Morningstar makes compelling case for tontines

A research paper just published by US data provider Morningstar has stressed that proactiveness on the part of the policy-makers to facilitate tontine-style pensions is needed to spare millions of American retirees an uncertain financial future. 

Author Jasmin Sethi explains that the demise of defined benefit schemes has left a vacuum in the US pensions landscape, with many retirees now running the very real risk of running out of money. But while a shift towards long-established annuities would appear the obvious solution to bridge the gap, the paper observes that they remain extremely unpopular and that other sub-sectors of the guaranteed income product universe, notably tontines, offer a much better deal in terms of transparency, efficiency and cost.

According to the paper, in 2019 just 5 per cent of American families held an annuity product. Reasons for this included:

• High costs due to the funding of income guarantees to cover longevity risk.
• Complex regulation and structure.
• The virtual impossibility of being able to compare them without the aid of a professional or special analytical tool.
• Lack of availability in employer-sponsored plans.

Compare this to tontines, which offer:

• Much higher levels of income as the pool of participants shrinks.
• More attractive fees thanks to significantly lower costs of management/oversight and administration, plus the fact that longevity risk is covered by the pool of members rather than expensive insurance.
• Frictionless assimilation into occupational schemes.

Ms Sethi highlights the adoption of tontine-style schemes that is currently underway in a number of countries and recommends that US Congress follows the recent shift and facilitates tontine-structured products for Americans.

“We hope that such policy initiatives will put pressure on the industry as a whole to become more transparent, competitive in terms of cost, and technologically advanced,” she concludes. 

We’re pleased to add that you couldn’t ask for a stronger recommendation of the merits of our MyTontine pension than that.

You can read a summary of the paper here.