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"It's sleazy, illegal, and could be the future of retirement"--Tontines
Old 09-29-2015, 07:57 PM   #1
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"It's sleazy, illegal, and could be the future of retirement"--Tontines

This is an interesting article on tontines in the WashPo. From the article:
Quote:
Some academics even argue that with a few new upgrades, a modern tontine would be particularly suited to soothing the frustrations of 21st-century retirement. It could help people properly finance their final years of life, a time that is often wracked with terribly irrational choices. Tontines could even be a cheaper, less risky way for companies to resurrect the pension.
“This might be the iPhone of retirement products,” says Moshe Milevsky, an associate professor of finance at York University in Toronto who has become one of the tontine’s most outspoken boosters.
. . .


A simple modern tontine might look like this: At retirement, you and a bunch of other people each chip in $2o,000 to buy a ton of mutual funds or stocks or whatever. Every year, the group withdraws a predetermined amount and divides it among the remaining survivors. You might get a bonus one year, for instance, because Frank and Denise died.
The article indicates a tontine payout could be 10-20% higher than an annuity, primarily due to decreased costs.
I think tontines could be a great product, for many people, if the safeguards were in place. But they are still largely illegal.
We've touched on tontines in the past (several posts in each thread)
Here
Here

Anyway, maybe somebody will find a way to bring these products to market.
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Old 09-29-2015, 08:04 PM   #2
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Agatha Christie could have made a nice little murder mystery out of a Tontine group.
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Old 09-29-2015, 08:16 PM   #3
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Agatha Christie could have made a nice little murder mystery out of a Tontine group.
yes it could... but even without that concept....

Not sure I would jump into one. I think one needs to grab all the long lived people for this... short lived will just loose. Now of days there is likely more information on longevity than in 1900. But then again, maybe not well known for many of us. If one was setup blind, you would not have an estimate of the longevity distribution of participants.
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Old 09-29-2015, 08:19 PM   #4
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yes it could... but even without that concept....

Not sure I would jump into one. I think one needs to grab all the long lived people for this... short lived will just loose. Now of days there is likely more information on longevity than in 1900. But then again, maybe not well known for many of us. If one was setup blind, you would not have an estimate of the longevity distribution of participants.
You are right about more information about longevity now ruining the deal. Unless you set up a fantasy tontines pool, and got to pick people based upon their genes ;-)
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Old 09-29-2015, 08:29 PM   #5
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Near impossible to do I guess, but a ton of back testing results would be nice to look at.
I think those who wish to leave something for family could be accommodated through a hold back of a portion of their share.
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Old 09-29-2015, 11:25 PM   #6
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Robert Louis Stevenson wrote a novella about a tontine called The Wrong Box which was turned into a funny/strange 1960’s comedy farce starring Michael Caine, Peter Sellars, Dudley Moore, John Mills and Ralph Richardson. TCM has shown it occasionally.


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Old 09-30-2015, 04:39 AM   #7
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It looks like the reverse concept of life insurance, with very little corporate overhead.
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Old 09-30-2015, 05:58 AM   #8
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I was wondering how these are set up. Does everyone in a tontine have to be the same age? How about the difference between women and men? If most of the people are age 50, you wouldn't want a 25 year old buying in. They'd be certain to get it all. Just curious what the original rules were for setting them up.
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Old 09-30-2015, 07:55 AM   #9
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Humm. Who knows. It would need a lot of regulation to avoid fraud. And what would be the business model for the tontine organizer to make money? I imagine it would have to be some offshoot from standard annuity providers - so by the time products actually appeared they would be not much better than annuities (if any better).
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Old 09-30-2015, 08:06 AM   #10
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Humm. Who knows. It would need a lot of regulation to avoid fraud. And what would be the business model for the tontine organizer to make money? I imagine it would have to be some offshoot from standard annuity providers - so by the time products actually appeared they would be not much better than annuities (if any better).
If you built this like an annuity (logical idea), would this not really be like a joint annuity (many participants) that has equal payouts for life of the longest lived. This is done for couples and the result is the payout usually goes down because of the odds of longer payouts.
So the annuity company would make out and the longer lived likely too.

now even less interested
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Old 09-30-2015, 08:10 AM   #11
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I thought a tontine was that thing Han Solo cuts open to keep Luke from freezing in Empire?

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Old 09-30-2015, 08:24 AM   #12
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Interesting article, thanks for posting it. From the link
Quote:
A simple modern tontine might look like this: At retirement, you and a bunch of other people each chip in $2o,000 to buy a ton of mutual funds or stocks or whatever.
This isn't like an annuity, it's like a pension fund, which has much broader options (compared with annuities) for investing the assets. Properly regulated, this could be an interesting alternative for retirees that have little or no annuity income. A pension fund can take on more portfolio risk compared with each individual member, so it offers a way to increase total return, and then use part of that return to finance the longevity risk.

The high returns, or course, imply that there is no partner survivor option.
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Old 09-30-2015, 08:33 AM   #13
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Originally Posted by Masquernom View Post
Just curious what the original rules were for setting them up.
I dunno. But I'd go with something very simple--everyone of the same age (maybe an offset for gender), no medical underwriting. Bias the product toward being longevity insurance since that's what it would do best (due to the "mortality credits" and a "% of remaining balance" payout that increases with age, like the RMD tables) so, probably no payouts until age 75.
Yes, in a rational world we'd expect the product to attract healthier-than-average participants, but I don't know if the selection bias would be incredibly strong for a few reasons:
1) People would buy based on their perceived health relative to others, which might be different from reality.
2) People with poor health/unhealthy lifestyles need longevity insurance too. Few people know exactly when their meter is going to run out, regardless of what the averages say.

