Foresight Podcast | Dean McClelland, Founder & CEO, Tontine Trust
What connects Louis XIV, Agatha Christie, the New York Stock Exchange and the Simpsons? The tontine. This is a type of financial instrument that could help address our global crisis in pensions, which are set to be underfunded by hundreds of trillions by 2050. Unlike today’s defined contribution pensions plans (forget about getting a defined benefit pension), a tontine is a pooled fund made up of members who share returns on their investment. When someone dies their initial stake remains in the pool, increasing the payout to those lucky, longer surviving members. In this way it provides a certain way of providing continuing, and ultimately rising, incomes for those who live longer. One of the first ones in France made a final payout in 1726 to the last member of 73,000 livres, not a bad premium on longevity for the widow who had made an initial investment of 300 livres.
These types of pooled investments have been used to fund capital projects, with the last survivor getting ownership of the building, which happened in the case of Richmond Bridge in the UK, and the New York Stock Exchange. Tontines have also featured in popular culture, for example the storyline of an Agatha Christie novel (e.g. ‘4:50 from Paddington’, which was remade as Murder She Said) and the Simpsons. The idea of bumping off the last remaining members of a pool is as old as patricide.
This podcast is a discussion with Dean McClelland, founder and CEO of Tontine Trust who’s building a new type of tech-enabled tontine for today’s world.
Transcript
Stephen Johnston
Hi, I’m Stephen Johnston, and this is the Seeking Impact podcast, the show where we hear from ‘systems innovators’ who are addressing some of society’s biggest challenges. We’ll learn about startups, corporates and investors thinking bigger than just their next quarters profits, and innovators from all walks of life who are seeking impact. Thanks for joining.
I'm here with Dean McClelland. He's the founder and CEO of Tontine Trust. And you may be wondering what Tontines are; up until last week, I didn't know myself. So I went and did a bunch of research and found some interesting references to murder mysteries and Agatha Christie novels. So I'd love to hear more about that, where that comes from. But the interest here might be doing this as an Aging2.0. interview, is because it does seem to be one of the most interesting innovations around financial resilience which is one of the topics that we have at Aging2.0 which is grand challenges.
And we have seen a lot of people doing really interesting things, especially around pensions and redefining retirement, which is one of the topics that we've been using a lot and from what we can see here, It looks like tontine is a very novel approach that really rethinks what a pension is and is an alternative to annuity model. And I just like to kind of ask him to give us a bit of background as to his own journey, and how he came up to this idea. And then for those who don't know, talk us through what it is and how it works.
Dean McClelland
Okay, great. Thanks, Stephen. Am delighted to be here and happy to explain this. I guess when you start a conversation and you bring up pensions most people are expecting to be bored silly. Certainly, I'm not a pension guy. I didn't consciously move into the pension industry, but three and a half years ago, I came across what pension people call the ‘decumulation problem’. And it occurred to me that the way the existing pension system is at the moment, it's very much broken, and the whole ‘retirement dream’ that we all imagined, is very much over. And I went looking for a solution. And somewhere along the line, I fell down a rabbit hole and started reading about ‘tontines’. And I just thought, well, you know, this is the way to solve it. This is the traditional way to solve the longevity problem. But I guess when you were searching for it, you came across what are we talking about, episodes of Mash, episodes of The Simpsons?
Stephen Johnston
It was a reference to Agatha Christie, people that are bumping each other off because the more people die, the better off you are, which is a very un-intuitive sense for financial products; it sort of starts to get very interesting and can people go, what people that have died, I made more money? So maybe it'll if you frame it a little bit - how's it different from a regular product that people might know?
Dean McClelland
Yeah, totally. If you think about a tontine, if you look at the media references to this, you know, typically you've got a bottle of whiskey, a famous bottle of whiskey that 12 people have bought together. And the idea is that every time one of the guys passes away, you know, everybody will share a part of the whiskey. And then when the last but one has passed away, the remainder of the bottle goes to the survivor. And this is the classic idea of the tontine. But actually, tontines built the European pensions industry, and they certainly built the US insurance industry at one point, because we had countries like France and Germany and Holland that were looking to raise money, and traditionally what they did is they offered an annuity to their citizens, but people weren't interested in annuities. And that was the case 400 years ago. It remains the case today. And then this Italian gentleman came up with the idea of a tontine, and instantly It was the most successful, most popular pension product in Europe, and also in the US when it was exported over there. But fundamentally, the way we are bringing back tontines to address the issue that we all know about, which is people living longer and needing more money in retirement and the way ours works is that if you think in your case, I think you're 1974?
