Are Tontines the Future of Retirement Products? (w/ Dean McClelland)
MAX WIETHE: I'm sitting down with Dean McClelland, CEO and founder of TontineTrust. You are a special guest for us because our CEO and founder, Raoul, has very much been interested in having you on. We're exploring the retirement crisis that is impending, not just in America but all across the world as populations age and pensions are unfunded. People are really trying to figure out how are we going to solve this problem, and he came across some of your work and was really interested in it. Obviously, as some of our viewers may have heard, TontineTrust, we're going to be talking about tontines today. Dean, thanks for coming. Why don't you tell us a little bit about yourself and how you got into this almost ancient side of finance? DEAN MCCLELLAND: Okay. Well, first of all, thanks very much for inviting me. I'm honored to be here. I'm a fan of the channel. I have to say sometimes, it scares the heck out of me, the stuff that I'm seeing on the channel, but this is stuff that needs to be said, so kudos to you guys for being the guys who say it. MAX WIETHE: Well, thank you. We appreciate that. DEAN MCCLELLAND: In terms of the background, stuff that open as a mix, what was the question again? MAX WIETHE: Tell us a little bit about yourself, how you got into tontines. There's not really a standard. People go into banking and there's a whole infrastructure for you. You go to the right school and you do the right major, and then you become an investment banker, but there's not really any established path for how one finds their way into the world of tontines, or at least not for the last hundred years. I just like to hear a little bit about how you ended up in this line of work. DEAN MCCLELLAND: Well, let's just say I didn't wake up three years ago thinking I want to get into the pensions business. I was living in the south of Spain, semi-retired and I'm having a conversation with my mother, who's also living in Spain. For some reason, she's off for a game that day. I'm asking her, what's wrong? She tells me that one of the friends in the golf club has just passed away. I said, oh, she must have been really close to you. Is that why you're so upset? She's like, yeah, but not really. It's more about the fact that she's so tight with our money. What do you mean by that? She's like, well, look, you have to understand. She says, in the golf club, we've got all these members age between 65 and 85, we've all got money. We're down here to enjoy our lives. The problem is none of us know how long we're going to live. We're terrified to spend money. Every day we worry about it, because if we run out of money, we're going to end up-- if our kids don't take care of us, we could end up in the nursing home, back in Ireland or England or something like that, which to them is the equivalent of being sent to prison or something. MAX WIETHE: Where in Spain is this? DEAN MCCLELLAND: In Marbella. Can you put this in context? What's this got to do with the lady? She said, well, the thing is we worry about this so much. We're terrified of spending money. We worry about it all the time. She said, but then something happens where this lady passes away. She was the most careful of all about spending money, she didn't want to spend a penny, and now she's dead. All that money sitting in a bank account, she's nobody to leave it to, and she never got to enjoy her retirement. She says, we're having all these conversations in the club. We're thinking, why are we saving, saving, saving? Why don't we just enjoy our retirement? Why don't we just go ahead and spend the money? This is what they think about. It's like, okay, wow, that's a bit deeper than I expected. I start going through what- - I said, look, how long you've been thinking this way. She's like, about 20 years. It's like, whoa, okay. I said, is there anybody else in the golf club that thinks that way? She says every single one of us. It's all we ever talk about, it's like, holy shit. This is a problem. Someone needs to do something about this. I said, okay, look, I solve problems. Let me go and have a look. That's, I guess, how I got interested in the topic. MAX WIETHE: You have this personal connection to it, but I'm sure your research, you didn't immediately end up on tontines. What was the first place you dipped your toe in and you started to realize the magnitude of this problem and that really what's out there, isn't going to solve these problems for anybody. DEAN MCCLELLAND: The first thing I looked at was reverse mortgages. The idea that you give your house to someone and they pay you an income for the rest of your life. Then when you pass away, and your house goes to the company. There was just something that didn't feel right about it. I didn't think any of them would agree to do it. At this point, I've now promised them that I'm going to find a solution. I didn't think anybody would be comfortable signing their home over to someone else. It just feels wrong. Obviously, the natural next up to look at was annuities. I went online and start getting pricing, let me see if I can find some firms. Eventually, I did got a few quotes from the annuities companies, and I was just absolutely shocked by the price, by the value on offer, I just have, there's no way I can go back to these people and start offering this because it just doesn't