With no need to maintain big cash reserves/ultra conservative investments (esp many years before payouts begin) and lower overhead costs, we could expect a product like this to return a significantly higher % of clients' money and do a better job of providing for their old age than an annuity can.
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Old 09-30-2015, 08:57 AM   #14
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Old 09-30-2015, 09:31 AM   #15
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just looked up some stuff on tontines..

Quote:
Each beneficiary was to receive an annual payment
based on the interest earned by the combined initial capital
contributed of investors in the applicable age cohort. The rate of interest
increased with the age of the nominee. As nominees died, the share
related to that nominee became worthless and the payments based on
each of other surviving nominees would increase. The subscriber
represented by the last nominee in each group would get all the interest
generated by the capital within that band. On the death of the last subscriber,
the capital would revert to the government.
taken from "Fordham Journal of Corporate &
Financial Law"
note that it was not the age and mortality of the subscriber, but of the nominee... a person chosen by the subscriber whose life the the payouts based.

Also note in that text the some cases finding against tontines did not state what law was violated.

Don't bet that all of the tontines are winner take all... more likely originator still takes much of it.
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Old 09-30-2015, 09:34 AM   #16
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I thought a tontine was that thing Han Solo cuts open to keep Luke from freezing in Empire?
Currently unavailable, just like the tontine.
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Old 09-30-2015, 10:36 AM   #17
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Originally Posted by bingybear View Post
Don't bet that all of the tontines are winner take all... more likely originator still takes much of it.
But a new product could be structured in just about any way. A "winner take all" lottery wouldn't be much of a practical financial product. A tontine that people could count on to start making regular payments when they turned 75 would allow them to spend more in the intervening years. This could be a useful product for the large number of people who have limited retirement savings--making the nest egg last for just 10 years or so, esp with some help from SS, is a lot more do-able than making it last for an unknown (but possibly long) life expectancy.
A tontine payout wouldn't have the guaranteed future monthly payment of an annuity, but what is that worth, anyway? If it's not inflation adjusted, then there's no telling what the firm, fixed payment 20 years in the future will really be worth, so it is not much of a guarantee. If it is inflation-adjusted, then the real growth rate is minuscule (largely because of the slow growth of the required very conservative investments).
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Old 09-30-2015, 11:07 AM   #18
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But a new product could be structured in just about any way. A "winner take all" lottery wouldn't be much of a practical financial product. A tontine that people could count on to start making regular payments when they turned 75 would allow them to spend more in the intervening years. This could be a useful product for the large number of people who have limited retirement savings--making the nest egg last for just 10 years or so, esp with some help from SS, is a lot more do-able than making it last for an unknown (but possibly long) life expectancy.
A tontine payout wouldn't have the guaranteed future monthly payment of an annuity, but what is that worth, anyway? If it's not inflation adjusted, then there's no telling what the firm, fixed payment 20 years in the future will really be worth, so it is not much of a guarantee. If it is inflation-adjusted, then the real growth rate is minuscule (largely because of the slow growth of the required very conservative investments).
you can buy annuities that will start making payments some years out... like you note (bold). But you keep noting tontine, so I assume you are wanting this to funnel deceased subscriber's benefits to the remaining subscribers. My term "winner take all" was intended to mean the last one standing gets the rest of the pot. I can see that as confusing.

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But a new product could be structured in just about any way.
I don't believe this product can be done in the US. From the Nolo's Plain-English Law Dictionary
Quote:
Tontine
An agreement in which investors receive annuity payments, with the special provision that when one participant dies, his or her share goes to the others (increasing the payments to the survivors). Generally, the last to die receives the remaining funds. They are illegal in the United States.
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Old 09-30-2015, 11:20 AM   #19
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Since these seem to have originated in Europe, do you think there is any chance of seeing them revived there or other places with well regulated financial/investment/insurance industries? The USA definitely isn't the only place facing issues of financing retirements in the 21st century.
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Old 09-30-2015, 12:02 PM   #20
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But you keep noting tontine, so I assume you are wanting this to funnel deceased subscriber's benefits to the remaining subscribers. My term "winner take all" was intended to mean the last one standing gets the rest of the pot. I can see that as confusing.
There's no particular reason it has to structured so that the pot goes to one last survivor. Just structure it so that the X% of the end-of-year balance every year (X increases in a fairly aggressive way each year as the cohort ages) is divided among all the surviving members. The thing could be set up in many different ways to distribute any remainder when the last member dies--there shouldn't be much money left, anyway if we choose the distribution rate appropriately. Heck, the thing could even be set up to distribute the entire pot to all survivors when the cohort reaches age 75, everybody gets a lump sum. They'd still do pretty well: Imagine that the tontine is sold to 55 year olds and liquidated when the cohort reaches age 75. About 1/3 of the people alive at age 55 will be dead by age 75, so the survivors would receive a check approx 1/3rd larger than they would have achieved through their own investments (on average). And probably even better than that--with no withdrawals for 20 years (unlike an individual portfolio), there's no "sequence of returns risk", so the fund can be invested in assets with greater volatility/expected return for the first decade or so, then transition to an AA with progressively less volatility.

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Originally Posted by bingybear View Post
I don't believe this product can be done in the US. From the Nolo's Plain-English Law Dictionary
Quote:
Tontine
An agreement in which investors receive annuity payments, with the special provision that when one participant dies, his or her share goes to the others (increasing the payments to the survivors). Generally, the last to die receives the remaining funds. They are illegal in the United States.
There's some disagreement about that among sources I've seen. According to this paper (see pg 514), only SC and LA specifically prohibit tontines. And if we structure this product so that it benefits a large number of participants and accomplishes a legitimate goal rather than being a morbid winner-take-all death lottery, maybe the legal prohibitions would be avoided.
The point is to provide a product with advantages over existing deferred annuities, then people could decide if they want one, both, or neither.
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