Modern tontines as a pension solution: a practical overview
Direct Link: European Actuarial Journal
- Author: Pascal Winter
- Co-Author: Frederic Planchet
Abstract
In the context of global aging population, improved longevity and ultra-low interest rates, the question of pension plan under-funding and adequate elderly financial planning is gaining awareness worldwide, both among experts, regulatory bodies, and popular media. Additional emergence of societal changes—Peer to Peer business model and Financial Disintermediation—have contributed to the resurgence of the concept of “Tontines” in various papers and the proposal of further models. These generalizations can offer efficient decumulation schemes with high longevity protection which is particularly well adapted for retirement needs—both for its members and carriers.
In this paper, we revisit the mechanism proposed by Fullmer and Sabin (Journal of Accounting and Finance, 2019.) — which allows the pooling of Modern Tontines through a self-insured community. This “Tontine” generalization retains the flexibility of an individual design: open contribution for a heterogeneous population, individualized asset allocation and predesigned annuitization plan. The actuarial fairness is achieved by allocating the deceased proceedings to survivors using a specific individual pool share which is a function of the prospective expected payouts for the period considered.
After a brief introduction, this article provides a formalization of the mathematical framework with prospective analysis, characterizes the inherent bias, generalizes the mechanism to joint lives, and analyses simulated outcomes based on various assumptions. A reverse moral hazard limit is exposed and discussed (the “Term Dilemma”). Some solutions are then proposed to overcome scheme shortcomings and some requirements for practical implementation are discussed.