work. I got stuck at that point. Eventually, in fact, to her credit, she came in, knocked on the door and said what's going on? Have you found this because I've told the people in the golf club myself is on the case, and I just keep looking and looking. I start reading about this thing called tontine, and I'm finding all these academic papers, and all these highly respected academics around the world have been publishing papers saying, look, there's a retirement crisis in its way, the only way we're going to solve this is to bring back the tontines. That's how it all started. MAX WIETHE: Well, if we're going to bring back the tontines, I think the best place to actually start is to go even further back and look at the evolution of the tontines from its beginnings, some of the ways that it was used, and actually the death of the tontine. There are some places in the world where they still exist, but in America, they were very popular and now, most people have only heard of tontines from episodes of cartoons and dime store mystery novels, so they've fallen out of favor. There is good reason for that, but it's definitely worth exploring before we jump into how tontines can solve the problem. DEAN MCCLELLAND: We're very much aware of the problem. The first thing to do is look at what is wrong with the existing solution, because even when I started doing this, all of the firms that I spoke to said just tell them to buy an annuity. What's wrong with an annuity? You've had some personal [indiscernible]. MAX WIETHE: Yeah, I actually worked at an insurance company right after I graduated, I didn't put enough effort into going and finding a job and I ended up calling up somebody at my golf club and he worked at an insurance company, I said, what do you got, I need something while I figure out what I'm going to do with my life? I ended up on the annuities desk, helping financial advisors, which the way our company was set up, we were a non-fiduciary and that meant that all of our advisors were actually working at other companies who we had servicing agreements with. They were selling our products. Nobody who worked at my company actually sold our products. These salesmen would call in and they had no idea what they were selling, not only were some of these benefits not very good or overpriced, but the actual salesmen themselves, the "financial advisors", didn't know what they were selling. Then as well, I got to talk to some of the actual annuity holders and they didn't know how to use these products. They were overly complex and the company itself ended up actually misforecasting interest rates so poorly that they had to close down the entire annuity business in an effort to get financial advisors to transfer our annuities which had actually made promises that were too juicy, the benefits were too good. They figured out through some dealings that they could stop paying commissions to the salesman if they stop selling annuities altogether with the bet that those annuity salesmen would transfer out the products and get them off of our balance sheet. It worked perfectly because the salesmen are just interested in getting paid. The people who own the products don't know how good they have it, if it is any good. If it is any good, they still don't understand it, but there are issues with the fees and that it doesn't actually, in some cases, it doesn't guarantee income for life, which is really what's needed in a world where people continue to live longer. You can make a plan today that puts you out into the longevity calculations that we have with modern science but at the rate at which health and wellness is advancing, you could do a pretty good job for yourself now and because of a fantastic advance in modern science, still be left out to dry. DEAN MCCLELLAND: Yeah, and this is the problem and we all face it. This is what we need to solve but if you go back to annuities specifically, when I started this journey almost two and a half years ago, nearly three years ago, I was contacted by Registered Investment Advisors of the US. They said, oh, this is brilliant. This is exactly what we want to give to the clients. This is what we've wanted to show to them. Because the annuities that we're having, which are our only option as well, we just don't want to do it. I said, look, do me a favor, can you send me over some brochures for your best-selling annuities? He sent me over these documents, they're like, 60, 70 pages long. If even I couldn't understand them, I'm pretty certain you would struggle to understand this because they're not there to explain the product. They're there to hide the fee. MAX WIETHE: It's pretty much just liability. That's why it's 60, 70 pages so that it covers every single intricacy so that they can say that they gave the client exactly everything that they needed, knowing full well that that client is never going to be able to understand it and make an educated decision based off of the information that's been released in front of them. DEAN MCCLELLAND: Exactly. If you thought the terms and conditions on Facebook were already complicated, try reading the terms and conditions of an annuity. You need a Math degree to just to be able to work out what the hell's going on. MAX WIETHE: You figured out that annuities weren't going to solve it. Obviously, a lot of certain countries, we have the Social Security system here in the US, I