And the Pensions Oscar goes to: Tontines

The prestigious Chris Daykin Prize is how the International Actuarial Association's Pension, Benefits, and Social Security Section recognizes outstanding research in pensions.

This week in Brazil, this years award was presented to a team of reasearchers for their paper, "Optimal Performance of a Tontine Overlay Subject to Withdrawal Constraints".

As readers of this blog will know, a Tontine is a contractual arrangement whereby members share the risk of living a long life by agreeing to share whatever is leftover in their individual Tontine Trust once they are gone, in return for receiving a share of leftover funds from those members that pass away earl;ier than them.

“Based on almost 100 years of financial data, the paper by Forsyth, Vetzal and Westmacott showed that modern tontines can be an effective way to reduce longevity risk and increase payments to the participants,” notes the International Actuarial Association in its description of the research.

About this award-winning research:

As defined benefit pension plans continue to decline, individuals increasingly rely on defined contribution plans, requiring them to carefully manage withdrawals to ensure their savings last throughout retirement. The authors explore the potential of a tontine overlay, a mechanism that pools longevity risk among participants, as a way to improve retirement income security.

A tontine is a financial arrangement in which members of a group agree that upon their death that any leftover monies will be shared among the surviving members thereby ensuring that the longer lived members never run out of money.

Unlike annuities, which provide a fixed income but offer poor value for money due to the costs of guarantees from insurance companies, tontines operate without external guarantees and distribute benefits directly among members, making them a far more cost-effective alternative for retirement planning.

One of the key conclusions is that retirees using a tontine have better financial outcomes compared with those following conventional withdrawal strategies.

Tontines redistribute funds among surviving members, meaning those who live longer benefit from contributions of those who pass away. While this structure requires tontine participants to give up their remaining investments after death, the study demonstrates that the increased lifetime withdrawals outweigh this trade-off for retirees.

Tontine Trust is the global pioneer of modern Tontine Trust Funds and Retirement Tontines.

You can read the full version of the above paper here or simply go ahead and test drive our 'Tontinator' to see what all of the excitement is about.