Optimal retirement income tontines

DOI10.1016/J.INSMATHECO.2015.05.002MaRDI QIDQ495455zbMATHOpenAlexFDO

Authors Thomas S. Salisbury, Moshe Arye Milevsky

Publication date 14 September 2015

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

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

zbMATH Keywords

mortality riskvariable annuitiesannuitieslongevity insuranceretirement planning

Mathematics Subject Classification ID

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.

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Cited in

(37)

• 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
• Modern tontines as a pension solution: a practical overview
• Longevity risk and capital markets: the 2015--16 update
• Longevity risk and capital markets: the 2019--20 update
• Optimal performance of a tontine overlay subject to withdrawal constraints
• Optimal retirement planning under partial information
• Would you prefer your retirement income to depend on your life expectancy?
• Equitable retirement income tontines: mixing cohorts without discriminating
• Optimal dynamic asset allocation for DC plan accumulation/decumulation: ambition-CVaR
• 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
• Benefit volatility-targeting strategies in lifetime pension pools
• Peer-to-peer multi-risk insurance and mutual aid
• Tackling longevity risk by means of financial compensation
• Tonuity: a novel individual-oriented retirement plan
• TARGET VOLATILITY STRATEGIES FOR GROUP SELF-ANNUITY PORTFOLIOS
• Pricing participating longevity-linked life annuities: a Bayesian model ensemble approach
• Optimal retirement products under subjective mortality beliefs
• Actuarial fairness and social welfare in mixed-cohort tontines
• On the optimal combination of annuities and tontines
• Optimal retirement in a general market environment
• Solvency requirement in a unisex mortality model
• Care-dependent tontines
• Building Better Retirement Income Models
• Tail index-linked annuity: a longevity risk sharing retirement plan
• Optimal investment and consumption strategies for pooled annuity with partial information
• Wealth heterogeneity in a closed pooled annuity fund
• Modern life-care tontines
• Fair valuation of insurance liabilities via mean-variance hedging in a multi-period setting
• Options on tontines: an innovative way of combining tontines and annuities
• Egalitarian pooling and sharing of longevity risk a.k.a. \textit{can an administrator help skin the tontine cat?}
• Modern tontine with bequest: innovation in pooled annuity products
• Valuation of guaranteed lifelong withdrawal benefit with the long-term care option
• Quantifying the trade-off between income stability and the number of members in a pooled annuity fund

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