Data unavailable

Feb 4, 2022

Data unavailable

05:00 min read

How Tontines could bring Innovative Mutualism to Brazil

José Ribeiro Pena Neto, former CEO of both Abrapp and Forluz discusses how Tontines could improve the Brazilian Pension System.

Data unavailable

The following is a translation of an article by Jose Ribeiro Pena Neto, the original article can be read here.

Innovative Mutualism – By José Ribeiro Pena Neto*

February 3, 2022

From the 2010s onwards, the Brazilian supplementary pension system assumed an apparently irreversible trend towards defined contribution plans, abandoning the outdated experience of variable contribution. Since then, we are very concerned about the lack of an instrument to ensure that the assisted person has an income until death. In a previous article, we already called attention to the fact that our system is excessively focused on the individualistic capitalization phase. We do not see any effort from our entities, the authorities, the insurance or financial system to create an alternative that allows pension savers, not only in closed pensions but also in open ones, to have a lifetime and adequate income.

We make one caveat, however. A recent international event promoted by the Undersecretary of the Complementary Pension Scheme brought specialists who spoke about annuities, tontines and collective defined contribution plans (CDC). Annuities, which have been offered for a long time in many countries around the world – it is true that with much criticism, mainly because of their cost –, did not reach Brazil.

The CDC, uncommon, but already present in some countries, and the tontines in their modern version, as they were conceived centuries ago, had never been discussed – I believe – in our country. These products are mutual solutions, which provide lifetime income in the benefit fruition phase and whose financial and longevity risk does not impact the sponsors.

We have always defended the idea that the international experience should serve as an example and inspiration for us, even if it is subject to tropicalization. That's why we were excited to read a text by Keith Ambachtsheer, one of the world's leading pension experts, on an innovative model of transforming capital accumulated in CD plans into lifetime income. Interestingly, he starts from the case of the plan of the University of British Columbia (UBC), in Canada, created half a century ago and which would never have been successfully copied over those years.

And it comes to the implementation, last May, by the QSuper fund of Australia, of a product called Lifetime Pension inspired by the UBC plan. The main features of this product are: a) it pays a lifetime income for the participant and, optionally, for their spouse; b) can be acquired between 60 and 80 years of age; c) the amounts paid are adjusted annually based on the fund's net profitability and mortality; d) guarantee of minimum receipt of the amount contributed.

In parallel with the Australian initiative, the Canadian company Purpose Unlimited launched an investment fund called the Longevity Pension Fund (LPF), with the objective of transforming the capital contributed by the investor into a lifetime income. In this way, it is possible for anyone to have income until they die without having to pay dearly to an insurance company. Payments are readjusted every year according to the fund's profitability and mortality, there is a guarantee of receipt of the amount contributed and a projection of an increase in the amount received monthly over time.

What makes these products viable? They are based on the model of the tontines, a product conceived in the 17th century, which fell into disrepute at the end of the 19th century for fraudulent use and was banned in the United States, but which somehow continued to exist in countries such as France and Sweden and today is regulated in the European Union. Even in the United States where it is considered illegal, there are products with tontine characteristics operating, such as TIAA's variable annuities, teachers' pension fund, and government employee plans in Wisconsin.

Modern tontines have been studied in the academy by some authors and brought to real life by professionals in the financial and social security markets around the world. Among them is Richard Fullmer, who gave a presentation at the aforementioned SURPC seminar. He has published several texts on the subject, among which we suggest Tontines A Practitioner's Guide To Mortality-Pooled Investments, which addresses various aspects of this interesting financial instrument.

Another indication to learn more about tontines, in a lighter way, is to watch Dean McClelland's interview with Real Vision. He created the company Tontine Trust in Ireland which offers a lifetime income product for individuals, as well as a platform for pension funds, governments and financial companies to incorporate tontines into their portfolio.

In our view, tontines can be used in our country by closed supplementary pension entities without the need for changes in the current legislation. With the word, our jurists and actuaries. Of course, something done in concert with the authorities would be much safer. Incidentally, QSuper launched its product at the instigation of Australian regulators who called on the pension fund system, called Superannuation, to find a solution to the lack of adequate annuity product.

The implementation of tontines in Brazil would also require careful technical, financial and actuarial evaluation, so that the system is fair to its participants, as described by Fullmer in the aforementioned text, avoiding intergenerational transfers and other distortions. Going back to the QSuper example, they took some time to deploy the product there, in an effort to make it simple, attractive and efficient.

Another important point to consider is finding a name that sounds better in Brazil. Fullmer, in his study, points out this need in the United States due to the bad reputation acquired in the past by the tontines and the association with mortality. Here, moreover, the word tontine does not bring to mind a product that is neither financial nor social security and can refer to silly (tonto in Portuguese), which would not be convenient. Here, with the word our communicators.

Returning to a point from the previous article, we understand that it is fundamental that the much-heralded innovation in the supplementary pension system is not restricted to processes, but also reaches the product. And that the product is not only good in the accumulation phase, but also when it comes to producing income.

‍Tontines can guarantee lifetime income at a fair price without risk to sponsors.

Who knows, they may be the innovative solution we need for the current and future assisted in our system. This would prove a phrase by Tom Morton, co-founder of MTV, who said “innovation is taking two things that exist and putting them together in a new way”. So we would be innovating with a product that has been around for almost 400 years, brought into an organized system about half a century ago.

At a time when a good part of our society is inclined towards individualism and that in our system some point to mutualism as a problem, the idea of the tontines goes in the way of treating mutualism as a solution. More than that. Mutualism is the raison d'être of welfare.

*Former CEO of Abrapp and former CEO of Forluz. He is currently a Supplementary Pension Consultant.

More like this


Pechter_Kerry.jpg
CanadianFlagwebp
Italy.png
  • About Us
  • About Tontine Trust
  • The Team
  • Our Advisors & Ambassadors
  • Who we work with
  • Transparency Policy
  • Investor Relations

Website TermsPrivacy Policy

© 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™.