Stephen Johnston
1973.
Dean McClelland
So the idea is that you know, when you when you eventually get to retirement and you hang up your boots, and you're ready to relax and have the perfect retirement, the thing is actually, you don't know if you're going to live five years, 10 years or another 50 years which is potentially possible. The trick is you need to find a way to make that money last the rest of your life. Now the pensions industry has not been very good at this. Which is why people talk about underfunded pension schemes. So expecting individuals to be able to do it is sheer lunacy. What the tontine does is, it provides a very simple mechanism that allows you to be able to have an income stream for the rest of your life. And the way it works is we get 10,000 guys born in 1973. They all club their money into an investment pool in a pension fund, then every month, that pension fund starts paying out. Let's say you're lucky enough to be able to invest a million dollars, the pension would start paying let’s say four and a half thousand per month, but the rule in a tontine is that if you're dead, you don't need the money. So what happens is that you're you start doing this.
Stephen Johnston
So to clarify, you put a million bucks in, if you're unlucky enough to die that next month your family doesn't get a million bucks?
Dean McClelland
Yeah, exactly. So we're assuming that the million you're putting in is aside from the assets that you want to give to the children. And obviously, aside from the capital that needs to go into your wife’s tontine to make sure that she’s got a lifetime income product as well. But the trick is that once you join the club, you're a member for life. And the rule of the club is that it will continue paying you monthly payments, even if you live up to, and beyond the age of 120. And the way it works is that if you start out with 10,000 guys your age that you're in a pool with at age 65, by age 75 maybe you're down to 9000 guys in there, which means 1000 members no longer need the money. And that money is spread around for the benefit of everybody else.
Stephen Johnston
So there’s no real point in them leaving because they're not going to get that money back? So basically, that's the only reason they're not any more in the group is that they’ve died basically?
Dean McClelland
Exactly. You know, there's two certainties in life, death and taxes. You know, we know the taxes are coming regularly - death, we just can’t predict when it's going to come to us. And obviously, the tontine continues running, the trustees invest in a defensive portfolio, our job is just to make sure that we stay ahead of inflation realistically. But by the time we've reached 85, we're probably now down to about five thousand members out of the 10,000. And what's happened is that the algorithms that manage our system have been incrementally increasing the payments to the members every month as a result of other members passing away.
Stephen Johnston
So it’s a deadpool kind of idea?
Dean McClelland
Yeah, absolutely. It's a deadpool. And your job in the deadpool is to take care of your health, eat better, exercise and outlive everybody else. Because if you're one of the lucky ones that ends up living to 95 years old, we as fiduciaries are obliged to pay that money out to you as quickly as possible while you and the other members are still alive. So we've now gone from having four a half thousand per month income stream to possibly having a 15,000 or when you get into your 90s you have a 25,000 per month payout, in order that we can liquidate the fund.
Stephen Johnston
I can see so you’ve less people in the same pool, but presume you still have an investment risk? So if we have a big crash, like in the middle of now, then presuming your capital is at risk, so you can’t guarantee it? Or are you going to take the guarantee on yourself, so that they're going to get a percentage return, even though you don't know what the market is doing?
Dean McClelland
At the moment, we're only predicting a four and a half percent gross return over the next decade with a net return of three and a half. We think 7% is completely unrealistic at this point. And if we were taking 7% we’d have to take a lot more risk.
Stephen Johnston
A lot of pensions are based on 7%, right? I was hearing about the California pensions which are very generous if you're a firefighter or police man on $300,000 a year and then a 95% final pension. It's one of the factors of the pension schemes that are going bankrupt.
