OECD: Tontines allow higher expected retirement incomes for all participants compared to what they could achieve on their own

OECD: Tontines allow higher expected retirement incomes for all participants compared to what they could achieve on their own
The 2020 OECD Pensions Outlook explains how "tontine-type annuities... offer real benefits over individual arrangements"

The 2020 OECD Pensions Outlook explains how tontine-type annuities “offer real benefits over individual arrangements"

Every two years, the OECD Pensions Outlook analyses different pension policy issues in OECD countries and discusses policy guidelines to help governments strengthen the resilience of their retirement savings and old-age pension systems.

2020's report states that “tontine-type annuities... offer real benefits over individual arrangements in terms of risk mitigation and the level of expected retirement income, even without an external guarantee from a provider”.

The report concludes that:

"Risk sharing in the design of retirement income arrangements offers benefits in terms of risk mitigation and the level of expected income in retirement compared to individual retirement arrangements.

“The ability for a collective retirement income arrangement to pool risks and smooth funding shocks over time can significantly mitigate the risks that individuals would otherwise bear on their own.

“This allows for higher retirement incomes to be paid, and ultimately increases the collective capacity of the arrangement to invest in higher risk assets (than just bonds) that can provide a higher expected retirement income overall."

Read the OECD 2020 Report on "Sustainable risk sharing in retirement income arrangements" here.

Abstract from the OECD Pension Outlook Report December 2020:

This chapter explores how retirement income arrangements can distribute risks among participants and providers, and the implications that design and regulatory features have on who bears those risks and the level of retirement income they can provide.

It first discusses the benefits of collective risk sharing in terms of individual risk mitigation and what this means in terms of fairness for participants.

It then looks at how valuation and funding requirements can help to ensure the continuity of the arrangement. It also presents the different approaches to securing any guarantees that the arrangement offers and looks at what drives their effectiveness.

It concludes with a discussion on how the regulatory framework can support the objectives of fairness, continuity and security to promote sustainable risk sharing in retirement income arrangements.

Read the full chapter explaining the benefits of collective risk sharing tontines here.

Every 2 years, the OECD Pensions Outlook analyses different pension policy issues in OECD countries & discusses policy guidelines to help governments strengthen the resilience of their retirement savings and old-age pension systems.

2020's report states that 'tontine-type annuities... offer real benefits over individual arrangements in terms of risk mitigation & the level of expected retirement income, even without an external guarantee from a provider'.

The report concludes that:

"Risk sharing in the design of retirement income arrangements offers benefits in terms of risk mitigation and the level of expected income in retirement compared to individual retirement arrangements.

The ability for a collective retirement income arrangement to pool risks and smooth funding shocks over time can significantly mitigate the risks that individuals would otherwise bear on their own.

This allows for higher retirement incomes to be paid, and ultimately increases the collective capacity of the arrangement to invest in higher risk assets (than just bonds) that can provide a higher expected retirement income overall."

, by Dean McClelland
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