A modern tontine

Choose the money to commit

The agreement can cover part of a pension. The chosen contribution is spread across the whole ladder; savings outside it remain available for other purposes. Within the ladder, each rung has an agreed date on which its sharing commitment ends.

One rung for each year of income

A contribution is spread across the whole ladder. One rung prepares for the first payment year, another for the next, and so on. Distant rungs have more time for investment growth. Those approaching payment move towards assets suited to the cash they must provide.

The worked example starts with a £100,000 contribution at age 65 and forty annual payments. Consider the rung intended for income at age 85. It remains in the sharing pool until age 84, then moves into an individual distribution account for payment a year later.

Release ends that rung’s mortality commitment. Its money then belongs to the member or their beneficiaries, while later rungs continue to participate in sharing. The target is used to plan the investment; the payment depends on the assets available at release and the distribution policy.

Follow the £100,000 from opening investments to actual payments.

How longevity sharing helps

Members agree that, on their death, the assets still committed to the pool will be allocated to surviving members. In return, they receive allocations while they remain eligible. Each receipt is invested across the recipient’s remaining ladder.

Choosing the contribution means choosing how much to commit to future income, and how much to retain outside sharing for flexibility and inheritance.

Sharing can reduce the initial cost of a future payment because that payment is conditional on reaching its release date. The commitments of members who do not reach that date help fund those who do. The later the date, the greater the potential contribution from sharing.

Work back to the starting investment

The amount needed today depends on the income target, the time available for growth and the risk the member is prepared to accept. A certainty equivalent is the certain amount a member values as highly as the modelled uncertain outcome. The corresponding discount rate lets us work back from the future target to its starting investment. A lower rate means setting aside more money today.

In the worked model, a £1,000 target at age 85 costs £468 initially without sharing. The model assumes a 56.8% chance of reaching release at age 84. Under ideal pooling, the sharing adjustment reduces the starting amount to £266. Both calculations use the same investments and risk preference.

Across all forty rungs, the same approach gives £100,000 an annual certainty-equivalent target of £7,420 with ideal sharing, compared with £4,907 without it. These targets use hypothetical returns and synthetic mortality. The simulations examine the income produced when actual FTP transfers replace the ideal sharing assumption.

The certainty-equivalent calculation · The reduction in each rung’s starting amount.

Keep the arrangement fair

People of different ages and with different balances bring different exposures to the pool. A fair transfer plan, or FTP, sets allocations so that each member’s expected receipts equal the expected committed value they give up, under the mortality model. A separate calculation checks that equality before money moves.

A pension also needs the remaining pool to support future allocations. A fair transfer today can leave a smaller pool unable to share fairly next time. The research examines how allocations and distributions affect that capacity, including cases where several deaths are settled together.

The next step is to connect those rules to the complete income policy: how payments respond to investment outcomes, how new members join and how the final years of the ladder are supported. The simulations provide the member accounts and payment histories against which those choices can be tested.

How fair sharing works · Operation and ownership · The research ahead.