Dean McClelland
Yep, it's why so there's 49 out of 50 US states are expecting that the state pension scheme will run out of money between seven and 15 years from now. There's only one pension that is fully funded, and that is the state of Wisconsin and why because they run it like a tontine. And so essentially what happens is if the investment returns are a little bit higher or a little bit lower than expected before people are living longer than they adjust to payments to take that into account. And by doing so, they ensure that the scheme itself is 100% sustainable. So it does lead to micro-fluctuations along the way. Personally, I'd rather have micro-fluctuations, than worrying if my pension scheme is going to go bankrupt tomorrow.
Stephen Johnston
Okay, so we've got a pool of people and this is you said in your examples of 10,000 people all roughly of the same age maybe the same birth year. Do you care how biologically fit they are? Or is it my benefit if I am keeping myself healthy compared to somebody who's perhaps a little less so?
Dean McClelland
So it's most definitely in your benefit if you're keeping yourself healthy. But everybody keeps saying to us, well, you know, are you going to do some sort of biological age or fitness assessments on people, when they come in, we say no. Because the reality is up until you join a tontine, you are living in fear. Whether people admit it or not, 84% of people are worrying and worrying about running out of money in retirement. And that is causing stress. This is what I read in the report from TIAA in the US. And, and that stress of worrying every day about your money running out, is reducing your quality of life, but the moment you join into a tontine, you're now facing a future where you'll never run out of money, and most likely, the monthly payment will rise much faster than inflation. So immediately you join the tontine, and it’s statistically proven, you are likely to extend your life. It’s a financial products that actually make you live longer.
Stephen Johnston
So you've got you've got this logical, novel insight - but it makes a ton of sense - that less people taking the money out will make your income go up? Does it have to be a minimum critical mass of people for this to work could I do with a few buddies? Or is it something that there has to be population level above a certain size to make it work?
Dean McClelland
Well, we've been working on the algorithms for the last few years. And the magic number for us really is 1000 members, the numbers work perfectly. If it gets over 10,000 members, then the numbers don't work any better than they did whether it was 100,000 or 10,000 members. So what we do is we initially bring all the pools together, and then once we have a critical mass, We'll separate it out so that you're in a pool with people just like yourself. And the idea is that it's almost like the Hunger Games of pensions. And we want to make it a fair fight, where you're in a competitive battle to outlive everybody else, to collect their money. And that's what we want you to thinking about when you get up and go to the gym in the morning.
Stephen Johnston
Okay, so I think the genius insight here, or the behaviour shift that we're seeing, is that you're motivated to live long, healthy lives. Which is what many governments, the UK government in particular and the Dutch government have both committed to a strategy to increase healthy life expectancy. But the way they're doing it, it's not really clear how it’s actually going to happen. And the social and healthcare systems are chronically underfunded, we're already seeing a massive social care crisis here in Australia. We have a huge care crisis, you know, headlining every day and it's about how badly underfunded, poorly delivered aged care services are, whether they're for people living in aged care in nursing homes or at home, perhaps isolated and lonely. Is there a way that this can help a broader number of people? The numbers you said may have been illustrative but a million dollars is not going to be feasible for 45% of people over 50 in the States have got less than $10,000 available for retirement. How do we kind of make this something beyond just helping rich people have even better lives and actually make this a broad mass-market offering?
Dean McClelland
Well, it's, it's interesting. I think you were saying, ‘what's the minimum amount required to participate’? The way we've built the system is to make it truly scalable. I was over in Bangladesh in February - they have 180 million citizens with no pension scheme whatsoever. As far as we're concerned, we could support that country overnight, and get people saving. We’ve got a number of strategies to do it, the amount of money is irrelevant to us, it's all about getting people saving more, and then managing it properly in retirement, so that it gives a lifelong income stream.
Stephen Johnston
So it doesn't have to be a million dollars. It could just be something better. So this is something that you're working with governments on - or you're looking to do this on a private b2c model, or both?
Dean McClelland
It's all of the above. I met a Nobel Prize-winning economist at the beginning of 2018. I shouldn't be surprised, but he understood it really quickly. And his response was that ‘you’ve built a pension system for the world that can never go bankrupt’ which is a description I totally agree with. But the idea is that we'll roll it out in as many countries as possible, with as many partners as possible, as long as they're ethically aligned with what we’re doing. And what we’re going to do is keep it safe, sustainable and local.
