A tontine (English pronunciation: /tɒntin/) is an investment plan for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th centuries. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases. On the death of the last member, the scheme is wound up.
Contents
- History
- Concept
- Patent
- Uses and abuses
- Projects
- Broader uses of the term
- Tontine pensions
- Popular culture
- References
Tontines acquired an unsavory reputation, and were eventually prohibited or heavily restricted in many countries. However, in March 2017, the New York Times reported that tontines were getting fresh consideration as a way for people to get steady retirement income.
History
The investment plan is named after Neapolitan banker Lorenzo de Tonti, who is credited with inventing it in France in 1653, although it has been suggested that he merely modified existing Italian investment schemes. Tonti put his proposal to the French royal government, but after consideration it was rejected by the Parlement de Paris. The first true tontine was therefore organised in the city of Kampen in the Netherlands in 1670. The French finally established a state tontine in 1689 (though it was not described by that name because Tonti had died in disgrace, about five years earlier). The English government organised a tontine in 1693. Nine further government tontines were organised in France down to 1759; four more in Britain down to 1789; and others in the Netherlands and some of the German states. Those in Britain were not fully subscribed, and in general the British schemes tended to be less popular and successful than their continental counterparts.
By the end of the 18th century, the tontine had fallen out of favour as a revenue-raising instrument with governments, but smaller-scale and less formal tontines continued to be arranged between individuals or to raise funds for specific projects throughout the 19th century, and, in modified form, to the present day.
Concept
Each investor pays a sum into the tontine. Each investor then receives annual dividends on the capital invested. As each investor dies, his or her share is reallocated among the surviving investors. This process continues until only one investor survives. Each subscriber receives only dividends; the capital is never paid back.
Strictly speaking, the transaction involves four different roles:
- the government or corporate body which organizes the scheme, receives the loans and manages the capital
- the subscribers who provide the capital
- the shareholders who receive the annual dividends
- the nominees on whose lives the contracts are contingent
In most 18th and 19th-century schemes, parties 2 to 4 were the same individuals; but in a significant minority of schemes each initial subscriber-shareholder was permitted to invest in the name of another party (generally one of his or her own children), who would inherit that share on the subscriber's death.
Sometimes the names in (4) were well-known people such as kings and queens. This eased the problem of death-verification and also reduced the risk of murder etc. to improve one's chances.
Because younger nominees clearly had a longer life expectancy, the 17th and 18th-century tontines were normally divided into several "classes" by age (typically in bands of 5, 7 or 10 years): each class effectively formed a separate tontine, with the shares of deceased members devolving to fellow-nominees within the same class.
In a later variation, the capital devolves upon the last survivor, thus dissolving the trust and usually making the survivor very wealthy. This version has often been the plot device for mysteries and detective stories.
Patent
Financial inventions were patentable under French law from January 1791 until September 1792. In June 1792 a patent was issued to inventor F. P. Dousset for a new type of tontine in combination with a lottery.
Uses and abuses
Louis XIV first made use of tontines in 1689 to fund military operations when he could not otherwise raise the money. The initial subscribers each put in 300 livres, and, unlike most later schemes, this one was run honestly; the last survivor, a widow named Charlotte Barbier, who died in 1726 at the age of 96, received 73,000 livres in her last payment. The English government first issued tontines in 1693 to fund a war against France, part of the Nine Years' War.
Tontines soon caused problems for their issuing governments, as the organisers tended to underestimate the longevity of the population. At first, tontine holders included men and women of all ages. However, by the mid-18th century, investors were beginning to understand how to game the system, and it became increasingly common to buy tontine shares for young children, especially for girls around the age of 5 (since girls lived longer than boys, and by which age they were less at risk of infant mortality). This created the possibility of significant returns for the shareholders, with significant losses for the organizers. As a result, tontine schemes were eventually abandoned, and by the mid-1850s tontines had been replaced by other investment vehicles, such as "penny policies", a predecessor of the 20th-century pension scheme.
Tontines became associated with life insurance in the United States in 1868 when Henry Baldwin Hyde of the Equitable Life Assurance Society introduced tontines as a means to sell more life insurance, and meet the demands of competition. When Equitable Life Assurance was establishing its business in Australia in the 1880s, an actuary of the Australian Mutual Provident Society criticised tontine insurance, calling it "an immoral contract" which "put a premium on murder". In New Zealand at the time, one of the chief critics of tontines had been the government, which issued its own insurance.
A property development tontine, The Victoria Park Company, was at the heart of the notable case of Foss v Harbottle in mid-19th century England.
While once very popular in France, Britain, and the United States, tontines have been banned in Britain, pursuant to the British Life Assurance Act 1774, 14 Geo. 3, c. 48, and as amended, and in the United States. See, e.g., Warnock v. Davis, 104 U.S. 775, 779 (1881). Such financial instruments are illegal primarily because they create beneficiaries who have an interest in the reduced lifespan of another person, and because many of these schemes were little more than swindles that encourage mischief against the life of the insured. Geneva, in Switzerland, was known for its active market in tontines in the 17th and 18th centuries. The First Life Directive of the European Union specified tontines as a class of insurance business to be underwritten by authorised and regulated companies, but that part of the regulations was not enacted in the United Kingdom.
Projects
The proceeds of the subscription were often used to fund private or public works projects. These sometimes contained the word "tontine" in their name.
Broader uses of the term
In French-speaking cultures, particularly in developing countries, the meaning of the term "tontine" has broadened to encompass a wider range of semi-formal group savings and microcredit schemes. The crucial difference between these and tontines in the traditional sense is that benefits do not depend on the deaths of other members.
In the U.K. during the mid-20th century, the term was applied to communal Christmas saving schemes, with participants making regular payments of an agreed sum through the year, which would be withdrawn shortly before Christmas to fund gifts and festivities.
As a type of rotating savings and credit association (ROSCA), tontines are well established as a savings instrument in central Africa, and in this case function as savings clubs in which each member makes regular payments and is lent the kitty in turn. They are wound up after each cycle of loans. In West Africa, "tontines" - often consisting of mainly women - are an example of economic, social and cultural solidarity.
Informal group savings and loan associations are also traditional in many east Asian societies, and under the name of tontines are found in Cambodia, and among emigrant Cambodian communities.
Tontine pensions
In 2015, John Barry Forman and Michael J. Sabin, using modern actuarial techniques to calculate fair transfer payments when participants are different ages and have made different contributions, proposed a new structure of pension plan on the tontine model, through which large employers could provide retirement income for their employees. They argued that tontine pensions would have two major advantages over traditional pensions, as they would always be fully funded, and the plan sponsor would not be required to bear the investment and actuarial risks. Similar arguments were put forward in the same year by Moshe Milevsky.
Popular culture
Tontines have been featured in: