The Longevity Pension Fund’s announcement sparked a flurry of reactions, with a mixture of excitement, curiosity, confusion, and outright contempt and dismissal.
The fund uses an interesting and innovative structure. For background on the offering, you could start with this wonderful 2018 post on MoneySense by Jonathan Chevreau: Why Ottawa needs to push for tontine-like pensions.
In this post, Moshe Milevsky refers to a study carried out by a pension expert and academic and says …
“While a tontine revival could make sense around the world – the retirement and longevity trends are almost universal – they make particular sense in Canada. The authors state that they “believe that Canada lacks personal risk protection products compared to the US market”. You are not aware of any Canadian insurance company that offers a true deferred pension (DIA or ALDA), nor does it offer a variable pension, or stock-indexed pensions with essential benefits: all available in the US. and they’re really not that great when it comes to lifelong income. “
All in all, the Longevity Pension Fund is Not a tontine (call it a modern tontine if that makes you happy); it’s more of a pension model that’s a mutual fund. While there are underlying assets, the secret is mortality loans. From the post on my website and a statement by Purpose CEO Som Seif …
“It’s based on what they call longevity risk pooling. The difference between the fund’s required return (3.5% net) and the income paid to investors (6.15% +) is that when people buy it, they get their income, but since some people repay / die earlier, they leave behind in them bundle their returns on their invested capital (they get their unpaid capital paid out in the event of death or repayment). These lagging returns reduce the total return required to provide the stream of income for all investors. ”
Stay tuned. Jonathan Chevreau will be back next week with a special post on this new retirement offer.
While there is more research to be done, I believe this pension / mutual fund has the potential to transform Canadian retirees.