know you're from Ireland, countries all over the world have their own forms of pension to protect people after they retire, but it's pretty obvious here that Social Security is not going to be a viable solution, most likely by the time I reach retirement age. As well, if you just talked to anybody about the sorts of checks they're getting from Social Security, it's not enough to live on, so that you have to supplement it somehow. We know that what's available from the government is not enough and what's available on the private market currently is sub-optimal to be polite. How did you come to this conclusion that tontines were a viable alternative? DEAN MCCLELLAND: Well, just if I can comment on the Social Security pensions situation first, there was a Citi Group report out I think it's about two years ago now, they calculated that the richest 20 OECD countries in the world have a combined pension deficit of 78 trillion, which is bigger than global GDP. They forecast that this is going to rise to 400 trillion by 2050. Basically, it's rising faster than GDP. If you've got a problem that big, that's completely out of control. It's not getting solved anytime soon. Anybody I talked to in Europe, that's around more like your age, I say how do you feel about the pension system you have to pay in at the moment? They're like, we'll never see it. We'll never see it. We'll never see a penny. It's like a tax that just completely ripped it off. If you think about the US, obviously, that's where we are at the moment, of the 50 states, I think 49 of them are so underfunded that there's a good chance to run out of money really between the next seven and 15 years, which is unbelievable. Again, it's an unsolvable problem. There's one state, which is Wisconsin, which is fully funded. The reason you can trust in getting your pension from Wisconsin is that it's run exactly like a tontine. MAX WIETHE: What is some of the differences between the way that it's run in Wisconsin? You say it's run like a tontine, but why don't we get into the nitty gritty? What does that mean to be run like a tontine? DEAN MCCLELLAND: If you think about from a pensions perspective, in the good old days, you have defined benefit pension. Your uncle worked all his life for GE, let's say, once the greatest company in the world, some would say. He contributes every month and he knows when he reaches retirement, he's going to receive a pension for the rest of his life. Unfortunately, all those calculations that were made by GE, originally, were wide of the mark. They didn't put enough money aside to be able to make up for that and now, I think you've read all the articles, ultimately, GE's pension fund is probably going to take it down over the next, well, certainly less than a decade. That's like almost 600,000 families that were expecting this payment for the rest of their life, it's now just going to disappear. What the world has done is they've shifted away from defined benefit pensions because they realized that just they're unaffordable for governments or for big corporations. They've moved to something called defined contribution pensions. Basically, a defined contribution pension is that you save all of your life and then when you get to retirement, you can then start drawing it out. It's great that they get you saving so you've accumulated some capital but then you got the problem of working out how much can I spend every month, so that I don't run out of money. MAX WIETHE: There was an example in our conversations, before this interview, brought up of one country in particular that has some pretty horrifying statistics about a similar plan, where you have to pay in, but you reach that age and it's totally available to you which is how the defined contribution plans usually work. In Malaysia where it was 90% of all savers have run through their entire retirement savings within 18 months of reaching retirement age, so there still has to be-- we as human beings are still, at least with our current education system and the way the world works, we're not equipped to actually save for ourselves in this way and in some ways, there is a little bit of hand holding that needs to be done. That's where I think your plan meshes some of the, in the defined contribution aspects, which is that there isn't a set payout for everybody at the end, but knowing full well that you still can't give everybody the keys to the kingdom when they reach retirement age. You defined ambition plan, can we talk a little bit about that? DEAN MCCLELLAND: First of all, if you look at Wisconsin and Netherlands and Denmark, and so Netherlands and Denmark are the only A rated pensions in the world, by there's an annual report that comes out every year. The reason they're so highly rated is that they have the ability to adjust the amount that they're paying. If there's been a market crash scenario, as it was in 2008, and as is likely to happen in the not too distant future, then the pension fund has the ability to adjust the payments that they've been making going forward. Demand is not fixed. It's like a safety mechanism that allows them just to balance the books. That's it. It's that simple. Just allowing that feature enables the fund to maintain its solvency all the way along. When you're saving into the Danish state pension, they'll tell you what they expect you to receive, but it's an ambition, it's not