I riffed on Tontines here a dozen years ago https://t.co/HRWCp4zNB8 From 2010 my @ISRS_UCL action research has covered mutual legal designs of modern scalable risk, cost, surplus & production sharing agreements. Trust Law is very far from modern: we can do a lot better than that
— Chris Cook (@cjenscook) January 4, 2022
The article in the tweet was written by Chris Cook in 2009. In the intervening years, the intermediation by insurance companies in the payment of pensions has changed but “rents” have not diminished.
The DB endgame has ensured that , other than a handful of schemes entering the PPF, most DB assets and liabilities are heading for insured buy-out. Our DC pensions generally sit in insured funds on platforms owned by insurance companies and what money that is being drawn from pots, is either being swapped for annuities or drawn down from Sipps run by insurance companies or using their funds.
The Dead Pool concept is right
In this article, Cook’s particular target is the insured annuity and the arrow he shoots out is a variant on the tontine where a pool of pensioners builds over a few years, ensuring that all money remains within the pool of retirees
I suspect that Cook will be disappointed by the lack of progress towards a disintermediated pension system where ‘excess “orphan” funds will no longer come about which may then be appropriated by shareholders‘.
Cook’s economist eye falls on annuities and he considers how such a Dead Pool mechanism might operate.
Possibly the pool could be subdivided as between “cohorts” born in a particular year, and then pooling would be operated between members born in that year.
When a member dies then a part of his/her proportional equity share in the pool would go to his estate, with the balance remaining in the pool. As the cohort diminishes with time, it might be necessary to combine cohorts into (say) five or ten year cohorts.
There would be a cut off – retirement – date when premium payments in cease, and dividend payments out begin. This process would have to be managed by actuaries in the same way that annuities are managed now. But one of the beneficial aspects would that excess “orphan” funds will no longer come about which may then be appropriated by shareholders.
This is an attempt to return to pure mutuality, where there is a partnership between savers and spenders, aka investors and pensioners. Cook explains this as
a transition to direct connections between end users – in this case pension investors and pension recipients – and I believe that partnership-based frameworks will enable such a transition.
Pensions can be self-sustaining
There’s plenty I don’t agree with Cook about. His view of partnerships assumes the elimination of intermediation from financial services companies supplying capital to make pensions happen.
Or as Cook puts it
I applaud your work. Tontines are but one application of of quadripartite #Nondominium mutual framework agreements extending to Property & Money relationships and direct pension investment in development & operation of productive assets. This is recent https://t.co/qGCQCpMnbb
— Chris Cook (@cjenscook) January 5, 2022
But we can only get to such mutual framework agreements with the help of capital.
Capital is integrated into every aspect of the UK pension system – even Nest has had to be bank-rolled.
But it took a tax-payer loan of £1200m to get Nest to the position it is in today and were it not for that capital and the capital behind the insurance sector, auto-enrolment would not have happened.
We need to ensure that the rents being extracted by those who have provided capital on the way up, are not excessive once the saving is over. Part of the way to doing this is for trusts to establish the kind of self-annuitizing pools that Cook had in mind in 2009. But we can’t expect these to be organized independently of commercial insurers.
The public trust in the insurance industry is not broken and indeed we are now used to having our pension pots managed by the likes of L&G, Scottish Widows, Phoenix Standard Life and Aviva.
The partnership has to be between trustees , IGCs and GAAs on the one hand, and those representing the interests of shareholders on the other (for mutual insurers like Royal London and People’s Pensions – read “stakeholders”). The necessary tension is between the commercial pressure to execute efficiently and the fiduciary pressure to distribute fairly.
This is because no matter how desirable a pure mutual system looks, it is not going to get public support unless it is backed by a substantial covenant – tax-payer or mutual society or shareholder capital.