The components of retirement security are often described as a three-legged stool in which each leg represents a source of old-age security:

Governmental social security provides a first-level foundation against poverty in old age.

Employer-sponsored workplace pensions provide a second-level source of continuing income to replace some portion of employee paychecks after retirement.

Voluntary retirement savings programs — which likewise may be employer-sponsored — allow individuals to save additional amounts to achieve even higher levels of retirement security as needed.

Problems with Social Security and Workplace Pensions

Most social security programs suffer from unfavorable demographics and significant under-funding problems. Any politicians that ran on a platform of drastic pension cuts & higher taxes would quickly find themselves looking for a new career.

Workplace pensions appear even worse in light of a long secular trend in which employers have abandoned defined benefit (DB) plans. Many of the DB plans that still exist are materially underfunded, raising questions over whether they, too, will soon be abandoned.

Carillion, the largest construction company in the UK & the major government contractor recently went bankrupt with an estimated pensions deficit of over $3bn affecting 28,000 families. General Electric has reported a pension black hole in excess of $31BN affecting over 620,000 families for 2016 and it is expected that this has deteriorated further since.

It is alarming that the burden of retirement security is increasingly transferred away from institutions (governments and employers) and onto individuals, who having suffered through the 2008 banking crisis are the least able to afford to take up the slack.

How did we get here?

Arguably, the most significant cause of this crisis lies in the original benevolent idea that Social Security and Workplace Pensions should offer guaranteed fixed incomes in retirement. A wonderful idea… who wouldn’t want that?

The problem is that real world involves uncertainties and risks that are very difficult to forecast and can be very expensive (if not impossible) to hedge. That’s a problem! When a party makes an absolute guarantee, they incur risk. If things go bad (e.g., unexpected increases in human longevity, non-existent interest rates, severe recessions, debt crises), someone is going to feel it. When it gets bad enough, the pain ultimately falls to taxpayers (bail outs) and pensioners (benefit cuts).

Economist and Nobel Laureate William Sharpe best summises the origins of the pensions problem as due to, “magical thinking and bad economics.”

This crisis is going to be massively expensive to fix, in fact prohibitively so.

To wit: a recent report from Citibank estimated that the public pension deficit in the 20 largest OECD countries is now $78 trillion! And that figure does not even include private pensions… or the public pensions of non-OECD countries.

No one wants to see these important institutions collapse, and a number of ideas have been proposed to shore them up. Most of these ideas peck at the edges of the problem, rather than the core. In other words, they do not solve the underfunding problem, but simply alleviate it, at best.

Enter Tontines

Tontine Pensions seek to address the core issue head on. The tontine solution discards the fanciful notion of a guaranteed fixed income benefit. Instead, a tontine’s income benefit continually adjusts to maintain full funding status at all times. Tontine pensions eliminate underfunding risk by eliminating the hollow promise of a guaranteed fixed payout. Instead, they take whatever has been contributed into them and then pay out to participants what is actuarially fair — no more and no less. Tontines eschew magical thinking and bad economics for realism and common sense.

Of course, whilst tontines fully share the benefits of any excess performance, it is also true that a tontine’s income stream may decline in response to falling markets or unexpected increases in lifespans. Is that a problem? If the decline is severe, then yes, of course. However, it is likely that pensioners can easily tolerate fractionally small monthly adjustments, especially if it means that they and future generations will not be saddled with the seismic benefit cuts which can be expected when the current fixed income systems finally causes the system to collapse under its own weight.

Keep in mind that a tontine provider can mitigate the variability in tontine pension payouts by investing conservatively and using liability-relative portfolio construction techniques, or by using conservative mortality and payout assumptions (or both, if desired). Naturally, doing so reduces upside potential, so there is a trade-off decision to be made. Regardless, the solution will remain fully funded at all times — it is just a matter of how much variability is desired of the payout stream. We can work with pension plans, both public and private, to craft solutions tailored to their specifications.

About TontineTrust

Tontine Trust Limited is a not-for-profit developing a patent-pending retirement savings platform which is seeking to issue internationally regulated ALWAYS-fully-funded retirement savings products , secured on the blockchain and managed autonomously by a Robo-Actuary.

For further information see https://tontinetrust.com

To speak to the TontineTrust team, please contact:

Email: prosper@tontinetrust.com

Telegram: https://t.me/TontineTrustSupergroup

Twitter: https://twitter.com/TontineTrust