From Hope to Reality, At Last

1 minute read

Keith Ambachtsheer is widely recognized as one of the world’s most original thought leaders on pension design, governance, and investing. He is:

  • Director Emeritus, International Centre for Pension Management (ICPM),
  • Executive-in-Residence, Rotman School of Management, University of Toronto,
  • Senior Fellow, National Institute on Aging (NIA), Ryerson University, and
  • President, KPA Advisory Services

The most recent issue of The Ambachtsheer Letter titled Transforming Capital Accumulation Plans Into Lifetime Income Plans: From Hope to Reality At Last “traces the long journey from the birth of the ideal lifetime income option to where it stands today.” It goes on to say that:

“It is at last becoming a tangible choice for the millions of people who should be converting at least part of their accumulated retirement savings into a cost-effective lifetime income option that they understand and trust.”

What kind of lifetime income option is he talking about? Noninsured longevity risk-sharing. In other words, tontines and tontine-like arrangements.

“The standard life annuity offered by insurance companies does provide a life-long stream of income payments, but at a steep price. These annuities tend to have complicated conditions and riders, are subject to sales commissions, and offer low payouts as the insurer must set aside sufficient capital to make good on the guarantee. The ideal lifetime income option does not suffer from these shortcomings.”

Our CEO, Richard Fullmer, enters the story in a section titled Understanding the Economics of Longevity Risk Pooling. Speaking of Richard’s study titled Tontines: A Practitioner’s Guide to Mortality-Pooled Investments CFA Institute Research Foundation, Ambachtsheer writes:

“While the history side of the study is interesting, it is its technical side that will prove to be most useful today. Why? Because for the power of longevity risk pooling mechanisms to be broadly appreciated as fair risk mitigation tools, their essence needs to be broadly understood. That means understanding the fair reallocation of longevity credits to the pool survivors…”

We couldn’t agree more.