Joseph M. Belth Tontine Rebuttal

gm-bioI’m disappointed that the insurance industry’s venerable Joseph M. Belth(Belth), in his recent Insurance Forum blog article: “No 127: Tontines Are Not Likely to Stage a Comeback” elected to not support a possible revival of a tontine designed income financial arrangement. Moshe Milevsky (Milevsky), a professor at the Schulich School of Business and a member of the Graduate Faculty in the Department of Mathematics and Statistics at York University in Toronto and an annuity industry maven, in his new 2015 book; “King William’s Tontine” supports a Tontine thinking revival. Belth cites two main objections.

The first objection is individuals shouldn’t “directly” benefit from the deaths of others. However, this pricing mechanism already exists in the annuity industry but insurance actuaries currently calculate mortality credits using an “averaging method” to “smooth” out company mortality estimates. Just because Tontines don’t smooth mortality estimates, I don’t believe participants in a nationally accessible Tontine would more directly benefit from the deaths of others than what they already experience in a normal mortality pooled income annuity.  The annuity mortality averaging method obscures income annuity pricing (a Belth side objection).  However, a tontine design would clearly position gains due to earnings and gains due to survival eliminating this Belth side objection.

The second objection is there is no beneficiary value. However, Belth recognizes the higher annual incomes produced by the absence of beneficiary eligible payments (period certain).  I have seen Tontine income estimates of 15%-20% premium cost savings for any given benefit or conversely 15%-20% higher benefits for any given premium vs. standard mortality pooled annuities for the same age and gender individual.  In today’s low interest rate environment, this is sufficient economic incentive to consider the Tontine design for a portion of an individual’s retirement income need.  Certainly, Tontine utilization shouldn’t be an all or none consideration as indirectly positioned by Bleth.  Individuals purchasing a Tontine type arrangement, as with a life annuity, should have plenty of other assets/wealth to leave to his/her beneficiaries if so desired.

The life insurance industry, as a whole, continues to be crushed by the persistently low interest rate environment and increasing longevity estimates.   In the aftermath of 2001 then again in 2008 and the following interest rate collapse, guarantees have become tremendously more expensive.   Tontines eliminate annuity reserving issues and therefore can support higher annual payments albeit with payments not guaranteed from year to year.

Belth certainly doesn’t address the very important social role of maintaining annuitant wealth under possible adverse circumstances that life annuities and Tontines provide. These very specific mortality pooled designs, along with pensions (that hardly anyone currently has) and social security (not enough of) are consumers’ last line of defense against dissipation issues that may cause them to become dispossessed prior to the end of life compelling them to fall back on public general welfare and family support systems.

Systematic withdrawal schemes only work out over the long haul of retirement if they can stay in-force and nothing adversely happens to the consumer. After retirement, if you get into a personal jam for wherever reason that has financial consequences, you are really going to wish you did that mortality pooled annuity or Tontine that your insurance agent recommended way back when and not that investment portfolio your investment manager recommended.  Mortality pooled annuities and Tontines are only effectively valuable to their owners and not to third parties so they tend to stick around for the long haul.  Hopefully, to really secure your future income, you will have done some of each; mortality pooling and investments.

Milevsky via his 2004 white paper publication regarding advanced life delayed annuities (ALDAs) helped coax the annuity/retirement industry to bring back the retail deferred immediate annuity aka the deferred income annuity (DIA), now a multi-billion dollar industry. I have been hoping some deep pocketed financial services organization would take up this newest Milevsky work and attempt a modern Tontine.  Hello out there, interest rates are still crushing us!  I’m hoping for that intrepid financial services firm, in the retirement income space, that wants to leap and not just stroll forward.

See my Milevsky book review: “King William’s Tontine by Moshe A. Milevsky A Life Insurance Industry -Shot Across the Bow!” posted April 28, 2015 on my blog.

4 comments

  1. Mark Chamberlain says:

    Gary,
    Thanks for sharing your rebuttal points. I’m wondering if there might also be similarities to commonly accepted ideas embedded in Defined Benefit plans. If legacy benefits and mortality pooling were issues in that world, we might never have had the DB plan at all.

    • Gary Mettler says:

      Mark, certainly the modern defined benefit pension plan has its founding roots imbedded in the old Tontine design. Pensions like their immediate annuity cousins use an actuarially determined mortality smoothing technique to even out future year to year benefit payments. However, Milevsky does point out that some countries like Sweden and others (but Sweden is by far the largest) use a Tontine based retirement income system. So, cultural differences aside, it can be done.

  2. Mark Chamberlain says:

    Seems difficult to find anyone who disparages the DB plan’s role in protecting retirees from poverty. If anything, most decry the loss of the traditional pension for average Americans outside of union employment. Also, I just finished reading an interview with a financial business luminary who states there are only two results in retirement: either your money outlives you, or you outlive your money. A possible third option, that your money lasts exactly as long as you do, is an idea too often subjugated for Tontines to get serious consideration.

    • Gary Mettler says:

      Mark, certainly no one is suggesting we actually revive a 1693 Tontine arrangement. However, given where we are today with excruciating low interest rates and ever increasing mortality estimates, thinking “outside the box” regarding mortality sharing is certainly warranted. Milevsky made some very pertinent suggestions regarding major overall hauls necessary to move such a financial arrangement into the 21st century. We have to do something. Even if future interest rates improve another decade could possibly slip by and with ever lengthening survival estimates, look for the continued persistence of historically low annuitizations rates or withdrawal rates for lifetime income riders. And what age 70ish+ individual has time to wait. The good thing is it doesn’t have to be a life insurance company manufacturer. Any financial services company with enough competitive temerity could take a shot at it.

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