What is a modern tontine and why are some researchers proposing revival?

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AcadiFi · Accepted Answer

A tontine is a pooled longevity arrangement where participants contribute capital to a collective fund; each member receives periodic payments, and when a member dies, their share is forfeited to surviving members. Payments naturally rise over time as the pool shrinks. Unlike annuities, tontines carry no insurer credit risk because there is no guarantee — payments depend purely on realized mortality and investment returns within the pool. Modern proposals (Milevsky's tontine-like instruments, Canada's Purpose Longevity Pension Fund) revive the structure with transparent accounting, open-ended membership, and investment in diversified bond/equity portfolios. Example: 1,000 sixty-five-year-olds each contribute $50K into a tontine fund of $50M. Annual distribution equals the investment income plus a mortality-credit component from forfeited shares. In year 1 with 15 expected deaths, $750K of forfeited shares are redistributed, adding roughly 1.5% to the payment yield. By year 25, with only 300 survivors, the same investment return plus larger mortality credits produce a much higher per-survivor payment. ```mermaid flowchart TD P[1000 members
$50K each] --> F[Fund $50M] F --> Y[Investment income] F --> M[Mortality credits
from deaths] Y --> D[Distribution] M --> D ``` Advantages: no insurer credit risk, lower fees than commercial annuities, transparent mortality credits. Disadvantages: no guarantee so payments can fall if the pool does not age as predicted; illiquidity; adverse selection (healthy people self-select in); regulatory obstacles in many jurisdictions. CFA L3 notes tontines as a theoretical benchmark for pure mortality-credit capture without insurance-company margins.

What is a modern tontine and why are some researchers proposing revival?

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