” participants within a modern risk pool may be anonymously and randomly assigned to sub-pools, granting an extra layer of protection if this is desired.
This is what we mean by modern longevity risk pooling solutions. Our job is to help pension and retirement plan providers do it fairly, flexibly, efficiently, transparently, better.
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