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“Discovery consists of seeing what everybody else has seen, and thinking what nobody else has thought.” ~ Nobel laureat Albert Szent-Györgyi (1893-1986) We are excited to announce that Modern Tontines by Pascal Winter (1) and Frédéric Planchet (2) has been published by the European Actuarial Journal. 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. 1 Nuovalo Ltd, Winter AAS, Taipei, Taiwan 2 Institut de Science Financiére et d’Assurances (ISFA), Lyon, France

“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

“Discovery consists of seeing what everybody else has seen, and thinking what nobody else has thought.” ~ Nobel laureat Albert Szent-Györgyi (1893-1986) We recently read an interesting Christmas Day blog article by Henry Tapper called Pensions not tontines please! To be honest, we found the article rather confusing in that it advocates on the one hand for modern tontines (“if there is one concept we could do with right now, it’s what is described in this video as the Modern Tontine”), but then spends the rest of the article objecting quite strenuously to them. Perhaps he meant to say, “we could do without” rather than “we could do with?” We are not sure. Antiquated Tontines Regardless, it bears mentioning that the article appears to focus primarily on the characteristics of antiquated tontines rather than modern tontines. This is a common misstep and perhaps a forgivable one – after all, people have heard about the tontines of the past (and their stained history, so what better than citing an episode of The Simpsons that parodies them… touché!), but they may not be familiar with the concept of modern fair tontines. So, this seems like a good opportunity for us to highlight the differences. Let’s start with Mr. Tapper’s definition of a tontine. We reproduce his full paragraph here (the bold emphasis is his): “A tontine is a legal agreement where people make an investment into a trust in return for the right to receive a regular income for as long as they live. When a member passes away, their income is shared with the remaining members causing the surviving members income to rise.” Correct. But notice what this definition does NOT say. It does not say the arrangement must be in the form of a closed-end pool, that there must be a last survivor, or that the members must all know each other’s identities – all of which are features that he criticizes. This represents a type of straw man fallacy: focusing criticism on the features of some types of tontines and then fallaciously extending the argument more generally to all types. But in the past few years, both academic and practitioner research has studied the boundaries of fair tontine design and found them to be not at all limited to the closed-end designs of the past. For those interested, we provide a non-comprehensive list of the literature here. Mr. Tapper further attempts to differentiate pensions from tontines, saying that “while a pension is finite, a pension fund/plan/scheme need not be. Which is why ‘tontine’ is the wrong word to use in association with pensions.” Modern Tontines But modern tontines likewise need not be finite. Indeed, modern tontines can be open-ended, accepting new members forever. Moreover, tontine payouts can be structured similarly to traditional defined-benefit (DB) pensions, with the exception that payout levels are not guaranteed. This is the major difference between tontine pensions and DB pensions. Tontine pensions strip away the guarantee while also eliminating all of the guarantee costs, passing the cost savings on to pensioners. For a deeper discussion on the topic of tontine pensions, see here and here. Semantics Matter Mr. Tapper does make a good point about semantics. Whether we like it or not, the word “tontine” is often associated with many of the unwanted attributes that his article describes. The founders of Nuovalo have had numerous discussions about what to do about this. Should we take every opportunity to set the record straight that modern tontines need not resemble those of the past? Or should we accept that the term has (sadly) become synonymous in popular culture with its past forms such that debating its academic definition is an effort in marketing futility? I think the right answer for Nuovalo is to do both. We still write academically on the subject of tontines in our research, but… A Rebranding We recently decided to significantly reduce the use of the t-word in our branding. We had originally thought that the qualified term “modern tontine” would adequately differentiate the modern form from the antiquated forms of yestercentury. And while we believe that this fight is still worth fighting, the issue remained that the word “tontine” does not describe what we offer. Nuovalo is an actuarial technology company that specializes in fair longevity risk pooling. We do not offer tontines or any other type of investment product. Rather, we offer longevity risk consulting services and longevity risk pooling administration systems. We offer these services and systems to defined contribution plan sponsors, financial services companies, and governments that wish to offer the benefits of longevity risk pooling without the overhead of insurance guarantees or DB liabilities. Such solutions may go by many names including collective defined contribution (CDC) plans, group self-annuitization (GSA) plans, dynamic pension pools, tontines, and more. A common element in each of these solutions is longevity risk pooling – and that is the part we do. For this reason, our branding now focuses on phrases such as longevity risk pooling and longevity income solutions because this better describes our business. Modern Longevity Risk Pooling As I once wrote in this practitioner’s guide published by the CFA Institute Research Foundation: “If most of what you know about tontines came from a fictional novel, a film, a newspaper article or an episode of The Simpsons, rest assured that you are not the only one. But this does not have to be the case.” Nuovalo is modernizing pensions through efficient, low-cost longevity risk pooling. Our platform supports: Actuarially fair risk sharing, longevity credits, and payouts 100% fully funded pensions Both closed-end structures and modern open-end structures that accept new entrants in perpetuity in the same way that traditional pensions do Single-ownership and joint-ownership with a spouse or partner Mortality rates that can be determined by any number of different factors (not limited to age or age + gender), if desired and as may be governed by law Any reasonable asset allocation or investment strategy Both packaged products (as with a fund or trust) and individually managed accounts (such as with robo advisory platforms) that allow investors or their advisors to tailor their own investment strategies Immediate and deferred payouts Lifetime payouts, term payouts, and lump sum payouts Payout trajectories that can be designed to rise, fall, or remain flat in either nominal or real terms Payouts that can be customized by each individual pensioner, if desired Statistical analyses and income projections that consider factors such as pool membership size, cohort sizes, individual account balances, investment strategies, payout options, etc. Payout smoothing (notably, this differentiates tontines from CDCs and similar defined-ambition plans – whereas a CDC plan might allow its funding status to fluctuate within some range, a “pure” tontine must remain fully funded at all times) Pools that can span across multiple plans and products Pools that can span nationwide and even across country borders (global risk pools) Transparent pricing and accounting And in the future, immutable ledgers And to the extent that any provider or regulator is worried that such risk pools, in Mr. Tapper’s words, once “created a moral hazard which tempted the community to put harm in each other’s way,” participants within a modern risk pool may be anonymously and randomly assigned to sub-pools, granting an extra layer of protection if this is desired. This is what we mean by modern longevity risk pooling solutions. Our job is to help pension and retirement plan providers do it fairly, flexibly, efficiently, transparently, better.

