Optimal retirement income tontines

DOI10.1016/J.INSMATHECO.2015.05.002zbMATH Open1348.91176arXiv1610.10078OpenAlexW279225087MaRDI QIDQ495455FDOQ495455

Authors: Thomas S. Salisbury, Moshe Arye Milevsky 

Publication date: 14 September 2015

Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)

Abstract: Tontines were once a popular type of mortality-linked investment pool. They promised enormous rewards to the last survivors at the expense of those died early. And, while this design appealed to the gambling instinc}, it is a suboptimal way to generate retirement income. Indeed, actuarially-fair life annuities making constant payments -- where the insurance company is exposed to longevity risk -- induce greater lifetime utility. However, tontines do not have to be structured the historical way, i.e. with a constant cash flow shared amongst a shrinking group of survivors. Moreover, insurance companies do not sell actuarially-fair life annuities, in part due to aggregate longevity risk. We derive the tontine structure that maximizes lifetime utility. Technically speaking we solve the Euler-Lagrange equation and examine its sensitivity to (i.) the size of the tontine pool $n$, and (ii.) individual longevity risk aversion $gamma$. We examine how the optimal tontine varies with $gamma$ and $n$, and prove some qualitative theorems about the optimal payout. Interestingly, Lorenzo de Tonti's original structure is optimal in the limit as longevity risk aversion $gammaoinfty$. We define the natural tontine as the function for which the payout declines in exact proportion to the survival probabilities, which we show is near-optimal for all $gamma$ and $n$. We conclude by comparing the utility of optimal tontines to the utility of loaded life annuities under reasonable demographic and economic conditions and find that the life annuity's advantage over the optimal tontine is minimal. In sum, this paper's contribution is to (i.) rekindle a discussion about a retirement income product that has been long neglected, and (ii.) leverage economic theory as well as tools from mathematical finance to design the next generation of tontine annuities.

Full work available at URL: https://arxiv.org/abs/1610.10078

Recommendations

• On the optimal combination of annuities and tontines
• Equitable retirement income tontines: mixing cohorts without discriminating
• Options on tontines: an innovative way of combining tontines and annuities
• Tontines with mixed cohorts
• Tonuity: a novel individual-oriented retirement plan

zbMATH Keywords

mortality riskvariable annuitiesannuitieslongevity insuranceretirement planning

Mathematics Subject Classification ID

Cites Work

• Guaranteed minimum withdrawal benefit in variable annuities
• Abraham de Moivre: Setting the stage for classical probability and its applications
• Title not available (Why is that?)
• Title not available (Why is that?)
• Title not available (Why is that?)
• OPTIMAL INSURANCE DESIGN UNDER RANK‐DEPENDENT EXPECTED UTILITY
• Exchanging uncertain mortality for a cost
• Bringing cost transparency to the life annuity market
• Fundamentals of Actuarial Mathematics
• ACTUARIAL FAIRNESS AND SOLIDARITY IN POOLED ANNUITY FUNDS
• Demand and adverse selection in a pooled annuity fund
• Optimal consumption and portfolio choice for pooled annuity funds

Cited In (37)

• Current developments in German pension schemes: what are the benefits of the new target pension?
• The modern tontine. An innovative instrument for longevity risk management in an aging society
• QUANTIFYING THE TRADE-OFF BETWEEN INCOME STABILITY AND THE NUMBER OF MEMBERS IN A POOLED ANNUITY FUND
• Would you prefer your retirement income to depend on your life expectancy?
• Modern tontine with bequest: innovation in pooled annuity products
• Fair valuation of insurance liabilities via mean-variance hedging in a multi-period setting
• Optimal retirement in a general market environment
• Options on tontines: an innovative way of combining tontines and annuities
• Longevity Risk and Capital Markets: The 2017–2018 Update
• Closed-form solutions for an explicit modern ideal tontine with bequest motive
• Fees in tontines
• Tontines with mixed cohorts
• TARGET VOLATILITY STRATEGIES FOR GROUP SELF-ANNUITY PORTFOLIOS
• Tail index-linked annuity: A longevity risk sharing retirement plan
• MODERN LIFE-CARE TONTINES
• Benefit volatility-targeting strategies in lifetime pension pools
• Pricing participating longevity-linked life annuities: a Bayesian model ensemble approach
• Longevity risk and capital markets: the 2019--20 update
• Tackling longevity risk by means of financial compensation
• Modern tontines as a pension solution: a practical overview
• Actuarial fairness and social welfare in mixed-cohort tontines
• Optimal retirement planning under partial information
• SOLVENCY REQUIREMENT IN A UNISEX MORTALITY MODEL
• Building Better Retirement Income Models
• Optimal investment and consumption strategies for pooled annuity with partial information
• Care-dependent tontines
• Optimal performance of a tontine overlay subject to withdrawal constraints
• EQUITABLE RETIREMENT INCOME TONTINES: MIXING COHORTS WITHOUT DISCRIMINATING
• Optimal dynamic asset allocation for DC plan accumulation/decumulation: ambition-CVaR
• TONUITY: A NOVEL INDIVIDUAL-ORIENTED RETIREMENT PLAN
• Optimal retirement products under subjective mortality beliefs
• Longevity risk and capital markets: the 2015--16 update
• Egalitarian pooling and sharing of longevity risk a.k.a. \textit{can an administrator help skin the tontine cat?}
• Valuation of guaranteed lifelong withdrawal benefit with the long-term care option
• Peer-to-peer multi-risk insurance and mutual aid
• ON THE OPTIMAL COMBINATION OF ANNUITIES AND TONTINES
• Wealth heterogeneity in a closed pooled annuity fund

This page was built for publication: Optimal retirement income tontines

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q495455)