Why Tontine Pensions?
We need tontines now more than ever
While the overwhelming majority of savers want to avoid the risk of running out of money in retirement by securing a lifetime income, current products are complex and charge high fees.
The simple and safe answer is to enable modern 'tontines' which pay a monthly income for life that rises over time.
In 2018 the UK government found that a return to risk-sharing pensions would eliminate the costs associated with insurance. This is because a tontine is like a mutual society where profits go to the members rather than to the shareholders of an insurance company.
The 2019 PEPP Regulation has enabled Tontine PEPPs to become the international gold standard of lifetime income pensions, just in time to benefit the 75 million Europeans retiring in the next decade.
Tontines eliminate individual longevity risk
Traditional private defined contribution pensions are no longer fit for purpose in a world of rising life expectancies.
Our tontine product is designed to both mathematically guarantee that a retiree's fund never runs out of money and offer payouts that are likely to increase over time.
This has been proven empirically, with tontines proving hugely successful in the past, as confirmed by multiple peer-reviewed studies.
Tontines offer better value for money
Payouts from alternative pension products such as fixed annuities lose their purchasing power due to inflation, as outlined in the 2019 Better Finance (EU) report on the Real Return.
Inflation-adjusted annuities are available but are even more expensive than fixed annuities.
TontineTrust has designed its pensions in compliance with the PEPP Regulation, in which PEPP providers cannot charge more than 1% per year.
As a result, we can safely solve top two needs of consumers (lifetime income that increases over time) with by far the most cost-effective product.
Tontines are proven
Tontines have proved to be extremely successful and popular with consumers, earning plaudits over the centuries from luminaries such as 'the Father of Economics' Adam Smith who explained in his 1776 book 'The Wealth of Nations' that:
Tontines are worth more than an equivalent annuity to the consumer;
Tontines always attract more capital than annuities.
Modern consumers expect increasing transparency not just over fees but also as to where their money is being invested.
TontineTrust plans to use distributed ledger technology to publish the details of all investments and associated fees paid by the Trust.
We believe that this radical transparency will ensure absolute protection of consumers' interests for generations to come and will set a new standard of trust and fairness in the pensions sector and the retirement products industry generally.
Tontines versus existing solutions
Defined benefit (DB) pensions are becoming increasingly unavailable in Europe. With ultra-low bond yields and rising life expectancy, the amount of capital needed by a DB pension to fulfil its promise of a fixed and guaranteed income for life has become unaffordable to employers and governments who have historically funded these schemes.
Defined contribution (DC) pensions were introduced in the 1980s to succeed defined benefit pensions. In Europe, they now comprise the majority of employment-related and personal pensions. A typical DC pensions is a savings account into which a consumer builds up a capital lump sump directly out of their pre-tax income. Any growth by their capital remains untaxed until the consumer reaches retirement, at which point they will start paying income tax on amounts they withdraw from the account. If the fees are reasonable, DC pensions are excellent for accumulation savings but they are perilous as a decumulation tool due to the presence of several risks: 1. Longevity Risk: The consumer needs to draw down capital to live on. Even if the consumer takes income prudently, if they live a long time then there is an extremely high likelihood that the capital will be exhausted and the consumer will be financially destitute in old age. 2. Sequence of return risk: If the consumer retires just after a market downturn or in a very low return environment, the capital that is drawn down and spent early on will never be able to recover its value later. Therefore, their risk of financial destitution is markedly increased.
Annuities are the original defined benefit pension, dating back to the days of the Roman army. Other than in those periods of history when tontines were offered, annuities have been the only viable personal pension products to guarantee a truly life-long income. Now generally offered exclusively by insurance companies, annuities have garnered a reputation as ‘the most hated financial product in the world’. Why have annuities become so unpopular? - Low yields: To offset their liabilities, insurers are required to hold corresponding income-generating assets such as bonds. In a low interest rate environment, this has a devastating effect on annuity yields. - High Costs: Research shows that up to 30pc of a savers' capital is absorbed by the hidden costs of the income guarantees, further reducing annuity yields. - Perceived Unfairness: Consumers are aware that annuities are always priced to make a profit for the shareholders of the insurance company at their expense. This creates the same feelings towards annuity salespeople as a homeowner would have towards an investor that offered to buy their family home at a 30pc discount to the market price. - Lack of Indexation: The fixed/guaranteed nature of an annuity payment tends to overlook the damage to purchasing power caused by inflation. Whilst index-linked annuities can sometimes be found, their initial yields are even lower than those of fixed annuities.
The 1990s saw the launch of a new breed of accumulation/decumulation savings products which offered a key improvement over regular defined benefit pensions. Defined contribution pensions expose retirees to the risk that the timing of withdrawals from their account will have a negative impact on the overall rate of return available. Lifecycle funds aim to mitigate this risk by overweighting riskier assets such as equities when the saver is younger and then progressively re-balancing to more defensive assets such as bonds as the saver gets closer to retirement. Whilst this was a significant improvement, Lifecycle Funds nevertheless fall short of addressing several consumer needs: 1. They offer no longevity protection: the balance will run out if the retiree lives a long time. 2. They exposure the portfolio to the negative impact of an ultra-low interest rate environment with no other source of income available: - A retiree's drawdowns will directly reduce their capital balance and thus increase their risk of running out of money. - To maintain their purchasing power in a high inflation environment, the retiree will need to increase their capital drawdown rates at exactly the same time that the market value of their bond portfolio is falling.
What makes tontines unique as a pension solution is that they guarantee a source of income that is not obtainable from any other financial product: mortality credits. The assurance of this future source of income has led to several research papers from the Swiss Federal Institute of Technology which concluded that when a risk-averse saver joins a tontine pension, their ‘equivalent pension wealth’ rises by 87pc ‘with no added risk’. Therefore, a Tontine PEPP is the only PEPP that can offer the following features in a single wrapper for an inclusive fee of just 1pc: - Tax efficient, portable retirement savings. - Guaranteed enhanced income from mortality credits which provides natural protection from Sequence of Return Risk. - Enhanced income from stable dividend paying asset classes such as European Long-Term Investment Funds (ELTIFs). - Complete longevity protection for individuals. The advent of the PEPP, with its high governance standards and fee caps, is a major win for consumers, especially those that enjoy freedom of movement rights within the EU. The greater benefit for consumers, however, may come from the fact that the PEPP Regulation now unleashes the potential for substantial innovation in the European pension sector. PEPP means that tontines can once again reshape and redefine the pan-European pensions sector as they did in the seventeenth and eighteenth centuries. Once the standard is set in Europe, this next-generation pension product will be in demand all over the world.