Retired Money: Tontines moving from academia to Retirement marketplace

Annuity and Tontine expert Moshe Milevsky

My latest MoneySense Retired Money column, just published, looks at how the 17th century “tontine” scheme may help solve 21st century angst about outliving your money in Retirement. Click on this headline to retrieve the whole article: Why Ottawa needs to push for tontine-type annuities.

We have described Moshe’s pioneering work in annuities and tontines before: the York University finance professor and prolific author has published entire books on tontines and annuities. As he outlines in Pensionize Your Nest Egg, Milevsky has always emphasized the distinction between what he calls “real” pensions (guaranteed-for-life Defined Benefit pensions) and capital-appreciation vehicles like RRSPs or Defined Contribution plans, which have to be “pensionized” (or “annuitized”)before they can be considered to be “real” pensions.

Milevsky and three fellow Canadian co-authors have just published a paper partially funded by the pension section of the U.S. Society of Actuaries,entitled Annuities versus Tontines in the 21stCentury: A Canadian Case Study. (The other authors are Thomas Salisbury, Gabriela Gonzales and Hanna Jankowski). In it they make the case for the reintroduction of retirement investment income tontines (RITs) into the modern financial supermarket.

For those who haven’t seen the film The Wrong Box, tontines are mortality-linked investments that superficially resemble life annuities but were quite popular in Europe in the 17thand 18thcentury and later America. But they fell into disrepute by the early 20thcentury, in part because of the kind of sordid image they received, often popularized by novels and films like The Wrong Box. The “longest-living” winner takes the pot, which is why creative artists have often used this as a plot device involving skulduggery.

In essence, tontines pool capital and distribute all the capital and investment gains to those who live the longest: those unlucky enough to die early forfeit the capital (i.e. their heirs forfeit it), while those who live the longest benefit with super returns.

While a tontine revival could make sense around the world – the pension and longevity trends are almost universal – they make particular sense in Canada. The authors state they “believe that Canada has a dearth of products for hedging personal risk, compared to the U.S. market.” They know of no Canadian insurance company that offers a true deferred income annuity (DIA or ALDA), not do they offer a variable income annuity or equity-indexed annuities with living benefits: all available in the US. The closest we have are segregated funds, and they really aren’t that great as far as guaranteeing lifetime income, Milevsky told me.

Ironically, one reason Canadians have much less choice in the retirement income financial supermarket is that DB pensions have long been prevalent: at least in Government circles. Besides, Canada is the country that first invented the exchange-traded funds (ETFs) that are now supplanting mutual funds. Why not follow up with a revolution in annuities and tontine-like retirement vehicles?


I hit 65: party time?

Meanwhile, the Financial Post just published an article in which I reflect on reaching the magic milestone of age 65. It was in the Wednesday paper this week or you can read it online by clicking on the highlighted headline: Ain’t no party like an OAS party: Retirement guru Jonathan Chevreau on turning 65.

I should explain that I actually turned 65 on April 6th but had scheduled a hockey tournament that weekend. So we have picked May 26th for the party, and since the first OAS cheque is scheduled to arrive the prior week, decided to bill the party as an OAS one rather than an official birthday party. I know, more information than anyone needs to know about!

While coincidental, I also did an interview with CBC radio about the phenomenon of turning 65: I will post the link once it is available.

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