Manuel Garcia-Huitron contributed to a report published by NETSPAR distilling lessons for the Netherlands pension reform process from international experience. Onno Steenbeck and Benne van Popta were editors and leaders of the project and presented its main insights to the relevant policymakers in the Netherlands. The report included chapters from a range of countries and a cadre of pension experts, including Bernard Morency, Michael Preisel, Stefan Lundbergh, Yves Stevens, Chris Curry, Eduard Ponds, Zina Lekniute, David Knox, Marcus Karlsson, Avia Spivak, David Leiser, Keith Ambachtsheer, Alwin Oerlemans, and Emma Suzanne van Aggelen . Manuel contributed a chapter on lessons for the Netherlands of pension reform in Chile. Here is a one pager. The report can be downloaded here.

“What is now proved was once only imagined.” ~ William Blake (1757-1827) We have been working on a model that decomposes the sources of risk within a modern fair tontine and computes the risk-contribution of each source to survivor credit and payout variability. The model supports a broad degree of different product designs, and is useful to anyone who wishes to design a longevity risk-sharing solution or understand the components that drive such a product’s outcomes. As far as we know, the model is the first of its kind to use closed-form solutions rather than having to rely on Monte Carlo simulation. So in addition to being insightful, it is also lightning fast! There are a number of factors that govern the degree of idiosyncratic longevity risk diversification, primarily: Pool membership size (which is likely to vary over time, depending on whether the scheme is open-ended or closed and other design decisions) Cohort effects (ages, genders, relative size of account balances across cohorts, whether a single cohort or multiple cohorts) The distribution of investor contribution amounts Naturally, the selection of mortality rates and mortality improvement rates is an important input. The model can also project the probability distribution of payouts for any given member – again, without the use of simulation. The characteristics of the selected investment portfolio is an important input here, along with the design of the payout mechanism. We envision this will be useful not only for product designers, but also for individuals who are considering an investment and those who have already made investments and want to quickly look up what their up-to-the-moment payout projections. The model is rigorously tested and ready to use with our clients. Over time, we will create tools that wrap new functionality and user interfaces around it.

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.

The essays of Stefan Lundbergh, director of Cardano Insights, are full of thoughtful and interesting insights. His latest essay titled “The Risk is Not Dying” is no exception. The essay points out that half of us will live longer than the average life expectancy, which (when measured at the median) is true by definition, and because no one knows how long they will live, longevity risk pooling can be extremely beneficial. This is essentially the argument famously brought forth in Menahem Yaari’s seminal model of lifecycle finance 50+ years ago. According to Lundbergh, longevity risk pooling “should be able to sell itself as easily as ice-cream on a hot summer day.” It is a colorful phrase – and one that I wish I had thought of because I agree wholeheartedly! Yet, economists have puzzled for decades over why more people don’t do exactly this. Several explanations have been offered for this puzzle (some rational, some behavioral), but Lundbergh’s essay hits at a very important issue that we at Nuovalo believe must, and indeed can, be overcome. Value for money Current lifetime income solutions in the form of guaranteed annuities are simply too expensive. To wit: a recent study by the Boston College Center for Retirement Research (BCCRR) showed that the “money’s worth” of payout annuities is only about 80% for immediate income annuities and only about 50% for deferred income annuities (a.k.a., longevity insurance), amounts that have remained stable since 2000.