Stephen Johnston
And so in terms of like specific next steps, and where you are in the business, I think one of the interesting things that came up again, relating to the Agatha Christie murder mystery, is you don't necessarily want to have people know who else is in your deadpool necessarily because otherwise there's an incentive to bump them off. That may be a little far-fetched, but where are you in terms of using blockchain to improve transparency and to provide anonymity? And where are you in terms of the product launch over the reliability of the last few years? How sort of mature is this product and ready for market?
Dean McClelland
Yeah. Well, in respect to blockchain, I've been a coder since I was a kid. I was introduced to Bitcoin and the blockchain technology back in 2011. At the time, I couldn't find a use case and I felt, this is a monster opportunity for this new technology. Three years ago, when I was starting to work on this, I thought, Ok, well, we need to make the system completely transparent, that everybody can see that the money is invested safely, and make it impossible for anybody to tamper with the records, yet keep all the members anonymous to each other. And that is exactly what blockchain was invented to do. So most definitely will be using that technology but in the very first version we’ll be more like a traditional digital bank that you've seen in Europe. But over time, you'll find all our books and records are published to public distributed ledgers so that anybody can audit us at any point in time. Where we are the business is that we've actually had a very interesting year. We were looking for a major recognised country to allow us to pioneer the system and demonstrate that we could increase the savings rate. And in January, I started getting calls from lawyers all over Europe, saying, look, Europe has just passed a law making this possible in 27 countries. The insurance industry tried to block the law but they failed. Now there’s a law called the Pan-European pension regulation which applies all over Europe which means that by the end of the year almost we can already be starting to launch.
[Alarm blaring]
Stephen Johnston
One second, sorry!
Dean McClelland
That’s the insurance industry, the alarms are going off.
Stephen Johnston
Dinner’s ready…
Dean McClelland
So, it’s the Pan European personal pensions products legislation or otherwise known as the PEPP.
And if you think about it, over the last 25 years, they've introduced the UCITS legislation which is the gold standard for funds around the world. So if you're an European asset manager and want to sell a fund product the gold standard of fund products is a UCITS.
Stephen Johnston
So, how do you how do you spell that? UCIT?
Dean McClelland
Sorry? UCITS. But essentially, if your fund is a UCITS, then you know it adheres to the highest standard of governance of any fund product in Europe. So this is now the de facto gold standard of funds around the world. And the ambition of the European Commission is that the PEPP will be the UCITS of pension funds by raising the standards of transparency, low fees, ESG investing and everything else and it's perfectly suited to what we doing.
Stephen Johnston
Got it. Okay, so you are now ready or you're trying to get that certification, you want to be one of the first? Are there others that are using this already or how close are you getting it?
Dean McClelland
Nobody else has launched it yet. Yes, there are a few big institutions doing it. Typically our understanding is that what they're looking to do to launch a target date fund. And, you know, that realistically, I don't know if you know what target date funds are but all they do is change they change the composition of your investment portfolio as you as you grow older. It's not a longevity solution in that it doesn’t stop you outliving your money. Our solutions does, and it does so without the cost that is inherent in an annuity type solution. Typically, annuities charge you 30% of your capital upfront as an underwriting fee. And then they charge you the equivalent of 3-5% per year in asset management fees. So for us, we do the same job, but for a flat fee of 1% per annum for the full fleet.
Stephen Johnston
So if I put a million bucks and then every year I'm paying $10,000 of that into your company?
Dean McClelland
Yep, that's what we use to keep the lights on and make sure that your income is going to continue for the rest of your life until no matter what age you live.
Stephen Johnston
And how does one present compared to other pension management systems? I mean, as you said, 30% if I'm, if I'm getting an annuity 30% off the top, but as 30% over time, if I'm doing this for 30 years is that is that going to be 30% of the asset base?
