Tag Archives: tontines

Retired Money: How the financial industry may use ALDAs and VLPAs as Longevity Insurance

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Finance professor Moshe Milevsky welcomes industry’s implementation of academic longevity insurance theories

My latest MoneySense Retired Money column looks at two longevity-related financial products that the industry may develop after the road to them was paved in the March 2019 federal budget. You can access the full column by clicking on the highlighted headline: A new kind of annuity designed to help Canadian retirees live well, for longer.

Once they are created by the industry, hopefully in the next year, these new products will introduce an element of what finance professor Moshe Milevsky has described as “tontine thinking.” In the most extreme example, a tontine — often depicted in fictional work like the film The Wrong Box — features a pool of money that ultimately goes to the person who outlives everyone else. In other words, everyone chips in some money and the person who outlives the rest gets most of the pot. As you can imagine at its most extreme, this can lead to some nefarious scenarios and skulduggery, which is why you occasionally see tontines dramatized in film, as in The Wrong Box, and also TV, as in at least one episode of the Agatha Christie TV adaption of Miss Marple.

Fortunately, the Budget doesn’t propose something quite as dramatic as classic tontines but get used to the following two acronyms if and when the insurance and pension industries start to develop them: ALDA is an acronym for Advanced Life Deferred Annuity.  As of 2020, ALDAs could become an investment option for those currently with money invested in registered plans like RRSPs or RRIFs,  Defined Contribution (DC) Registered Pension Plans and Pooled Registered Pension Plans (PRPPs).

The other type of annuity proposed are Variable Payment Life Annuities (VPLAs), for DC RPPs and PRPPs, which would pool investment risk in groups of at least 10 people. Not quite tontines in the classic academic sense but with the pooling of risk VPLAs certainly have an element of “tontine thinking.”

The budget says a VLPA “will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VLPA annuitants.” That means – unlike traditional Defined Benefit pensions – payments could fluctuate year over year.

There is precedent for pooled-risk DC pensions: The University of British Columbia’s faculty pension plan has run such an option for its DC plan members since 1967.

The budget said Ottawa will consult on potential changes to federal pension benefits legislation to accommodate VPLAs for federally regulated PRPPs and DC RPPs, and may need to amend provincial legislation. But it’s ALDAs that initially captured the attention of retirement experts, in part because of its ability to push off taxable minimum RRIF payments.

Up to $150,000 of registered funds can go into an ALDA

An ALDA lets you put up to 25% of qualified registered funds into the purchase of an annuity. The lifetime maximum is $150,000, indexed to inflation after 2020. Beyond that limit you are subject to a penalty tax of 1% per month on the excess portion. Continue Reading…

Retired Money: Tontines moving from academia to Retirement marketplace

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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. Continue Reading…

Retired Money: Finally, a “Tontine” proposal for true Longevity Insurance

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Even if they’ve saved a million dollars, retiring baby boomers lacking Defined Benefit plans and their inherent longevity insurance justly fear outliving their money. It’s been said some fear this more than death itself.

The latest instalment of my MoneySense Retired Money column looks at an intriguing proposal made this week by the CD Howe Institute. Click on this highlighted text for the full link: An annuity that pays off — if you live long enough.

CD Howe has proposed the creation of a “pooled risk insurance” scheme called LIFE, which has all the hallmarks of a 17th century concept known as the tontine.

Moshe Milevsky has long suggested tontines as one remedy for outliving our money

Annuity expert Moshe Milevsky — also a finance professor at the Schulich School of Business and author of books like Pensionize Your Nest Egg — says LIFE is a “great idea.” He actually made the case for the resurrection of “tontine thinking” three years ago in a book I reviewed at the time also at MoneySense: Tontine: Retirement Plan of the Future? 

The CD Howe paper (Headed for the Poor House) authored by Bonnie-Jeanne MacDonald doesn’t actually come out and call LIFE a tontine scheme but it certainly appears to contain the DNA of one.

LIFE stands for Living Income for the Elderly. The idea is that by sharing mortality risk, those who make it to age 85 start to receive monthly payouts for as long as they live, funded in part by the less fortunate members who die between 65 and 84. Apart from normal investment returns, the lucky survivors would enjoy the “added return” of the mortality premium.

Continue Reading…

Weekly Wrap: We ARE saving enough for retirement; CPP & Social Security Redux, frugal millionaires

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MalcolmHamilton
Malcolm Hamilton at MoneySense’s fall Retiring Rich event

Retired actuary and retirement guru Malcolm Hamilton this week released a C.D. Howe paper entitled Do Canadians Save Too Little? The Hub’s initial take ran Thursday here: It’s an exaggeration to say we are saving too little for retirement.

Hamilton also wrote a summary of the paper in the FP Comment section of the Financial Post on Thursday, bearing the title False pension assumptions on Canadian savings.

We at the Hub have always said frugality is the key to saving and ultimately building wealth. But according to the most-emailed New York Times article this week, it’s tough for millionaires to dump the frugal habits that got them there: Millionaires who are frugal when they don’t have to be.  Shades of the book, The Millionaire Next Door!

More (much more!) on Voluntary CPP Continue Reading…

What’s the difference between life annuities and tontines?

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Here’s my latest MoneySense blog, entitled The case for tontines: part 2. It follows Part 1, which ran a week ago both at MoneySense.ca and here at the Hub: Tontine: Retirement Plan of the Future? 

After the first piece ran and even after reading both of Milevsky’s two latest books from cover to cover — one is essentially about annuities, the other about tontines — I realized I was still hazy about the exact difference between life annuities and tontines. I figured that if I was a little uncertain, so would many readers be.

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Moshe Milevsky

Moshe responded with a quick clarification of the two major differences, as well as sending me a recent presentation he made that touched on both concepts. Whether all these concepts could be incorporated into the ongoing debate about an expanded and voluntary CPP remains to be seen, but see today’s other guest blog by Pierre Laporte, entitled Voluntary CPP is an old idea … has its time finally come?

Not anywhere near as old as tontines, mind you!

For archival and one-stop shopping purposes, we also show the blog below, with a few subheads and images added: Continue Reading…