¹ You read that correctly… 50% money’s worth – 50 cents on the dollar!! Now, the researchers at BC rightly point out that there is a difference between insurance value and insurance cost, and that because the value provided by longevity risk pooling is very high, it can be worth the cost. That being said, it should come as no surprise that any income product with an expected payback of only 50 cents on the dollar is a tough sell. Imagine how much better it would be if longevity insurance could be supplied at a much higher money’s worth. That could be a game changer! The point is that lifetime income guarantees are expensive. This is not the fault of insurance companies – it is just the way it is. There is no getting around the fact that the cost to hedge and reserve against the risk is what it is. What is going on here? Let’s take a 10,000-foot view and consider what a lifetime income annuity provides. Depending on the country in which one lives, those who retire with savings from a defined contribution plan may generally have two high-level options. One option is to invest and draw down their assets on their own, which offers no longevity protection. The other option is to purchase a life annuity of some flavor (to borrow from the ice cream analogy). Figure 1 illustrates the choice, showing the relative advantages (in green) and disadvantages (in red) of these choices. The annuity provides the benefits of risk pooling, mortality credits, and a guaranteed income amount. On the downside, it is generally irrevocable, offers little or no control to the buyer, and comes with costs and counterparty risk. Self drawdown has none of these advantages or disadvantages, but instead has the advantage of giving the retiree full control to do whatever they wish. Most people chose the self-drawdown approach, which is not only risky, but also highly inefficient. To borrow a quote from Jose Herce: “If you survive your pension savings, you will be poor! If your savings survive you, that’s equally inefficient.” Figure 1: The Dilemma But it doesn’t have to be this way. Consider what you get with an income annuity. Figure 2 provides a high-level illustration by decomposing the value into two simple components: longevity risk pooling and a third-party guarantee. Figure 2: Value Decomposition Longevity risk pooling is high value and attainable at low cost. Doing so is utility maximizing in the language of economists such as Yaari. Or as Lundbergh puts it – the eighth wonder of the world. Experts widely agree: most people would be far better off if they pooled their longevity risk using at least some portion of their retirement savings, even if it is a small portion. Guarantees are also highly valuable. However, they are expensive and typically priced very opaquely. As a result, their value is much more subjective. To some, the cost and restrictions may seem worth it. To others, they may not. So, why not let people choose among these components separately? Why not let people choose longevity risk pooling without having to purchase a high-cost guarantee along with it? Can’t these components be separated? Of course, they can! Figure 3 illustrates that a Modern Tontine (or longevity pool or whatever one wishes to call it) does exactly that. A tontine provides a unique blend between self-drawdown and guaranteed annuities – offering some of the advantages and disadvantages of each. Figure 3: Modern Tontines – an Innovation with High Value and Low Cost No single product is ideal for everyone. But risk pooling is highly beneficial to most, and tontines represent a low-cost way to achieve it. Moreover, modern tontines can allow investors to retain control over how their assets are invested and how their payouts are designed. Regardless of what one chooses to call it, the principle of modern tontine finance provides us the potential to allow consumers an attractive “middle ground” option between self-drawdown and guaranteed annuities. Providing retirees with a low-cost way to pool their longevity risks may be utility maximizing not only for individuals, but for society as well. Richard Fullmer is CEO of Nuovalo, a B2B pensiontech company specializing in sustainable retirement pension solutions through longevity-risk sharing. Endnotes ¹ The money’s worth of an annuity represents the ratio of the expected present value of the annuity’s income benefit to its upfront cost.

