Tontines garnering a new wave of interest

Live longer could become the new retirement advice in coming years amid growing interest in tontines — investment pools where participants share longevity risks by distributing the assets of those who die as "mortality credits" to surviving participants.

Boiled down to their essentials, tontines are investment vehicles in which "members commit funds irrevocably," with the resources and income claims of those who die distributed among those who survive, according to an October report on tontines by The Brookings Institution, a Washington-based think tank.

Beyond that, tontines can be structured in any number of ways, from closed-end pools with increasing monthly distributions and the last man or woman standing "winning the lottery," to open-ended pools with mortality credits adjusted to account for the different life expectancies of surviving members and monthly payouts maintained at a constant level.

Some observers say the financial vehicle, first put into effect roughly 350 years ago, is poised to gain traction as retirement architects focus more attention on ensuring retirees don't outlive their savings.

"The scope and pace of reform" in Western retirement systems is accelerating and one seismic change could be the widespread adoption of tontine-style structures — an income solution to longevity challenges with the added attraction of not creating liabilities for government or company plan sponsors, predicted Nadeem Jeddy, founder and executive director of Karachi-based Magnus Investment Advisors Ltd.

According to Brookings' October report, tontine-inspired structures are "receiving attention around the world as tools to finance retirement income because they are efficient and transparent," with mortality credits making expected income for each dollar invested superior to that offered by traditional annuities.

In Australia, tontine-like products will be in the mix as superannuation funds face a June 2022 deadline to spell out their policies to address the needs of participants in retirement, said David Carruthers, senior consultant and head of retirement solutions with Melbourne-based investment consultant Frontier Advisors Pty. Ltd.

Frontier is working now with a group of nine of its super fund clients to hammer out their response, and chances are good the final plan will call for using a portion of participants' funds to make irrevocable investments in a tontine-like structure that offers mortality credits, Mr. Carruthers said.

Meanwhile, the Organization for Economic Cooperation and Development's latest annual Pensions at a Glance report, issued on Dec. 7, mentioned tontines for the first time as a vehicle where payout risks are shared collectively by participants — a sign that tontines are becoming mainstream, said Dean McClelland, founder and CEO of Dublin-based Tontine Trust Retirement Technologies Ltd., a provider and manager of tontines moving this year to launch its first live offerings to investors in pan-European personal pension, or PEPP, products.

But especially in the U.S., where insurance company fraud effectively dismantled a flourishing tontine market at the start of the 1900s, any revival could face marketing challenges, analysts say.

In the U.S., the embrace of tontines "will probably be a gradual process rather than a rapid one," although the growing need to convert savings into reliable predictable income should pave the way for progress over the long term, said J. Mark Iwry, a Washington-based non-resident senior fellow with the Brookings Institution and co-author of Brookings' October report on tontines, as well as a visiting scholar with the University of Pennsylvania's Wharton School.

One hurdle facing tontines in the U.S. is their "checkered history," giving the word connotations of legal uncertainty and a lingering air of disrepute or drama that could make lawyers and regulators alike cautious when first hearing about them, Mr. Iwry said.

A lack of familiarity with the product could also slow near-term acceptance, he said, adding "we're less certain how it will actually play out because we haven't seen how administratively feasible and practical the mortality credit pooling will turn out to be — whether the mechanisms here will prove to be more complicated than one might hope."

Despite those challenges, the potential of mortality credit pooling, without the hard and fast guarantees that trigger the full annuity regulatory apparatus, seems considerable, said Mr. Iwry.

Globally, some observers remain skeptical, predicting the complexity of tontines that pool together participants of both sexes and all ages will prove a considerable stumbling block to any material pickup in demand.

"Tontines sound conceptually good on paper but typically come with some very heavy baggage — not least how you manage joiners to the pool and selection risk being key," said Ashley J. Palmer, Hong Kong-based regional managing partner, Asia, retirement and investment with Aon Hong Kong Ltd.

"These pooled approaches are exceptionally hard to communicate and thus they break the golden rule: 'only invest in things you understand,'" Mr. Palmer said.

An investment executive with one industry fund in Australia was similarly pessimistic. "I expect close to zero takeup," he said, speaking on the condition of anonymity. "Members don't understand it, nobody wants to pay for it (and) there is an 'ick' factor about making money off your friends dying," said the executive, adding "for funds, it's too complex to set up and run without scale."

If there are challenges to marketing tontines, Mr. McClelland said the way to clear that hurdle is to keep it simple — offering a solution that enables people to retire comfortably for the rest of their life in such a way that "they can understand how it works within 30 seconds."

Frontier's Mr. Carruthers agreed: "You can create a fantastic product that meets (participants') needs" but if it's too complex, they won't sign on. If, instead, "we design a product that's good, not perfect" but one that participants can clearly see will meet their needs, "that's where the answer lies," he said.

The narrower a tontine's age cohort is, the simpler it is to understand, Mr. McClelland contends. "What we're building is the Hunger Games of pensions. I want you in with a bunch of guys that are exactly like you so it's a fair fight."

If the client is a 65-year-old European man, "you don't want to be" in the same pool with a 62-year-old woman or a 25-year-old, he said. So "we're going to join you to a pool of 10,000 others guys that are all the same age as you … and essentially, once the pool fills up, we close it to new entrants."

If that client puts in €1 million ($1.2 million), based on a target net investment return of 3.5%, "we start paying him €3,600 a month" and after 20 years, when only about half of the pool will have managed to reach the age of 85, that monthly distribution is likely to have increased to €9,000, Mr. McClelland said. Those who reach their 90s have "won the pension lottery because our job as trustees is to return all that money to members before the last few thousand pass away so we're effectively liquidating the fund," he said.

TontineTrust expects to roll out tontine pensions to European investors within two or three months, with the underlying investments to be overseen by partner asset management firms such as London-based Arabesque Asset Management, Mr. McClelland said.

One beneficial side effect of tontines, meanwhile, could be a greater focus on health as participants in the pool have the incentive to take better care of themselves to benefit from "the tontine effect," Mr. McClelland said.

Brookings' Mr. Iwry said focusing on the elements of a tontine-like structure rather than the word tontine itself could prove to be a superior branding strategy in the U.S. "You can call it longevity risk pooling or survivor credit pooling, which would be positive, innocuous and accurate," he said.

And it is a feature that can be incorporated into different arrangements, such as a defined contribution plan, which is where its greatest promise lies, Mr. Iwry predicted.

If options with tontine-like longevity protection become widely available over the coming decade, individual investors will then have to calibrate how much of their nest eggs they're willing to park, irrevocably, in those products, with the knowledge that the money will be lost to their families should they die relatively early.

By way of example, if an individual investor left 75% of their retirement savings in mainstream investment strategies and the remaining 25% in a group self-assured product like a tontine, they'll get some protection without putting the bulk of their family's finances at risk, Mr. Carruthers noted. "You'll give up some money if you die early but not a whole lot of your money," he said.

Mr. Iwry added: "Consensual mortality credit pooling would offer an alternative that should have a place among the options for financing retirement income. Your kids may thank you for reliably enhancing your own retirement security in this way, instead of leaving them a bequest," he said.