MAX WIETHE: I hear the phrase defined ambition and compare it with defined contribution and
defined benefits as they exist now, and it seems like a very straightforward swap to
be made.
A lot of people when they hear the phrase tontine, their head immediately goes to murder
mystery stories.
I have to wonder, why would you not stick with defined ambition as you're planning?
Why are we comparing it to tontines?
DEAN MCCLELLAND: The construction of a collective defined contribution scheme is the term that
they use in Europe for the defined ambition scheme.
The biggest risk facing that scheme is that you got young guys like yourself, putting
money in with older guys like myself, and maybe Uncle Jim, who's reached 65.
You now have to trust the trustees and the actuaries not to pay too much to Jim or to
me, and to make sure there's enough left for you.
This is a big problem.
The reason we're interested in tontines, the reason we want to bring it back, is that we
want to make it very simple.
We want to make it very easy for you to trust in the tontine.
The way we do that is that, if we use the case of your Uncle Jim again, we get 10,000
guys, they've reached retirement age, they put their money into the tontine and it's
only guys of the same age that are put in the same amount of money.
We keep the ladies in a separate pool, because they're going to outlive the guys.
They'd always win.
The idea is that now you got these members in a dead pool and year by year, at age 65,
let's say Jim puts in a million dollars, the first few years, he's getting five and a half
thousand dollars a month, five years later, it's got up to $6,000 a month, because the
number of members in the pool has gone from 10,000 maybe down to nine and a half thousand.
Bit by bit, the number of members in the group is falling and the amount of payment that's
being made every month is going up.
The whole point is that if Jim lives long enough, he's late into his 90s, he's going
to be flying around the latest Tesla because we need to pay all that money up because it
belongs to the members.
MAX WIETHE: Could you then just simply draw a line in the sand with Social Security for
instance, if we're taking one, it is a dead pool, my family doesn't get a check when I
die.
For my Social Security benefits which are leftover, it goes back into the fund so it
isn't the same way with a dead pool, but it's all grouped together.
Could they just draw that line in the sand where we say everybody before this point is
grouped together, and now we're going to start slicing you into cohorts and that would follow
the tontine model that you're trying to offer?
In reading your work, you're trying to bring some of this to the private market, but then
also trying to help governments around the world implement a system similar to this for
their own people.
DEAN MCCLELLAND: Yeah, well, we were talking to the pension folk over the World Bank last
year.
They built this amazing new pension system for Kenya.
They launched it because they said Kenya needs to get a pension system.
The problem was that I think after eight years, the number of people participating out of
a population of, correct me if I'm wrong, 50 million was I think, about 75,000 people
had to point out contributing into the pension system because they didn't really see the
value.
That was a defined contribution scheme.
Then I explained to them that, look, everything you've done is fantastic.
The problem is you haven't offered value, you haven't excited the population.
This is where the tontine comes in.
Because the reality is, when you join a tontine, you're taking a bet on you.
You're betting, you're no longer worried that I could live 20 years and run out of money
and be dependent on the kids or anything like that.
You're taking a bet, you're betting that you're going to outlive everybody else there.
If you do, the payoff is so spectacular, you'll never have to worry about money again.
That mechanism, that behavioral science mechanism has historically proven to be the fastest
way to raise the savings rate in any particular country, because everybody wants to take that
bet.
MAX WIETHE: If you were to compare that psychological aspect of it to life insurance where you're
essentially taking the opposite bet, you're betting that you are going to die before you're
able to accrue enough savings for the people that you care about, that's not a bet that
anyone wants to think about.
Just a good anecdote surrounding that is I had a boss who at the time was in Omaha, Nebraska.
This was before he moved to where I was living at the time, and he had had a friend who was
a contractor who worked for the police force, whenever somebody would die, he would go and
do the body cleanup.
He would call my insurance agent boss and say, I got a really good story for you that
you can use to help scare people into buying life insurance.
XYZ, I had to go clean up a body from somebody who fell down the stairs at the family reunion,
and like his mom and his daughter found him like it was all three generations were there
to witness this whole thing.
That's the type of story that it takes to get people to make this bet.
There is arguably a place, I'm not totally disparaging life insurance, there are places
and times and prices for life insurance, but when it takes that psychological tool to get
people to buy it, it lets you see how hard it is for people to make that bet on themselves.
It is actually very easy to make the bet that you are going to outlive everybody, everybody
wants to think that way.
Even some of the sales mechanisms that tontines have been used for, for structuring in the
past, demonstrate this where you're trying to raise money for a project and the idea
that one lucky person in that group could end up becoming the sole owner of whatever
project it is that you're trying to build can really encourage a lot of people to maybe
buy something that if they were just going to be a part owner, and it was guaranteed
that they were only going to be a part owner and they might buy that.
Historically, the New York Stock Exchange and the Coffee House on Wall Street is a great
example of that.
I look back and they sold shares initially at 200 pounds, and they really could have
just sold shares in a mutually owned coffee house, but why did they choose this tontine
structure?
It has to do with that psychological effect of I'm more willing to place that $200 bet,
if I outlive everybody, then my $200 becomes all these other things and I don't have to
buy anybody out or anything like that.
It's just really luck.
Then as well in the UK, there was the bridge in London.
You actually brought this one up, I'll kick that one back to you.
DEAN MCCLELLAND: In a lovely corner of London, where I used to live, this is called Richmond,
they had this wonderful Old Bridge, which was needed-- it's been there for a few centuries,
but it was needed way prior to that, and they couldn't raise the money to do it.
Someone came up with the idea, let's just run a tontine, and immediately, they were
able to raise the money, they had a whole lot of people club in and every year, the
bridge collected tolls for people that crossed it, and they paid it out to the members, but
only as long as you lived.
The longer you live, the bigger show you got from the bridge.
MAX WIETHE: Eventually, one lucky person owned that bridge, I'm sure.
Does the family still own the bridge these many hundred years later?
DEAN MCCLELLAND: There's no tolls.
I can tell you, there's no tolls anymore.
It's probably speeding camera, which I've contributed to, but that's a different story.