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Jan 30, 2018

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03:00 min read

Fintech's Answer To The Global Retirement Crisis

Fintech Tontine Trust sees an opportunity where millions deserve better solutions.

Olivia S. Mitchell

Olivia S. Mitchell is an American economist and the International Foundation of Employee Benefit Plans Professor at The Wharton School of the University of Pennsylvania. Her interests focus on pensions and social security, and she is the executive director of the Pension Research Council, the oldest U.S. center devoted to scholarship and policy-relevant research on retirement security. She also heads Wharton's Boettner Center for Pensions and Retirement Research.

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Consumer choice is good for society. Let’s bring tontines back, better than ever.

By Olivia S. Mitchell

Fintech innovators have the multi-trillion-dollar global retirement income market in their sights. An exciting example is the advent of blockchain-secured tontines as an alternative to traditional pensions and annuities.

What in the World is a Tontine?

A tontine is an investment pool managed in an actuarially fair way, according to a plan for distributing fully-funded payouts to investors. There are two key differences between a tontine and an ordinary investment. First, tontines investments are generally irrevocable. Second, account balances are not transferred to a member’s beneficiaries upon death. Instead, remaining assets are equitably apportioned among the pool’s surviving participants. Accordingly, monies forfeited by those who die increase the returns to those who survive.

These extra returns are referred to as “mortality credits.” In this way, tontines allow members to collect lifetime income by collectively self-pooling longevity risk among themselves. This obviates the need for (and cost of) an insurer as guarantor. Tontines are not insurance, though they can deliver lifetime income similar to payout annuities and pensions. Tontines simply cut out the middleman.

A key feature of a tontine is that it can never be underfunded, since – unlike many defined benefit pension plans – no explicit financial promises or guarantees are made without assets to back them. Critically, tontines make no explicit payout promises: instead, the benefits they pay adjust up or down in a continually self-correcting manner, ensuring that the present value of a tontine’s payouts never exceeds the present value of its assets. Tontines can never become underfunded!

Where do Tontines Come From?

Tontines originated in Europe in 1653 as government-sponsored programs. Later, insurers began to offer them as “tontine insurance” policies. Unfortunately, many of these were non-transparent and some issuers took advantage of this by misappropriating assets. Insurance regulators stepped in to stop the misuse, and tontine insurance faded away in the United States.

But that was then, and times have changed. Financial regulation is now far stronger. Recordkeeping, custody, and auditing systems have improved. Crucially, fintech innovations now offer further improvements in efficiency, security, and transparency for this product whose time has come again.

Why is the Time Ripe for Tontines Again?

Academics have long advocated for tontines as an efficient retirement income solution. Yet financial services companies have largely resisted the call, perhaps daunted by the uncertain regulatory environment or a desire to protect their customary business models. Enter fintech venture capitalists who see opportunity in the retirement marketplace, where millions deserve better solutions.

To be successful, tontine providers must reestablish the trust of investors, sponsors, and regulators. This is where blockchain technology comes into play. A blockchain is a continuous ledger that keeps a permanent record of all transactions in chronological order. Blockchain technology promotes security and transparency by providing an immutable and public log of all contributions, payout distributions, fees, and expense payments. Transparency of a tontine’s financial ledger allows regulators, analysts, and indeed anyone to audit its operations and status at any time. Accordingly, while tontines of the past were opaque and thereby susceptible to misappropriation, tontines of the future will be openly transparent.

One venture actively working to bring back tontines is the Gibraltar-based Tontine Trust. This company’s mission is to create secure, low cost, highly transparent lifetime income solutions via tontines invested passively in a highly diversified set of exchange traded funds (ETFs). The firm utilizes blockchain technology with pseudonymous immutable ledgers and biometric authentication, providing full transparency into every transaction with privacy protection.

Next Steps?

The fintech revolution is rapidly changing the financial services industry, most notably in the banking sector where blockchain-based technologies are upending traditional business models by facilitating near-instantaneous financial transactions anywhere in the world at near zero cost, cutting out banks as a middleman.

Technology now presents an opportunity to build efficient new ways to protect old-age consumption. Tontine providers must still clear significant regulatory hurdles, yet this innovation holds immense potential to disrupt the industry. Defined contribution plan sponsors may find tontines attractive as low-cost lifetime income solutions for plan participants, unburdened by the potential fiduciary liability that comes with selecting a guarantor. Defined benefit plan sponsors may find them attractive as a low-cost way to take risk off their books. Tontine plan sponsors bear no investment risk, no longevity risk, and no underfunding risk.

Consumer choice is good for society. Let’s bring tontines back, better than ever.

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© 2024 Tontine Trust Advisors LLC ('Tontine Trust'). All rights reserved.

Tontine Trust is a fintech enabling consumer-friendly lifetime income retirement products such as the state of the art TontineIRA™ via banks, chartered trust companies and credit unions (each a ‘Bank’).

Banking, trustee and fiduciary services in the US are provided by partner Banks which are regulated in the US to act as fiduciaries on behalf of US Tontine IRA™ accountholders (‘members’).

Tontine Trust provides and operates the TontineIRA™ administration and record-keeping platform on behalf of and under the supervision of the Banks.

Tontine Trust is not a Bank or a trust company and does not provide banking & fiduciary services other than certain administrative services in a ministerial capacity as the Trust Advisors to the Tontine IRA™s.

No information on this website or the platforms provided by Tontine Trust should be taken as constituting individual advice to you. The information is informational and of general guidance only. Tontine Trust does not provide investment management services, financial advice, banking or fiduciary services.

The choices you make or do not make around the investment of your retirement account are your own responsibility.‍ Neither Tontine Trust nor the Banks can be held responsible for any financial loss arising from your retirement choices or lack of them.

The amounts and duration of the lifetime income from the Tontine IRA™ are indicative only. By design, neither the amounts nor the duration of retirement income payments from a tontine plan are fixed or guaranteed.

Based upon many years of research and development, the TontineIRA™ platform displays reasonable best estimates of what level of income you can expect to receive over the course of your lifetime. These estimates are constantly reviewed (sometimes nightly) to incorporate any effects on expected incomes caused by changes in interest rates, investment returns, life expectancy and/or the actual mortality experience of members sharing the same tontine.

The Banks we work with are required to manage US trust assets in accordance with the Uniform Prudent Investor Act.‍

To ensure maximum security of capital and income for members, the Tontine IRA™ assets will be invested by the Banks in a basket of FDIC insured deposits such that each up Tontine IRA™ account can obtain FDIC coverage up to approximately $10m of assets per member.

Note that while the deposits made on behalf of the Tontine IRA™s are FDIC insured, the IRA accounts themselves are not a deposit or other obligation of, or guaranteed by a Bank or state chartered trust company and are not directly insured by the FDIC. Therefore they should be considered as being subject to investment risks, including a possible loss on the principal amount invested, for example when a member passes away before they have received total income in excess of their original contribution to the TontineIRA™.