"The world is better off with tontines"

An overview of the impact of systematic longevity risk on a optimal lifecycle portfolio with tontines from a research paper published by St. John's University and Goethe University.

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An overview of the impact of systematic longevity risk on a optimal lifecycle portfolio with tontines from a research paper published by St. John's University and Goethe University.

“Tontines can generate significant welfare gains compared to a world without tontines”. That’s the verdict of research carried out by the Goethe University, Frankfurt and St. John's University, New York.

Joining an increasingly loud chorus of endorsement from the world of academia, the paper makes an emphatic case for tontines to play a key role in retirement portfolios as longevity risk increases.

The analysis highlights that tomorrow’s pensions must be structured to meet consumers’ evolving needs as forty-year retirements become the norm rather than the exception. That, in the view of the research, will require a dynamic blend of equities, bonds and tontines.

According to the paper, tontines, with their ability to generate sharply rising income via the application of mortality credits, are an essential pensions building block, particularly in the phase of retirement where spending on medical bills and care can increase exponentially.

With their highly favourable risk-reward characteristics, tontines are also ideally suited to risk-averse retirees who are understandably wary of committing too much exposure to volatile equity markets. What’s more, their rapidly rising income has the potential to build an attractive pot of capital late in retirement for those wishing to leave a bequest. The research uses mathematical analysis to ascertain the optimum blend of assets required to ensure a smooth path of benefits over retirement. It concludes: “Tontines are cost-efficient financial contracts providing age-increasing cash flows, generated through the pooling of mortality without guarantees, which can help to match increasing financing needs at old age.” To read the paper in full, please click here.