| 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 |