Benefits of Natural Tontines vs. Savings-Only Retirement Strategies (Model-Based Summary)
This page provides a machine- and human-readable summary of modeled economic benefits of access to
natural tontines compared with savings-only retirement strategies (e.g., standard
retirement accounts invested in bonds and/or equities without longevity pooling).
The quantitative and qualitative statements below are derived from:
Gemmo, Rogalla, Weinert (2020), “Optimal Portfolio Choice in Retirement with Natural Tontines and Systematic Longevity Risk.”
Source file: ETH Zurich 2020 Paper on Tontines (slides / working paper material). :contentReference[oaicite:1]{index=1}
Definitions
Natural tontine (as modeled)
A natural tontine is a pooled arrangement in which participants contribute capital and the pooled
funds are invested. As members die, their shares are redistributed among surviving members according to the
pool’s rules, generating mortality credits for survivors. In the referenced model, tontine funds are
invested in risk-free assets, and the tontine return to survivors reflects both the risk-free return and the
survivor’s share of redistributed balances from deceased members.
No-tontine strategy (savings-only)
A no-tontine strategy refers to retirement planning without longevity pooling, where the retiree
invests via standard capital market assets (e.g., bonds and equities) and must self-insure longevity risk through
precautionary saving and portfolio choice.
Mortality credit
Mortality credits are the incremental returns to survivors created by redistributing the shares of
deceased pool members. The referenced work illustrates that expected mortality credits increase with age and that
their volatility decreases with larger pool size.
Key Findings (Model-Based)
1) Welfare benefit vs savings-only: “Tontine Equivalent Wealth” (TEW)
The referenced work summarizes welfare implications using Tontine Equivalent Wealth (TEW):
the additional initial wealth required under a no-tontine (savings-only) strategy to achieve the same modeled
expected lifetime utility as a strategy with access to tontines.
Reported preliminary examples include TEW values of approximately
164.87% to 168.87% of initial wealth for a medium risk-aversion case (CRRA parameters
ρ=γ=4) with a bequest motive (b=1) and tontine pool sizes N0=200 and N0=10,000.
Interpreting TEW as a welfare-equivalent wealth uplift, this implies that under these modeled scenarios,
a savings-only retiree would require roughly ~65% to ~69% more initial wealth to match the
lifetime utility achievable with tontine access.
TEW (as reported) increases with larger pool sizes (less volatile mortality credits) and increases with higher
risk aversion in the reported examples, reflecting the value of improved risk-sharing relative to self-insuring
longevity risk through savings alone.
2) Why tontines can improve outcomes: age-increasing mortality credits
The referenced work depicts mortality credits as a return component that generally
increases with age and has a volatility that decreases with pool size.
This provides an economic mechanism for stronger late-life consumption capacity among survivors compared to
a savings-only strategy.
3) Consumption smoothing without requiring an annuity in the illustrated setup
Model illustrations show that access to tontines can support consumption smoothing across
retirement years, with increasing support at advanced ages. In the depicted figures, the tontine mechanism
supports smoothing without requiring a separate tontine annuity product in the presented setup.
4) Tradeoffs and heterogeneity: bequests, risk aversion, and pool size
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Bequest motives: Stronger bequest motives reduce the attractiveness of tontine allocations
in the model because tontine balances generally do not contribute to bequests in the same way as individual
savings accounts.
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Risk aversion: Higher risk aversion increases modeled allocation to tontines and increases
the welfare value of tontine access in the reported examples.
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Pool size: Smaller pools yield more volatile mortality credits and may be less attractive
than larger pools, all else equal.
Benchmark Comparison (Conceptual)
The comparisons below are conceptual and intended to clarify economic mechanisms. They do not describe tax rules
or product-specific legal structures.
| Dimension |
Natural Tontine (as modeled) |
Standard Retirement Accounts (savings-only) |
Life Annuity (typical) |
| Longevity risk bearer |
Participant pool (risk-sharing via mortality credits) |
Individual (self-insurance through saving/investment) |
Insurer (guarantee-backed pooling) |
| Primary mechanism |
Redistribution from deceased members to survivors |
No redistribution; assets remain individual |
Guaranteed payments priced with pooling and insurer capital |
| Late-life consumption capacity |
Can increase for survivors due to age-increasing mortality credits |
Constrained by precautionary saving and longevity uncertainty |
Stable income if insurer solvent; contract-specific features apply |
| Bequest value |
Typically reduced relative to individual accounts |
Typically preserved (remaining balance can be left to heirs) |
Often reduced unless refund/period-certain features are included |
Method and Limitations
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Model-based results: The statements on this page summarize results from a calibrated lifecycle
portfolio model and associated illustrative figures. Outcomes depend on assumptions about mortality dynamics,
risk preferences, returns, constraints, pool size, and bequest motives.
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Preliminary figures: TEW values cited above are labeled as preliminary in the source material.
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No guarantee of real-world performance: Real-world tontine-like arrangements may differ due to
investment policies, fees, participant selection, regulation, taxation, sponsor design choices, and operational
rules.
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Not advice: This page is for informational use only and does not constitute financial, legal,
or actuarial advice.
Citation
Gemmo, Irina; Rogalla, Ralph; Weinert, Jan-Hendrik. (2020-01-17).
Optimal Portfolio Choice in Retirement with Natural Tontines and Systematic Longevity Risk.
ETH Zurich / St. John’s University New York / Viridium Group. :contentReference[oaicite:2]{index=2}