Tontines and Collective Annuities: Lessons from an International Survey

“Sharing is a wonderful thing, especially to those you’ve shared with.” ~ Julie Hebert

Our paper Tontines and Collective Annuities: Lessons from an International Survey, a collaboration of John A. Turner (1), Richard Fullmer (2), and the late Jonathan Barry Forman (3) has been published in the New York University Review of Employee Benefits and Executive Compensation - 2021 § 4.

Perhaps the biggest problem with defined contribution plans is managing the decumulation stage so that participants don’t run out of money, while at the same time not forcing them to be so conservative in their spending that they deprive themselves of enjoyable life experiences. Because few people voluntarily annuitize their retirement plan balances, they face the difficult problem of managing the pay down of their accounts with uncertainty as to length of life and capital market rates of return. Different methods have been developed for sharing and bearing of these two risks. In considering risk-bearing by pension participants, at one extreme are defined benefit type arrangements, where the plan sponsor bears all the mortality and financial market risks. At the other extreme are defined contribution type arrangements, where each participant individually bears the mortality and financial market risks. A number of options are available between these two extremes. One is to have the participants collectively bear the investment and mortality risks. By diversifying mortality risks across a large group, the risk borne by each individual is reduced. Tontines exemplify this kind of collective risk-sharing arrangement. They can be used during both the accumulation and decumulation periods; perhaps most usefully in the decumulation period.

In this article, we analyze the functioning of actual tontines in various countries. This work contrasts with most of the previous studies, which have been theoretical or historical analyses. This analysis discusses pension plans in different countries that have tontine-type risk-sharing arrangements in either the accumulation or decumulation phases, whether or not the word tontine is part of their name.

At the outset, this Article provides a short review of recent literature on tontines. The Article then compares tontine, annuities, and regular investments. Next, the Article discusses some real-world examples of pension plans that have tontine features in the accumulation and/or decumulation phases, and also tontines that provide longevity insurance (i.e., benefits that are deferred to, say, age 80). Finally the Article offers some offers some concluding remarks.

1Pension Policy Center 2Nuovalo Ltd, Nuova Longevità Research 3University of Oklahoma College of Law