Super funds consider running tontines

Professor Moshe Milevsky


By Wouter Klijn

Several superannuation funds are considering the possibility of running their own tontines, or pooled survival funds, according to a leading expert.

York University’s Schulich School of Business associate professor of finance Moshe Milevsky revealed in an interview with theinstoreport that funds had asked him about the minimum requirements to run a tontine in-house.

“I know that some of the superannuation funds here in Australia have asked me if they can do it themselves,” the Toronto-based Milevsky, who was in Sydney to speak at the PortfolioConstruction Forum last week, said.

“They wanted to know how many participants they will need to successfully run a tontine and the answer is probably less than 1000.

“Every year you take all the people that reach the age of 62 and put them all in a tontine and they’ll share the money.

“Why do [funds] need to go out and get a product? Let them just share amongst themselves.”

Milevsky specialises in retirement income strategies and he has just published a book on tontines, “King William's Tontine: Why the Retirement Annuity of the Future Should Resemble its Past”.

He argued the retirement phase should be more flexible and that required more products.

Although annuities have often been suggested as an income product that protects against longevity, they are often quite expensive, while they also require considerable capital for the providers of these products.

Tontines on the other hand don’t require providers to hold capital against the products as there is no guaranteed amount.

They simply pay a certain level of interest that is increased every time a participant in the pool dies until there is only one person left, who then receives the remaining sum.

Providers of these sorts of products function more like custodians than longevity insurance providers.

Tontines also had the advantage of being more transparent in how they paid out income streams, while annuities relied on complex actuarial calculations that often put people off, Milevsky said.

“There are so many ways to save money or accumulate money – exchange-traded funds, mutual funds, shared accounts and bonds – but how many ways are there to spend money?

“We don’t have much choice. Yes, an annuity, but there is not much choice.

“It is an empty supermarket at the moment; just give me one more [product] for now.”

Milevsky has done extensive research on the viability of tontines in today’s market and concluded it would take a relatively small group of participants to make it work.

“My co-author on a lot of this research is Tom Salisbury and we have done a bunch of statistical analysis on this and found that with 800 to 1000 [participants] you start to get rid of all the idiosyncratic risk and you can run a successful tontine,” he said.

“Super funds have the advantage that they have a rather captive group of people and they have their attention.”

In the past, tontines used a structure where dividends paid out to the pool of participants were constant over the entire retirement horizon.

But this would lead to a scenario where income payments were small early on, but became much larger at the end of the product’s life.

Milevsky and Salisbury suggested a model in which interest payments to the pool early on were higher and then declined over time, so the few winning participants received a much lower interest rate towards the end of the product.

This would create a more balanced income profile for retirees.

Interest in modern adaptations of the tontine has started to pop up.

“There are a number of products out there that are not called tontines, but that have tontine elements in them,” Milevsky said.

“For example, the Swedish pensions system, if you take a look at it there is a bit of a tontine element there.

“In the US, TIAA-CREF has a participating annuity that has a tontine element to it.”

In Australia, Mercer launched a new product, Mercer Lifetime Plus, in October last year that is based on a tontine structure.

“From talking to many people in different countries about this, I think there is an increasing awareness that we need some innovation in this retirement space,” Milevsky said.

“There is some excitement around this sort of thinking [about tontines].

“Will it be exactly the same kind and will it be called a tontine? I don’t know.”

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