Dean McClelland
There’s been various research reports published that show that when you give a million dollars or million pounds to an insurance company, what you get back has a fair value is 700,000. And then, you know, if you look at the ongoing growth of the capital in that, they charge you 3-5% asset management fee. The insurance industry fought against the PEPP legislation for the very simple reason that PEPP rules are that you have to cap costs to 1% per annum. Now, most of the asset management industry, and the insurance industry in Europe has been fighting this, they think it's too low. We think it is more than generous. It wouldn't surprise me if we end up cutting the fees later on. But for now, I think 1% providing a lifetime income solution, we’re way lower than anybody else in the market. But I think it's an acceptable cost for the quality of solution we provide.
Stephen Johnston
So when do you expect to be ready to launch in market that somebody could go ahead and give you their million dollars?
Dean McClelland
So we're anticipating launching in Ireland by the end of this year. We're looking for a second market to be able to take it into as obviously Ireland is quite a small market. We haven't decided what the next country is going to be but ultimately, we want to be into all 27 EU states by the end of 2022. And then there are quite a few other countries that we're talking to where we're not just talking to financial institutions, where we're talking to the government as well. So I think it's going to be an interesting few years.
Stephen Johnston
So to wrap up. I mean, this feels an idea that is timely, given what we're seeing right now. We already were in a bit of a crisis and sort of had existential concern about how we're going to manage the stresses and challenges of our aging societies. There are no doubt a number of really interesting business opportunities around this. And I think one of the things that intrigues me is when you mentioned this, when we were discussing before, which is as people get more confident in the future, you are giving them a path forward - and optimism about the future is really the definition of happiness - then you can sort of imagine that older people are going to be able to be less worried and more engaged in the community, more entrepreneurial, ready to take risks, more frankly, more willing to buy the products that makes sense to them. I was mentioning there's a friend of mine’s aunt in the US who died, alone, relatively lonely, but she had a million dollars cash in her bank account, and she was eating porridge every day for like, $1 because she was so worried about whether she would be able to survive. So I think we've all had sort of similar stories? So perhaps you could give a final wrap up in terms of what you would be interested now to hear from the folks who might be listening who are from aged care providers, senior housing companies, tech startups, innovators, academics, researchers, governments. What do you need next as an innovator? And how can we help?
Dean McClelland
Well, what we're doing at the most, we just moved the headquarters of the company to Ireland which is the country of my birth. And by being based in Ireland, we can launch it in every EU country over the next two years. But ultimately, we want to take this solution to every market in the world. And that was part of the reason for reaching out to Aging2.0 because you have such a large, perfectly aligned list of members that is interested to solve big problems like this. So ultimately what we'll be looking to do once we get the European product launched is to start conversations in other countries that are outside of Europe and explain how well it's working here for society and we need to take it to them as well. I think you were talking a moment ago about, you know, how worrying about money in retirement can affect you, one thought came to mind which I probably didn’t mention previously. I have seen studies where they show that worrying about running out of money can potentially decrease your IQ by 15 points. But if you take that worry away, then immediately it will rebounds. So if you think about the potential benefits for society rather than individuals. We have, you know, 75 million people approaching retirement age in Europe, if we see that these people don't go into a state of stress, worrying about money, but instead actually solve that problem for them, so that they can have nothing but confidence about finances in the future, that’s an incredible resource to unlock for Europe, and for every country really. And so that's that's what we're looking to do.
Stephen Johnston
Awesome. Well, Dean, this is an exciting development. As I said, I haven't seen a lot of really interesting new ideas in financial resilience and in pensions. And I'll be watching with interest as I know many of our members and the network will be. We've got chapters in as of now about 125 or 126 cities around the world, and there's going to be a lot of people throughout that network that they're really going to be paying close attention. So I think with that, just say thanks again for your time and best of luck on the journey.
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Thanks for listening to that episode of Seeking Impact with Dean McClelland, from Tontine Trust, who’s building one of the most exciting fintech products I’ve seen for a while. I really like in particular that it flips todays’ models on their heads, aligns incentives to help people live long, healthy lives and offers a way for millions of people to worry less about outliving their savings. When they do that they can consume more, produce more, engage more and generally and live life to the max. You can find show notes about at Fordcastle.com/podcast/dean and feel free to shoot me a note at stephen@fordcastle.com if you have feedback on this or ideas about other guests.