FT Lex Column: Tontines: not such a murderous idea

Blog post by Dean McClelland - Founder.

Back in my twenties, I developed an obsession with the world of finance, particularly learning how to better understand and interpret the signals and shifting sentiment. That's when I became addicted to the daily offerings of the sages at the FT's Lex column. To me at least, they were the smartest guys in the journalistic room. You know, the ones who always spoke last but with the greatest authority.

So this morning I was fascinated to read their critique of a topic about which I have no little knowledge and understanding myself: the tontine.

“Tontines: not such a murderous idea” insisted the headline. The article went on to list a rich tontine filmography that leaves all other financial products, even those of 2008, trailing in its cinematic wake.  

Then Lex kindly proffered a succinct answer to the question I get asked with indecent regularity: "Why did such a hit show get cancelled in the first place?"

“Insurers rushed to issue tontines but found the only way to turn a profit was via toxic clauses, such as expelling members who made late payments. Spooked US policymakers brought in laws in 1906 that effectively killed the products."

After adding that “...humankind has learnt something over the intervening century or so — and resurrecting tontines for the 21st century has a certain appeal” Lex went on to mention notable tontine tribute acts such as the Netherlands state pension, as well as more recent debutants such as Japan, Canada and the Royal Mail pension scheme in the UK.

To properly resurrect the tontine, Lex declared that “strict rules would need to be applied”, that fairness would be "crucial" and that members would need to be of "similar ages and life expectancies”.

At this point I begin to flatter myself that finally someone in the UK had read the manuscript I have been circulating. If I’m not mistaken, Lex has now somehow also realised that to successfully resurrect the tontine story, and solve the myriad pensions problems that the new CDC legislation hopes to address, there can be only one (way).  

But now for the moment of truth. Do "their highnesses" deign to advocate for the show to begin and in-so-doing also enable tontine pension funds to generate the long-term capital recently espoused by their esteemed colleagues at 10, Cannon Street?

“Future payments are not guaranteed. But researchers say tontines should pay more on average per dollar invested with less costly regulation. They are not so different to annuities, except a saver rather than an insurer benefits from residual capital. Time to give tontines a reboot.”

So there we have it. A reboot it shall be. Watch this space m'Lords.

Follow the link here to read Lex's full thoughts on tontines.

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