We presented our research, conducted jointly with professor Jonathan Forman of the University of Oklahoma College of Law, to the Savings and Retirement Foundation on 3 February 2021. The subject was our work — conducted through sister company Nuova Longevità Research — on an innovative solution for assuring lifetime income in state-sponsored retirement savings plans. The basis for the presentation can be found in this paper that discusses the concept and the research. The general idea is that a simple tontine-based solution that delivers assured lifetime income could be added as an option to virtually any defined contribution (DC) plan. This solution could help provide retirement income security for millions of private-sector workers who currently lack pension coverage, with minimal risk to the government as sponsor.

“With more Americans living longer, many older people lack the resources to sustain themselves in terms of income, housing, health insurance, and long-term care. They’re at one end of the so-called “longevity risk” spectrum; at the other end are sponsors of retirement plans that now have to finance people for longer periods after they retire. These circumstances provide opportunities for public-private partnerships to create financial products that help offset, pool, or transfer the longevity risks to other market participants while helping aging Americans support themselves.” Our research for the Wharton Pension Research Council, in collaboration with Jonathan Barry Forman of the University of Oklahoma, is discussed in this Wharton Magazine article.

“Tontines, a nearly-extinct financial device invented centuries ago, are receiving fresh attention as a tool for retirement income. I do mean fresh - modern tontines envisioned by economists today have evolved since the tontines of yestercentury." Richard Fullmer was interviewed in December, 2020 by Robert Powell on the subject of tontines and the formation of Nuovalo Tontine Solutions, a fintech startup company specializing in tontine design and technology. The interview is available in video format and runs about 23 minutes.

“Tontines were wildly popular in the 18th and 19th centuries but their status suffered at the hands of fraudulent life insurers. Natalie Tuck explores whether tontines have a place within a modern European pensions system…” Our own Tyron Fouche is quoted in this European Pensions article exploring tontines and their (new) place as retirement options. Note that while Nuova Longevità Research still exists as a research entity, our new fintech venture is now called Nuovalo.

