Fintech innovators have the multi-trillion-dollar global retirement income market in their sights. An exciting example is the advent of blockchain-secured tontines as an alternative to traditional pensions and annuities.
What in the World is a Tontine?
A tontine is an investment pool managed in an actuarially fair way, according to a plan for distributing fully-funded payouts to investors. There are two key differences between a tontine and an ordinary investment. First, tontines investments are generally irrevocable. Second, account balances are not transferred to a member’s beneficiaries upon death. Instead, remaining assets are equitably apportioned among the pool’s surviving participants. Accordingly, monies forfeited by those who die increase the returns to those who survive.
These extra returns are referred to as “mortality credits.” In this way, tontines allow members to collect lifetime income by collectively self-pooling longevity risk among themselves. This obviates the need for (and cost of) an insurer as guarantor. Tontines are not insurance, though they can deliver lifetime income similar to payout annuities and pensions. Tontines simply cut out the middleman.
A key feature of a tontine is that it can never be underfunded, since – unlike many defined benefit pension plans – no explicit financial promises or guarantees are made without assets to back them. Critically, tontines make no explicit payout promises: instead, the benefits they pay adjust up or down in a continually self-correcting manner, ensuring that the present value of a tontine’s payouts never exceeds the present value of its assets. Tontines can never become underfunded!
Where do Tontines Come From?
Tontines originated in Europe in 1653 as government-sponsored programs. Later, insurers began to offer them as “tontine insurance” policies. Unfortunately, many of these were non-transparent and some issuers took advantage of this by misappropriating assets. Insurance regulators stepped in to stop the misuse, and tontine insurance faded away in the United States.
