Tontines Are Alive, and They Could Compete With Annuities in the U.S.

Some retirement policy specialists want to create a new U.S. personal pension program based on tontines.

Financial professionals who paid attention to the history lessons in their early licensing exam courses may have vague memories of tontines being a problem that U.S. life insurers outgrew.

But some policy specialists contend that well-designed, well-regulated tontines could help meet modern workers’ income investing needs.

“Tontines demonstrate the ability to deliver more in retirement income at lower costs than commercial annuities,” Angela M. Antonelli and Christopher Mungiello write, in a report on a November 2021 policy forum organized by the Georgetown University Center for Retirement Initiatives.

What It Means

The desperate hunt for income investing ideas could lead researchers to scour archives, and the world, for product and program ideas.

If there is a people on a small desert island that has come out with an interesting twist on preparing for retirement, economists will track that down.

Meet the Tontine

“A tontine is a longevity-protected income solution where a group of individuals contributes to the same fund,” according to Antonelli and Mungiello’s report on the forum tontine discussions.

“Once individuals are in retirement, the assets in the tontine begin to pay out a portion of the pot to the beneficiaries, but as more people die, the payouts adjust depending on the number of beneficiaries remaining in the pool.”

A carefully regulated insurance company backs a modern U.S. annuity.

In contrast, an insurance company does not back a tontine, but the pooling of many individuals’ pensions can give individuals more security than they would get from ordinary individual retirement arrangements or 401(k) plan accounts, according to the forum report.

The authors note that modern tontines can be offered either through a closed pool or a pool that accepts new members in perpetuity.

Tontines can be provided either as packaged investment accounts or as separate accounts, and they can put target date funds or similar funds on the investment option menu.

The History

Historians credit the Italian Lorenzo de Tonti with either creating the modern tontine or increasing the popularity of this type of investment arrangement, according to An Introduction to the History of Life Assurance.

Lorenzo de Tonti — be better known today as the father of the military officer Henri de Tonti, who helped France explore North America — began trying to persuade the French government to approve a tontine program in 1653.

The French parliament rejected the proposal, but investors managed to organize a similar tontine arrangement in Kampen, in the Netherlands, in 1670, and the French later set up a tontine in 1689.

Later, in the late 1800s, U.S. life insurers sold many tontines.

In 1905, the officials working on New York state’s Armstrong investigation cited the lack of reserves backing tontine policies as a concern, and they pushed insurers to focus on offering annuities backed by reserves, rather than tontines.

Moshe Milevsky resurrected the tontine concept in 2015, in “King William’s Tontine: Why the Retirement Annuity of the Future Should Resemble Its Past.”

Tontines Today

Tontine arrangements continue to be common in France.

Olga Fuentes, Richard Fullmer and Manuel Garcia-Huitron have suggested, in a research paper brief included in the Georgetown forum report, that Chile could use a tontine-based retirement income product framework to help provide income for retirement-age individuals.

Fuentes and her colleagues suggested that offering a tontine-based system would complement the country’s private annuity market rather than distorting it.

Canadian policymakers have also promoted tontine-based retirement savings arrangements.

In the United States, the forum participants agreed, the dominance of the individual retirement arrangement and the 401(k) plan could crowd out proposals for alternatives.

“Nevertheless, the experience of other countries might spur innovation and lead to embedding some of the pooling structures as part of the customized solutions adopted,” Antonelli and Mungiello wrote.

On LinkedIn, the list of retirement services players “liking” the paper as a whole, although not necessarily expressing an opinion about any of the ideas described in the paper, includes Michael Finke, who is chair of economic security at The American College of Financial Services, and David Blanchett, head of retirement research at PGIM DC Solutions.

Pictured: Henri de Tonti, an Italian who lived from about 1649 through 1704 and helped France explore North America, was the son of Lorenzo de Tonti. Lorenzo de Tonti — who left fewer portraits than his son — is often described as being the father of the modern tontine life insurance market. (Image: Nicolaes Maes/History Museum of Mobile/Wikimedia Commons)