a guarantee, because they have that adjustment mechanism that's going to ensure that they're able to keep the promises that they're making. MAX WIETHE: They're able to keep their promise. It seems like a very straightforward methodology, what's preventing the rest of the world from following this model? DEAN MCCLELLAND: Nothing. They're doing it. Canada has just introduced legislation last year making I think they call it Group Life Pools or something like that. I can't remember the name, off the top of my head, but they've offered tax concessions for people when they come together to pool their money. The Royal Mail pension fund which I think is about $15 billion reformed, converted to a scheme like this last year, there was a lot of objections from the insurance industry, understandably, but they were able to convert their whole fund, and there was a 90% approval rating. Now, the UK Government has come out and said, look, this is actually a great idea. We need to put in place a framework so that everybody can start moving to this type of model, because this is the future. 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. MAX WIETHE: Those anecdotes can help explain the psychological effect in the way that it can help increase the savings rate, which is a huge problem in itself that we're not saving enough. There's the psychological aspect of the tontines, but while we're going back into the past, I think we should continue to stay there and look at how tontines fell out of favor, because it is really important to help dispel some of the myths surrounding them and then it also will lead us into a the technological advances that you are building into your product, which help deal with some of those problems. Back in the 19th century, tontines were the leading insurance and annuity product sold here. DEAN MCCLELLAND: Yeah, but Let's go back further than that. MAX WIETHE: I'll let you start. DEAN MCCLELLAND: I think was 1653, the King of France has decided he wants to declare war in England. Now, what governments have been doing, even as far back since the Roman army, is that they'll raise money by offering an annuity, but the King of France is trying to sell this annuity and nobody's interested buy it. This Italian banker, they're called de Tonti comes in and says, hang on, I have an idea. He said instead of paying these people 7% per year for the rest of their life, let's make it more interesting. We sell it to 1000 people. Every year, they'll come along, they'll get their 7% dividend, but if only 999 turn up, then they get slightly more. Obviously, what happens is that bit by bit, less people turn up every year because they're passing away and the yield goes through the roof until they're getting 25%, 50% yields or something later up. When it was launched, it sold out overnight, and immediately, France declares war in England, England is now stuck. Where are we going to get the money to fight the French and they were trying to sell them annuity, it wasn't working. Somebody said, well, why don't you just offer a tontine? After that, for the next hundred years, all of the European governments, whenever they needed to raise money quickly, they always issued a tontine. MAX WIETHE: It's pretty incredible, the different ways that it can be used to, and again, it speaks to that it's a psychological way to get people to invest in things that arguably were good investments prior, but there is something in us, in humans that we're not totally rational and sometimes we need that push and this is just a structure that is historically proven, gets us to that point. DEAN MCCLELLAND: If you go back and read Adam Smith's Wealth of Nations, this book is a manual for governments of how to run the countries and how to finance themselves. He said, look, if a government ever wants to raise money, they'll raise more money and faster by selling a tontine and buying an annuity. Then he went on to explain it. He said, look, as sure as people buy lottery tickets, because we naturally overestimate our chances of winning so everybody wants to join a tontine, because it's a bet they want to take. It's a bet on themselves that they want to take. MAX WIETHE: It's ironic too, because now a lot of states are using lotteries to fund their underfunded pensions so they even realize that it's these irrational bets on themselves that they're willing to make that are actually the thing that could save these plans, which are not working. Yeah, it is pretty incredible the way that can work and it played out. For the next couple hundred years, tontines thrived and even into the US. DEAN MCCLELLAND: What happened in Europe was that, at this point here, the Bank of England comes up with bonds. Bonds, well, the Central Bank of England hadn't existed. They created that and they learned how to issue bonds. Then they worked out. Actually, issuing bonds is much cheaper than the government issuing tontines. That was what brought the enter tontine era in Europe. At some point, I think it was about 150 years ago, Henry Hyde, the owner of Equitable Life in the US, he was struggling to compete with the other theater insurance companies. He started perhaps reading Wealth of Nations, so whatever, he learned about tontines, and he decided to launch a tontine pension product in the US. Immediately, the product was copied by I think all the other major firms and it became the