[FabHK]

But pensions are just the same thing as tontines on a larger scale, right? If in a pension scheme people live longer than expected, pensions will have to fall (or contributions rise). What's the difference (except scale)?

The article mentions annuities, which are again, in my understanding, basically the same thing, and highlights that tontines "could be much less costly than annuities because the risks are not taken onto the balance-sheet of an insurer" - not sure I understand that.

The difference alluded to might be that while both annuities and tontines insure against individual longevity risk, the case of unexpected collective longevity is borne by the insurer in the case of annuities, but the insured in the case of tontines.

[Ntrails]

Let's have a quick break down. There are two core types of pension:

Defined Benefit: Provider promises to pay $n per year for the duration of your retirement. Usually inflation linked etc.

Defined contribution: You and your employer put money in an investment vehicle and on retirement that pot can be used in a variety of ways to fund retirement (ie annuity, drawdown etc).

Both Annuites and DB pension payments are largely immutable, short of bankruptcy (of the pension fund / insurer respectively) there is usually no way to alter the benefits due to pension laws. They cannot be modified down once promised. For DB schemes the promise could have been made 30 years ago when interest rates were 10% and life expectency was 10 years on retirement, annuities are promised on retirement so have a better expected accuracy on cost. This is why DB pensions are phasing out at high rates - they're completely unsustainable.

Your core point:

Annuities are just risk pooling, pure ins-sewer-ants, some people die early, some late, and the insurer redistributes such that everyone gets a slice of the pie. The insurer takes on the full risk of the average life being longer.

DB pensions are the same distribution/pooling principle, only it's the pension fund taking on the risk of cohort mortality. Note, there are some really cool longevity swap transactions being done so funds can better guard against this risk.

I don't have any sort of understanding of tontines - limited as I am to a couple of episodes in cartoons for sources. The reason that risks are expensive on an insurers balance sheet is because of capital requirements - all risks need to be provisioned for by holding liquid short term investment grade bonds ("cash") which is a horrific vehicle to hold assets in. Even though they're only holding a % of their exposure - the tontine avoids that cost, hence the "cheaper" argument.

IANAA

[fivestar]

A tontine isn't really a modern thing--they were all outlawed. The only ones I am familiar with are from pop culture and literature. I think they are old world in origin and usually exist within a family or a small group like a fraternity or club of some kind and usually involve some item that can not be split up, such as a fine art or perhaps purloined treasure. The idea is that the last survivor gets the item. That's it. It's not insurance, it's more of a blood oath.

[rocqua]

The difference is what happens when returns aren't as expected.

In a pension, this can only be reflected in the payout up to a point. As such, much of the effect of mis-predicted returns is borne by current pension premiums and the captial buffer of the pension. Same goes for withdrawals, if either more or fewer people survive to benefit from a pension that isn't directly borne by the other pensioners.

With a tontine, the payout is directely linked to total number of beneficiaries and total returns. Any variation is borne directly by the benificiaries. This, means there is essentially no risk in administrating a tontine, as your capital buffer can't 'fall short'. Make the tontine big enough, and the risk averages out.

After amtortizing this risk, a trend-change (e.g. aging population or economic depression) is borne by the administrator in case of a pension and borne by the beneficiaries in case of a tontine.

[fivestar]

An annuity is not a tontine. It is a guaranteed payout for a certain period of time. I'm not a fan, but I suppose they can make sense to some people? Like reverse mortgages, they may help someone keep a certain standard of living at the cost of leaving anything to their heirs.