The Longevity Pension Fund’s announcement set off a flurry of responses, with a mix of excitement, curiosity, confusion, and outright contempt and dismissal.
The fund uses an interesting and innovative structure. For a backgrounder on the offering, you might start with this wonderful 2018 post on MoneySense from Jonathan Chevreau: Why Ottawa needs to push for tontine-like annuities.
From that post, referencing a study conducted by retirement expert and academic, Moshe Milevsky says…
“While a tontine revival could make sense around the world—the pension and longevity trends are almost universal—they make particular sense in Canada. The authors state they “believe that Canada has a dearth of products for hedging personal risk, compared to the U.S. market.’ They know of no Canadian insurance company that offers a true deferred income annuity (DIA or ALDA), nor do they offer a variable income annuity or equity-indexed annuities with living benefits: all available in the U.S. The closest we have are segregated funds, and they really aren’t that great as far as guaranteeing lifetime income.”
All said, the Longevity Pension Fund is not a tontine (call it a modern tontine if that makes you happy); it is more like a pension model that is a mutual fund. While there are underlying investment assets, the secret sauce is the mortality credits. From the post on my site, and an explanation offered by Purpose CEO Som Seif…
“It is based on what they call Longevity Risk Pooling. The difference between the required return on the fund (net 3.5%) and the income paid to investors (6.15%+) is because when people buy, they get their income, but as some people redeem/pass away earlier, they leave behind in the pool their returns on their invested capital (they get their unpaid capital paid out upon death or redemption). These returns left behind reduce the total return required to provide the income stream for all investors.”
Stay tuned. Jonathan Chevreau will be back next week with a dedicated post on this new retirement offering.
While there is more research to do, I am in the camp that this pension/mutual fund has the potential to be a game-changer for Canadian retirees.