Risk Pooling: The Unseen Pillar of Modern Society

Simon Barcelon


25 Jan 2024


While ancient wonders such as the Great Pyramid of Giza have mesmerized us for centuries, a few age-old concepts continue to profoundly impact our lives even in today’s technologically advanced world. Among these timeless ideas, risk pooling emerges as a financial marvel; often overlooked but deeply significant.

A Journey Through Time

In essence, risk pooling spreads out financial or operational risks across a group. Instead of bearing the entire brunt of a loss, individuals share it. A more positive way to think of it can be friends collecting funds for a communal gift: while the burden is distributed, the joy is universal. This concept isn’t new.

One of the earliest documented cases of risk pooling was seen with Chinese traders dating back to the 3rd Millennium BC. When transporting goods along dangerous rivers, these merchants would distribute the goods across several ships to reduce the potential loss if one ship encountered problems – effectively pooling the risk of losing goods during transportation.

Fast forward to the 21st Century, and you’ll find that risk pooling underpins the essence of industries from insurance to finance. Over the years, risk pooling has been wielded to safeguard communities, ensure financial security, and even spur innovations.

Risk pooling making lives better

The Evolution: Risk Pooling’s Enhanced Efficacy Over Time

Historically, while the concept was promising, executing risk pooling had its challenges. Inadequate tracking systems, lacklustre security measures, and minimal data processing capabilities often curtailed its potential. But the digital age has changed the game. Enhanced data analytics, robust tracking mechanisms, and secure platforms have transformed risk pooling from a straightforward financial strategy to a sophisticated and precision-driven tool.

  • On-Demand Insurance: Trov allows users to insure specific items for a chosen period through a mobile app. Users can turn insurance on or off for each item, pooling risk among a community of users with similar insurance needs, but only for the time they need it.

  • Flight Delay Insurance & Blockchain: Etherisc is transforming flight delay insurance using blockchain technology, enabling instant and automated compensation for travellers. This approach streamlines the traditional risk pooling process, ensuring transparency and efficiency and considerably simplifies the claims experience for users.

  • Peer-to-Peer Insurance: Contemporary platforms like “Lemonade” and “Teambrella” rejuvenate traditional risk pooling. While Lemonade employs AI for claims processing, Teambrella integrates a democratic, vote-based approach, emphasizing community-driven risk evaluation.

Longevity Risk Pooling

You might wonder about the connection between risk pooling and retirement. Think of risk pooling as a fundamental pillar in retirement planning. It’s widely used in the sector, and modern retirement systems rely heavily on it. Defined benefit (DB) pension plans use it to offer lifetime income to members. Governments employ it in social assistance programs like the Canada Pension Plan (CPP). Insurance companies use it to provide annuities, ensuring lifetime income solutions. While these tools are different, their core function is the same: they enable individuals to share their longevity risk with a group, helping to manage the uncertainty surrounding their life expectancy.

Closer to Home: The Longevity Pension Fund

The Longevity Pension Fund integrates the time-tested risk pooling concept with the power of contemporary technology. By creating a secure and cost-efficient risk pooling mechanism, this approach aims to offer retirees a balance of financial peace of mind and the immediate benefit of spending more today.

  • Ability to spend more in retirement: Longevity isn’t just about ensuring a safe future. It’s about relishing the present. By harnessing risk pooling, members can confidently spend more today, knowing they have income for life.

  • Longevity credits augment investment returns: Risk pooling creates longevity credits as members exit the Fund (either voluntarily or at death). The investment returns of the exiting investors remain in the Fund to benefit surviving members of the pool, leading to sustained or increased returns.

  • Democratizing an institutional solution: Longevity breaks barriers by making its risk pooling solution widely available for all Canadians (versus just those with access to a workplace pension plan). It’s an endeavour to ensure everyone can look forward to a secure retirement.

The chart below illustrates how longevity credits accumulate over time.

Investment returns, longevity credits (death), and longevity credits (voluntary)*Note: This example considers a constant portfolio return of 5.7%, and stochastically models investors passing away over time using the same mortality table and mortality improvement scale listed in the prospectus. The results shown are purely hypothetical and do not provide a guarantee of expected performance of the Fund. This table does not take into account all risks, fees, unique financial circumstances, or the costs of redeeming an investment in the Fund.

The Bottom Line

Risk pooling, while intangible, offers tangible benefits. It’s not just a shield against future uncertainties; it’s a tool for a prosperous today. Given how far risk-pooling products have come over the centuries and how secure and sophisticated they are today, it’s clear how they can help improve one’s retirement.

It’s important to evaluate your personal circumstances, including your tax situation, risk tolerance, and retirement goals. Speak with your tax professional and investment advisor for retirement and tax planning. Contact us if you would like to learn more.

Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. The prospectus contains important detailed information about the investment fund. Please read the prospectus before investing. There is no assurance that any fund will achieve its investment objective, and its net asset value, yield, and investment return will fluctuate from time to time with market conditions. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Income in the form of Fund distributions is not guaranteed, and the frequency and amount of distributions may increase or decrease. The Fund has a unique mutual fund structure. Most mutual funds redeem at their associated Net Asset Value (NAV). In contrast, redemptions in the decumulation class of the Fund (whether voluntary or at death) will occur at the lesser of NAV or the initial investment amount less any distributions received. You can always access the lesser of unpaid capital (initial value of your investment less any income payments made) or your net asset value. Fees may apply.

The Longevity Pension Fund is managed by Purpose Investments Inc. The document is not investment advice, nor is it tailored to the needs or circumstances of any investor. Talk to your investment advisor to determine if the Longevity Pension Fund is right for you, and always read the prospectus before investing. Nothing on this document shall be considered a solicitation to buy or an offer to sell, or a recommendation for a security, or any other product or service, to any person in any jurisdiction where such solicitation, offer, recommendation, purchase or sale would be unlawful under the laws of that jurisdiction. No securities commission or similar regulatory authority has reviewed this document, and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable; however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are, by their nature, based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments believe to be reasonable assumptions, Purpose Investments cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

The Fund is regulated by the Ontario Securities Commission (OSC), which is an active member of the Canadian Securities Administrators (CSA). The Fund is not regulated or overseen by the Financial Services Regulatory Authority of Ontario (FSRA) or other member organizations of the Canadian Association of Pension Supervisory Authorities (CAPSA). As such, any actuarial consulting relating to the Fund is conducted by third-party actuaries qualified by the Canadian Institute of Actuaries (CIA) but is not conducted under FSRA supervision.