Tontines are making a comeback and no, it's not a movie

The tontine is dead. Long live the tontine.

The tontine, an obscure, yet historically significant financial product, could very well be making a comeback, with offerings popping up in the global retirement marketplace as of late. Boulder, Colorado-based Savvly introduced its spin on the tontine last week, while Toronto-based Guardian Capital rolled out its version in early September, joining other recent releases in Australia and South Africa.

Both companies designed their offerings to combat longevity risk — the danger of investors outliving their money — and both serve that purpose exceptionally well.

The problem that inevitably arises with tontines, which has kept such investment vehicles from wider acceptance, is the somewhat distasteful — and in two states illegal — aspect of the tontine’s payouts being directly connected to the mortality of others.

“The world has entered its tontine moment,” said Moshe Milevsky, a finance professor at York University’s Schulich School of Business who worked with Guardian to design its GuardPath lineup. “There are more and more insurance companies, pension funds and straight-up mutual fund companies launching tontines.”

TONTINES THROUGH TIME

A tontine enables a group of investors to pool their money upfront and receive regular dividends over time in proportion to one’s contribution. The twist that differentiates a tontine from your run-of-the-mill annuity is that as tontine participants pass away, their share of the returns rises and is split among the surviving investors.

One other idiosyncrasy is that the last remaining investor in the tontine pockets the entirety of the dividend. The principal, it’s worth noting, is never repaid. And when that last remaining investor passes, the investment returns to the government or company that created the tontine.

It’s also worth mentioning that tontines employ age tiers because younger people generally have a longer life expectancy than older people. Savvly and Guardian, for example, use computer-generated algorithms and actuarial calculations to ensure their respective investors are placed in pools with similarly aged cohorts.

Without digging too deep into its history, the tontine is named after Neapolitan banker Lorenzo de Tonti, who brought it to France in 1653. Tontines were initially employed to finance wars, but were later used as retirement investments, and as a means to finance new buildings both in America and Europe.

Questionable practices by life insurers led to the banning of tontines in the U.S. in 1906. In fact, in Louisiana and South Carolina, laws prohibiting tontines remain on the books to this day.

Perhaps the best-known case against the tontine was its characterization in the 1963 film "Charade," later spoofed by The Simpsons. In the movie, a group of American soldiers enter a tontine-like agreement during World War II to claim an ill-gotten fortune, with the last living member getting the gold. The former band of brothers eventually turns fratricidal, killing each other before any of them could walk away with the riches.

BACK FROM THE DEAD

Of course, Cary Grant got away with Audrey Hepburn at the end of the movie, but it still served to put one more nail in the tontine coffin. It's a coffin that stayed relatively shut until now.

“They are making a comeback because of the growing emphasis on retirement income," Milevsky said, adding that tontines “by definition” address the problem of decumulation. He also pointed out that they offer investors a nice bump in what many retirees still consider a low-interest-rate environment.

What about the idea that tontines are ghoulish, or could motivate one pool member to murder another? That's pure movie madness, Milevsky said.

“Historically that never happens,” said Milevsky, who has done the research, digging through the archives to write numerous books and articles on the subject. “There is no documented evidence of anybody even being accused of murder to collect on a tontine other than in movies and fiction.”

A TONTINE BY ANY OTHER NAME

Savvly’s offering is structured as a private placement open only to accredited investors. It utilizes a pooled equity index fund that benefits those who reach their predetermined payout age — the earliest for men being 70 and for women 75.

Under Savvly’s model, participants allocate a small portion of their investment portfolio (5% to 10% max) into an investment pool, which is a limited partnership. The funds are then held by an SEC-regulated, independent custodian and are invested in the Vanguard S&P 500 ETF.  

When a Savvly investor reaches their own payout date, their account gets access to an amount equal to the index fund’s value of their account — plus their share of the longevity pool created from the forfeitures of the other investors who leave Savvly before their own payout, either voluntarily, by withdrawing early, or involuntarily, by passing away.

Savvly investors have the option of requesting an in-kind transfer to their brokerage and can take advantage of the tax benefits of a limited partnership. Investors can also decide to extend the payout date into the future. Finally, investors can join Savvly and then change their mind, with zero early withdrawal penalties imposed for the first two years.

“Our new retirement-focused platform utilizes the same risk-pooling concept behind most annuities, pension plans and Social Security, but adds the returns of the stock market and the tax efficiency of a limited partnership. We have adapted this concept so accredited investors and their financial advisers can take advantage of its features as part of their retirement planning and estate management,” said Dario Fusato, Savvly’s co-founder and CEO.

Prior to Savvly, Fusato spent decades with McKinsey and in the insurance industry working on capital management, data analytics, and large commercial insurance brokerage. As to why he decided to launch the product now, Fusato says he wishes he had introduced it to the market earlier.

“The American population is aging and for many, Social Security won't be enough," he said. "The market needed a new product that requires only a minimum financial commitment.”

All that said, Fusato remains hesitant to call his investment pools “tontines” despite all the similar attributes.

“Tontine funds are different because they are an old concept where people used to put money in, and then they couldn’t take it out. Tontines require cohorts of people of the same age, trusts, a lifetime commitment and a large portion of someone’s net worth to generate the necessary income, as they are basically annuities with mortality credits," he said. "In tontines, the oldest person always wins, while with Savvly that is not the case because each client decides her own payout age.”

Milevsky, on the other hand, is unabashed. “I don’t care what you call it, the DNA is pure tontine,” he said.