By John Drachman
In a 1996 episode of “The Simpsons,” Bart discovers Grampa and Mr. Burns were the last living survivors of a “tontine,” a centuries-old insurance scheme that pays participants in a closed pool of assets higher dividends as members of the group die off. The result: Mr. Burns joined a storied tradition of villains looking to bump off the other tontine members to claim the big payoff.
Because surviving investors quite literally profit from the deaths of people they knew, the tontine’s dark potential for twisted tales of greed has proven irresistible to scores of writers from Agatha Christie and Robert Louis Stevenson to P.G. Wodehouse.
Once hugely popular in the U.S., half the households in the country owned tontines at one time. Questionable financial practices on the part of providers however finally led to a government investigation that outlawed the colorful financial instrument in 1906.
Tontines Redux
Today, tontines may prove to be a potential solution for investors in search of a lifetime retirement income strategy.
Buckingham Wealth Partners’ Michael Kitkes says tontines deserve this second look. Citing the work of Associate Professor Moshe Milevsky, Mr. Kitkes explains that “tontines are attractive because they provide the regular income of an annuity and even more income for living members. Because of tontines’ structure and low costs, they produce higher yields than annuities. A key feature of a tontine is that it can never be underfunded, since – unlike many defined benefit pension plans – no explicit financial promises or guarantees are made without assets to back them.”
Enter Blockchain
Olivia S. Mitchell of the Pension Research Council agrees: “Enter fintech venture capitalists who see opportunity in the retirement marketplace, where millions deserve better solutions. To be successful, tontine providers must reestablish the trust of investors, sponsors, and regulators. This is where blockchain technology comes into play.”
As the financial industry continues to adopt blockchain’s distributed ledger features, a permanent record of transactions in chronological order provides the kind of transparency that regulators like. “The transparency of a tontine’s financial ledger,” Ms. Mitchell continues, “allows regulators, analysts, and indeed anyone to audit its operations and status at any time.”
The Bottom Line
In contrast to being opaque and susceptible to manipulation in their literary past, the blockchain-driven tontines of the future will be open, transparent – and downright wholesome.
Regulated in Europe through the European Parliament, the vehicle is common in France. Finding a tontine in the U.S. though takes effort. TontineTrust is getting set to launch MyTontine, a web and mobile app that enables users to pursue their own lifetime income pension based on tontine principles. Pershing Square Capital Management recently launched Pershing Square Tontine Holdings (NYSE: PSTH), a special purpose acquisition company (SPAC).
Even with blockchain’s sunshine to eliminate its dark history, tontines are still speculative. Better check with a financial pro first to see where a tontine would fit to avoid putting your portfolio through unnecessary plot twists.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.