This article, co-authored with Jonathan Barry Forman, first appeared in the RetireSecure Blog of the Wharton Pension Research Council. Oregon, Maryland, and a number of other US states have recently created state-sponsored retirement saving plans to help millions of private-sector workers lacking pension coverage to save for retirement. While these programs offer a good way to accumulate retirement savings, people also need an efficient way to convert their retirement savings into lifetime income. To address this need, state governments would do well to investigate and potentially sponsor new, low-cost lifetime pension assurance funds. An assurance fund would operate like mutual funds currently held within defined contribution (DC) plans, but with the added features of longevity risk pooling and fully-funded lifetime payouts. A DC plan could offer a few different assurance funds in the same way that it offers a few different traditional mutual funds. Moreover, the DC plan could use the same underlying investments for both. Participants could allocate their retirement contributions between regular mutual funds and assurance funds, however they wished. Assurance funds would offer some of the same features as traditional defined benefit (DB) pensions, such as longevity risk pooling and lifetime payouts. A big difference, however, is that their sponsors would not promise a specific benefit level, and thus they would avoid incurring any defined benefit liabilities. In short, assurance funds would not operate as DB pensions, but rather as tontine pensions. Tontine Pensions A tontine is a financial arrangement that operates according to the survivor principle: the assets of those investors who die are enjoyed by those investors who survive. To illustrate, imagine that 1,000 65-year-old retirees each contributed $1,000 to a tontine that purchased a $1,000,000 Treasury bond paying two percent interest coupons. The bond then earns $20,000 interest per year, split equally among the surviving investors in the tontine. A custodian would hold the bond, and because the custodian takes no risk and requires no capital, the custodian would charge at trivial fee.If all investors lived through the first year, each would receive a $20 dividend from the fund ($20 = $20,000 / 1,000). If only 800 original investors were alive a decade later (at age 75), then each would receive a $25 dividend ($25 = $20,000 / 800). If only 100 of the original investors were alive two decades after that (at age 95), then each would receive a $200 dividend ($200 = $20,000 / 100), and so on. Basically, investor accounts are forfeited at death, and the proceeds are fairly apportioned among the surviving investors as “longevity credits.” Of course, many retirees would prefer level benefits rather than benefits that increased exponentially toward the end of their lives, and that is where tontine pensions come in. In a tontine pension, payouts are designed to be level (including in real terms) rather than increasing exponentially over time, and the pension itself is subject to a strict budget constraint that requires the plan to remain fully funded at all times. To be sure, payouts would vary somewhat from month to month, based on actual investment performance and, to a far lesser extent, the collective mortality experience of the tontine members. State-sponsored Lifetime Assurance Funds A lifetime assurance fund is essentially a DC pension designed to pay out what it can—no more and no less—in an objective manner fully disclosed to all participants. The investment balance of each investor is accounted for individually and reflects actual market values. Contributions are irrevocable, to enforce the condition that the risk-sharing arrangement is for life. In return, investors receive both investment returns and longevity credits for as long as they live. The term ‘assurance’ is used to differentiate these funds from ‘insurance’ products. By dispensing with the costs of insurance-company guarantees and reserves, assurance funds can be expected to generate higher average payout rates compared to commercial annuities. Moreover, since assurance funds make no guarantees, plan sponsors would bear no risks of underfunding. All told, these state-sponsored assurance-fund pensions could provide lifetime income to millions of retirees. They could be operated much like today’s state-run 529 educational savings plans, where states typically contract with investment managers to offer several investment options for savers. Costs could be very low, perhaps as low as 30 basis points, consisting of around 10 basis points in fund management fees for assets managed passively and about 20 basis points for other administrative expenses. Tontine pensions may also be of interest outside the US as an efficient, low-cost way to provide access to assured lifetime retirement income, perhaps especially in countries where deep insurance markets do not exist. This article, co-authored with Jonathan Barry Forman, first appeared in the RetireSecure Blog of the Wharton Pension Research Council. Richard K. Fullmer is founder of Nuova Longevità Research and cofounder of Nuovalo Longevity Income Solutions. Jonathan Barry Forman is the Kenneth E. McAfee Centennial Chair in Law at the University of Oklahoma College of Law.