absolute blockbuster pension product so much so that I think they increase the household savings rate from low single digits up to over 50% of households were now investing in tontine pensions, and the tontines themselves were holding over, I think 7.5% of US national wealth in a single generation. MAX WIETHE: Yeah, it's absolutely incredible. Though they did fall out of favor, and a lot of people, they cling to these exciting stories, and they think it's because it was all about murder, and it's such a great way to get yourself killed. My argument to that would be, we sell life insurance, you're more likely to get killed by someone you know and you only have to kill one person to steal the life insurance, but we still sell life insurance. It doesn't make sense to a group of 1000 people, you're really going to bump them all off to get the tontine? It doesn't really make sense. If you look into it a little further, it was actually the insurance companies themselves that got too greedy with tontines and started putting these clauses in where they were taking advantage of people purposefully losing checks so the clause would say the check doesn't show up, we can't-- the clause says we absorb all that either sometimes it goes into the tontine and it's paid out to other members, which makes the yield go higher and make sales easier, and then they can make money on the fees or in some cases, it just went directly back into the insurance company as profit. Either way, the person who has been paying in is getting screwed over and the insurance company is benefiting and the government stepped in and said these sorts of practices are not going to be allowed anymore. Sure enough, the insurance companies instead of becoming more fair and honest with their customers, started selling annuities. In 1906, they put out these laws saying you can't do this stuff anymore with tontines. Sure enough, that marks the death of tontines in America. DEAN MCCLELLAND: I've actually seen a few tontine companies, there's quite a few that continued on afterwards, but not nearly as high profile. Certainly, from what I can tell, there's about 2000 tontines operational in the US at the moment in the form of retirement villages. Where the idea is that, you join a retirement village, the ones I've seen are mostly in Florida. You buy a home, you survive there as long as you can and if you run out of money, the community takes care of you until you do eventually pass away, at which point your property's resold to someone else. That sounds pretty much like a tontine to me. MAX WIETHE: One of those problems that we mentioned was the payment can come in and it can get lost or it can get legitimately lost. I'm not saying that all cases of this problem happening were all bad action by the insurance companies-- DEAN MCCLELLAND: Well, it wasn't just the payments getting lost. If you read through the Armstrong, the report of the Armstrong Commission, there was a number of obscene practices. First of all, if your payment goes missing or you miss a payment, your pension is cancelled. The assets of the pensions were being invested in all sorts of personal projects connected to the directors of the insurance companies. There was incidences where relatives of the directors of the insurance company were suddenly appearing as if they'd been in there for 20 years, receiving these big payouts and it was no way to explain it. All the while, they'd shown in the report that there was accounts where the insurance companies had these side accounts that they were using to bribe judges to keep all the court cases from going to trial and it was only in 1905 that eventually the dam broke and then everybody found out about what was going on. The insurance regulator stepped in correctly, and said this can't continue. MAX WIETHE: That brings us forward now in time to what you're doing and your tontine is not as simple as just a list of names and the amount of payments they've made and the time, you've taken some of these technological advances that we've seen over the last century really, and apply them to your product to create a modern tontine. It does have a lot of similar facets to the tontines previously, but a lot of those problems and the practices can be solved by your use of blockchain distributed ledger technology. As well another problem with tontines. It's a problem here in America with Social Security is death verification, the idea that there are people here who their families won't report them dead because they want that Social Security check to keep on coming in. There really are a lot of problems with-- it's not just related to tontines, but it's related to pensions in general, but you've applied some of these fixes to your product. I'd love to hear about how you're using technology to build this modern tontine. DEAN MCCLELLAND: Well, when I got into this, I started contacting all the global experts on tontines, and talking to them about what are the problems? Why hasn't anybody done this so far? Bit by bit, you get a feeling for what's needed to really bring this back. One of the biggest things is trust, because the insurance companies mess this up badly last time. If you're going to bring it back, you need to make sure the trust is 1,000% in the product. For this basis, I've been familiar with Bitcoin and blockchain since 2011 but I'd never found a use case, suddenly the penny