Modern Tontine Expert GPT
A chat GPT all about Modern Tontines - try it out and tell me what you think!
Example:
Could modern tontines provide a solution to the looming retirement crisis? There seem to be loads of types. What, in your view, is the optimal product?
Yes, modern tontines could provide a solution to the looming retirement crisis. The key issue in retirement planning is ensuring that retirees do not outlive their savings while maintaining an adequate and predictable income. Traditional annuities solve this issue but often come with high costs, inflexibility, and concerns about insurer solvency. Modern tontines, which leverage mortality pooling without requiring an insurance guarantee, can deliver higher expected payouts than traditional annuities while remaining fully funded at all times.
Optimal Tontine Product
From the available designs, the Fair Tontine Plan (FTP) over a ladder of target-dated funds appears to be the best approach. This structure allows:
Heterogeneous Membership: Unlike closed-end tontines, this design remains perpetually open to new members of all ages, reducing adverse selection risk.
Custom Investment Strategies: Members' funds are allocated into a ladder of target-dated sub-funds based on their age and survival probabilities. This ensures that each member’s investment is appropriately managed for both risk and expected return.
Fair Transfer Plan (FTP) Distribution: Upon death, a member’s remaining assets are fairly redistributed among survivors based on actuarial fairness. This avoids the unfair advantage younger members would otherwise have over older ones.
Higher and More Stable Income: Unlike traditional tontines where payouts fluctuate significantly due to mortality experience and market returns, the combination of bond laddering with mortality pooling stabilizes income.
Non-Insurance Structure: Since it does not require an insurer's guarantee, there are no costly reserve requirements or profit margins that reduce payouts, making it a cost-effective alternative to annuities.
Why This Model is Superior
Higher Expected Payouts: The FTP approach increases lifetime payouts compared to traditional annuities because it redistributes mortality credits fairly and efficiently while minimizing administrative and capital costs.
Fully Funded by Design: Unlike traditional pensions, which often struggle with underfunding, a tontine never has an unfunded liability since payouts are strictly based on available assets.
Greater Transparency and Flexibility: Members know exactly how their contributions and mortality credits are allocated, fostering trust in the system.
Risk-Managed Investments: By structuring payouts through bond ladders and equity allocations that match retirement needs, the FTP model reduces payout volatility.
Conclusion
The optimal modern tontine product is an open-ended tontine structured over a ladder of target-dated funds with a Fair Transfer Plan (FTP). This model provides higher payouts, full funding, transparency, and sustainability—all essential in solving the retirement crisis.
Would you like a deeper dive into any specific aspect, such as the mechanics of the FTP, investment structures, or payout projections?
Why is an FTP so hard to explain?
A Fair Transfer Plan (FTP) is conceptually straightforward—it ensures that when a member dies, their remaining assets are fairly redistributed to surviving members. However, explaining how it achieves fairness is where things get tricky. Here’s why:
1. It’s an Actuarial Concept, Not an Intuitive One
Most people understand simple tontines where a fixed pool is shared among survivors. However, an FTP is not a traditional tontine—it dynamically adjusts based on each member’s probability of dying, their remaining assets, and the composition of the survivor pool. Since people aren't used to thinking in terms of actuarially fair bets, explaining it in simple terms is difficult.
2. The Redistribution is Complex
In a basic tontine, if someone dies, their share is just split evenly among survivors. In an FTP, the redistribution follows a restricted transportation problem (a sophisticated mathematical optimization problem). Each survivor receives a proportional share based on:
Their probability of dying.
Their investment in the pool.
The overall composition of the tontine.
This ensures fairness, but it requires non-trivial actuarial calculations.
3. It’s Not a Fixed-Payout Annuity
Most people expect predictable, fixed payouts (like a pension or annuity). FTP-based tontines provide higher payouts on average, but those payouts fluctuate due to:
Mortality experience (who dies and when).
Investment returns (bond ladders stabilize this, but not entirely).
This uncertainty is challenging to explain, especially since retirees often prefer guarantees over probabilities.
4. It’s a Continually Open Pool
Traditional tontines have a fixed cohort that shrinks over time. FTP-based tontines remain open, meaning new members are continuously joining. This keeps mortality credits stable but makes explaining how new entrants affect existing members more complex.
5. The Fairness Constraint is Hard to Grasp
The core idea of fairness in an FTP is that the expected value of each member’s gain is zero. This means:
If you live longer, you gain more than expected.
If you die early, you lose, but your heirs don’t “lose out” because they were never part of the tontine in the first place.
For many people, fairness means equal payouts, not equal expected value, which makes the FTP counterintuitive.
How to Explain it Simply?
One approach is:
Think of it like a lottery, but where everyone gets fair odds based on age and investment size.
Instead of winning a jackpot, survivors get extra income—not randomly, but in a way that keeps the system balanced over time.
It’s like a pension, but without guarantees—higher expected payouts, but with some fluctuation.
Would you like a more detailed analogy or a step-by-step example?
how is it like a restricted transportation problem?
The Fair Transfer Plan (FTP) in a modern tontine is mathematically similar to a restricted transportation problem because it involves optimally redistributing a finite resource (the assets of deceased members) among a set of recipients (the surviving members), following strict fairness constraints.
What is a Transportation Problem?
In operations research, a transportation problem involves distributing goods from multiple suppliers to multiple consumers at minimum cost while meeting demand and supply constraints. The classic example is shipping goods from warehouses to stores efficiently.
How Does the FTP Resemble This?
In an FTP-based tontine, when a member dies, their remaining assets must be distributed fairly among surviving members. This allocation must be actuarially neutral, meaning each survivor receives a fair share based on:
Their probability of survival.
Their current investment.
The overall composition of the pool.
This is analogous to a restricted transportation problem because:
The deceased’s assets are the "supplies" that must be distributed.
The survivors are the "demand points" that receive portions of those assets.
There are fairness constraints ensuring that every survivor receives a proportionate share according to actuarial principles, rather than just splitting it evenly.
Why is it "Restricted"?
A standard transportation problem allows flexible allocation of supply to demand points. In the FTP:
The distribution is restricted by mortality probabilities.
Each surviving member gets a pre-determined share based on a fairness formula (rather than just a cost-minimization strategy).
The system must ensure zero expected gain or loss for each participant over time.
Computational Challenge
The FTP requires solving an optimization problem at each member’s death, ensuring that redistribution maintains fairness across a large, heterogeneous group. This is why it needs significant computing power—it isn't as simple as a direct split among survivors.
Would you like a more technical breakdown of the math behind this?
This really is cool - do try it!