Why are so many companies closing their final salary pension schemes? High on the list of reasons is the longevity risk: a final salary scheme commits the company to continue paying a pension no matter how long the pensioner lives. When these schemes were widely adopted in the 1950s and 1960s, few pensioners lived past their early eighties, so this commitment was not a threat to the solvency of schemes, let alone to the companies themselves. But the spectacular improvement in our longevity is changing all that. The number of people aged at least 90 living in England and Wales has increased from 40,000 in 1951 to 369,000 in 2004, and is forecast to exceed 1m by the early 2030s. Companies feel that they can no longer afford to carry this risk, and are adopting “defined contribution” schemes instead, in which the retiring employee receives a lump sum based on the past contributions made by the company and employee. Thereafter it is the retired employee who has to manage the fund and carry the longevity risk.
The chance of an active, satisfying life at 90 is appealing. But fear of outliving one’s financial resources and having to rely on a minimal state safety net, or on children and grandchildren, worries many people.
The tontine provides a neat solution to the problem. As any fan of Robert Louis Stevenson’s novel The Wrong Box knows, the tontine is a club to which each member contributes a sum of money. The total sum is then given to the last surviving member when he or she has outlived all the others.
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