Actuarial Science Series – Retirement: back to the future?

Climate change, poverty and ageing populations can create huge risks for society and the insurance sector. In a new series we look at how research in Actuarial Science can help tackle these issues.

How about talking… tontines? There are retirement products dating back to the 17^th century. Their idea is simple: Pensioners are provided money at the time of retirement. This money is invested and used to finance annual payouts that are shared by survivors only. Today, modern versions are becoming more popular, for example in Australia, Canada and France.

Workers firstly have to pay into a modern tontine. On the one hand, they keep individual accounts where their money is invested on financial markets. However, these accounts are shared among a pool of pensioners. Upon death, the money is not left as a bequest but distributed among survivors in the pool. Those who live longer receive more money from the pot than those who die early.

Tontines could be the answer to the pension gap that exists in many developed countries where governments cannot afford to fully fund the elderly in their retirement. This is why Peter Hieber, professor of Actuarial Sciences at HEC Lausanne is researching their design and effectiveness.^{1, 2, 3}

“Soon, pension schemes from the state may not be paying enough. People are living longer and fewer workers need to fund more retirees. Tontines could be a way to complement pensions, helping those that are fortunate to live to 90 or 100 years old,” he explains.

Hieber adds: “Typically, an insurance company or pension fund guarantees a fixed lifelong pension payment. This comes at a price as somebody needs to pay if we all live longer than expected.”

Modern tontines offer higher average incomes, since the cost of managing tontines is less than other products. Such risk sharing schemes could boost pension incomes by 60%, according to the UK government.⁴ The drawback is that these payments are no longer guaranteed.

New tontines are now being implemented around the globe alongside state and private pensions. These products could be a great supplementary retirement vehicle. The Royal Mail in the UK now has one. For many years, insurance provider Conservateur in France has also had one. In the U.S. there is the Teacher’s Retirement Fund, while Canada is rolling out its Variable Pension Life Annuities.

If tontines are made more attractive to investors then they could also garner greater interest worldwide. Professor Hieber is researching how this can be done. For instance, the product could involve a choice to add disability benefits, widow pensions or bequest payments. He and other researchers have shown that tontines can also be designed to offer this.^1,2,3

“Long-term care is another aspect we’ve researched, since those with chronic conditions are often underinsured. Being in bad health makes it unattractive to convert money into a lifelong pension. If payments are boosted for those with long-term care, they may join the scheme. This is fair as those with bad health conditions tend to live shorter lives,” states Professor Hieber.³

So why is there are reluctance to invest in tontines? “So far there are hardly any products on the market. There may be regulatory concerns, and lastly few people know about them,” states Hieber.

“We need to change perceptions now, since such products could be an interesting alternative to avoid poverty in old ages,” he concludes.

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