drops, hang on. We're going to create a system where every penny you put into the system can be tracked on public ledgers, every investment we make can be seen on public ledgers, and every payout that's ever made can be shown but you have to keep all the members anonymous to each other so that nobody's going to be worried about anyone going around killing each other. That's like perfect use case for blockchain, or sorry, distributed ledgers, we try not to use the B word at the moment. Then the next thing we saw, which a few people have been already trying to work out was, how do we verify that the members are alive? This didn't seem too difficult to me, but whatever pending in 150 countries for thinking of it, which is that every month, we'll send Uncle Jim a notice, Jim, we haven't seen your wonderful smile in almost four weeks and you got a payment coming up. Please can you log in, shows that you have control of your device. In the course of doing this where we know he's got control of the account, but also we're verifying that Jim is alive, because we know we're not looking at a YouTube video of Uncle Jim, we can tell it's him that's there at the moment. That's the proof of life. That's done in 10 seconds, and the payment is in his account, his bank account within three or four seconds later. MAX WIETHE: That's a fascinating technological advance that actually does solve that problem of death verification. I want to ask you, how big of a market do you think there is for tontines? Specifically, why don't we just start with the US before we go all across the globe? DEAN MCCLELLAND: Well, if we think at the very highest level, on a global scale, at the moment, there's a billion people on the planet already aged over 60 and I think within 20 or 30 years, that's 2 billion. 80% of the money in the world belongs to this group, because millennials have no money. This is why it's such an important problem to be tackled. If you look at it in the US specifically, the statistic I read is that the baby boomers retiring in the next five years have $32 trillion saved for retirement. If you look at all the studies and say what, what is your main thing, once you hit retirement, what is your main fear? The number one fear is I live so long, I run out of money. The second fear is that I'll end up needing long term care that has to be paid every month. If I run out of money, I get kicked out, oh my God, which is two faces of the same problem. This is the problem that this whole generation faces now, and the only product they have an offer at the moment is an annuity which is variously known as the most hated financial product in the world for behavioral science reasons. If, and maybe it's worth one explaining the problem with annuities that the industry always talks about the-- what do they call it, the annuities puzzle, why don't people buy more annuities? Why don't people just ring up and buy annuities? Well, first of all, they're very expensive. The research shows that if you put a million dollars in an annuity tomorrow, the product they give you is worth about 700,000. That is it, because that's the profit margin of the insurance company. In the good old days, insurers, it was a mutual thing, they came together. They came together in Lloyd's Coffee Shop in London to cover each other's risks. It's not like that anymore. Insurance companies now, big corporations, and they're there to serve the stockholders. If they're selling you an annuity, if they're willing to offer it to you, it's because they think they can make a big margin on it. That's just the nature of the beast. The problem is they'll get Uncle Jim again. They'll get him to hand over his money. They'll offer him a lifetime income, but it's not index linked. He can get an index linked annuity if he wants-- MAX WIETHE: Which are, yeah, those are exploding on the market right now. That was actually one of the techniques that we had to get these variable annuities off of our books was we offered them a fixed annuity. That was the first line to try and get the annuities off of our books with the benefits that were too juicy, is we offered them a conversion, a nice conversion where we give you these benefits but we knew the entire time that the product that we were offering them was subpar even compared to what they had at the time. They are coming around a lot, but they still don't solved the problems that you're trying to address. DEAN MCCLELLAND: The problem with the fixed annuity is that it certainly offers a much lower yield than a tontine because a tontine, there's no 30% capital loss up of fund. Your income starts off, I think, it's almost 42% higher is the way the math works out. If you want to index linked, it goes even further. Let's focus on the fixed annuity for now. What we're saying is that you put your lifelong savings, you've worked all of your life for this amount of money, you're going to hand it over now, we're going to give you a fixed payment for the rest of your life, and it's guaranteed by XYZ. The problem with this is that first of all, it's probably not that attractive number in the first place and bit by bit, as you notice, the price of milk has gone up. The price of this, the price of that has gone up, you start realizing, oh my God, my lifestyle is getting worse. I've got a question for you. What is the definition of happiness? I heard a definition a few years ago, which