MAX WIETHE: Well, thanks for coming in. 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