I absolutely love. It was a Google executive explaining it. He said, the definition of happiness is an expectation of positive change in the future. I thought about this. This is very fascinating. Think about a billionaire. He's worth a billion now, if we tell him in two years' time, you're only going to be worth 500 million, he's not happy. He should be happy. He still had $500 million. He's not happy, because things are getting worse. You take a homeless guy on the street that has nothing. You say, okay, in six months' time, you're going to be living here, in 12 months' time, you're going to have a job, in two years' time, maybe you're going to have a family. He sees that life is getting better. Now, he's happy. It's an amazing definition. Go back to the annuities. I'm giving Uncle Jim $4,000 a month for the rest of his life. Then he starts to realize inflation is kicking in. He's given up all his savings in return for this payment that's actually going downward. His lifestyle is only ever going to get worse from here. Let's go back to the tontine. He puts his money in a tontine. First of all, he starts off with a much better payment to begin with, but year by year, the money is going up. Most likely, it's going up a lot faster than inflation. All that he can see is that his life is going to get better. He's now got this incentive to take care of his health, he's not going to be smoking, going to eat better, he's going to exercise more because he has something to look forward to is that if he's one of the winners of the tontine then it's going to be flying around the latest Tesla by the time he reaches 100. MAX WIETHE: Well, I'm sure some of our subscribers would probably disagree with you on the Tesla remark, but that's not why you're here. You're not here to analyze Tesla so we'll let that one slide. DEAN MCCLELLAND: If it's still around. MAX WIETHE: If it's still around, that's a good caveat to throw in there for all of the Tesla-Q viewers in the audience which we know we have a few. The psychological aspect of it with the tontines is really, to me, the way that it increases the savings rate is probably the most fascinating and interesting part of it. We brought up Malaysia, but we didn't go into any true case studies with numbers about how it could fix the problem, a good case study would really wrap it up. If there's any particular country that you want to talk about, about how this could be implemented, or if in particular, on a company level, so if you want to look at like a private example of a tontine, and how it could shore up a company that has an underfunded pension, whatever it may be, I think both of those would work as a good way to tie it all together. DEAN MCCLELLAND: If you take a look at Malaysia, which we touched on earlier on. It's a good case study. They've amazing pension scheme, 200 billion saved by Malaysians over the last, I think it's about 25 or 30 years. When they reach retirement age, the money gets paid out and what they found is that over 90% of the people, they've never had this much money in their lives. Maybe they've got friends and family coming around, all expecting a little share of it. Well ultimately, what happens is that 90% of those people spend all the money within 18 months. That's their pension, that's meant to last a lifetime. We're talking to countries like this, actually several governments that we're talking to as well don't go into details. We're saying, look, here's what we can do instead. Malaysia, specifically, is the most obese country in Asia. People are not taking good care of their health. Probably they're not incentivized to do so, because actually, if they live a very long time, they're definitely going to run out of money. They're not actually incentivized to take care of their health in the first place. If we now take that one or 2 billion that's been handed out every year and turn it into a lifetime income stream that rewards you for taking care of your health, you now have the effect that you've got all these Malaysians that have got a monthly income that incentivizes them to take better care of their health. That reduces the burden on the healthcare system in Malaysia, but there's another thing. There was a study done a few years ago, where they found that when-- it was a Princeton study, when people are running out of money, when they're worried about making it through, it has psychological effects such that even their IQs lowered by 13 basis points or 13 points. Effectively, if you can get the whole population to start thinking about moving to lifetime income, you've now improved the health outcomes. It's been proven that if people have a constant income that you lower the crime rate. Also, you've now got these people that are more comfortable within themselves. They're thinking smarter, they're now able to contribute more to society. This is why things like this are important. MAX WIETHE: Well, it sounds like tontines potentially could be solving some of the other issues with society as well as helping to fix this retirement crisis, which I think at this point, everybody agrees is going to come. Dean, I just want to say thank you so much for coming in today. I think our viewers are going to be excited to hear about tontines and what you guys are doing to try and change the way we save for retirement. DEAN MCCLELLAND: Absolute pleasure. MAX WIETHE: Thank you.