Tontine

This article is about the financial instrument. For the digital pensions company, see Tontine Trust. For the racehorse, see Tontine (horse). For the Australian pillow manufacturer, see Tontine Group.

Tontine Hotel sign, Ironbridge, Shropshire, UK

A tontine (/ˈtɒntaɪn, -iːn, ˌtɒnˈtiːn/) is an investment plan for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th centuries.

It enables subscribers to share the risk of living a long life by combining features of a group annuity with a kind of mortality lottery. Each subscriber pays an agreed sum into the fund and thereafter receives a periodical payout. As members die, their payout entitlements devolve to the other participants, and so the value of each continuing payout increases. On the death of the last member, the scheme is wound up.

Tontines are regulated in Europe under the Directive 2002/83/EC of the European Parliament and are still common in France.

The Pan-European Pension Regulation passed by the European Commission in 2019 also contains provisions that specifically permit next-generation pension products that abide by the "tontine principle" to be offered in the 27 EU member states.

Questionable practices by U.S. life insurers in 1906 led to the Armstrong Investigation in the United States restricting some forms of tontines. Nevertheless, 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 popularly credited with inventing it in France in 1653. He more probably merely modified existing Italian investment schemes; while another precursor was a proposal put to the Senate of Lisbon by Nicolas Bourey in 1641. 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 October 1670, and was soon followed by three other cities. 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 interest on the capital invested. As each investor dies, his or her share is reallocated among the surviving investors. This process continues until the death of the final investor, when the scheme is wound up. Each subscriber receives only interest; the capital is never paid back.

Strictly speaking, the transaction involves four different roles:

1. the government or corporate body that organizes the scheme, receives the loans and manages the capital
2. the subscribers who provide the capital
3. the shareholders who receive the annual interest
4. 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.

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 potentially making the survivor very wealthy. This version has often provided the plot device for mysteries and detective stories.

Patent

First page of Dousset 1792 French patent for a tontine

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 financial 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.

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.

Projects funded by tontines

The Tontine Coffee House (at left) on Wall Street, New York City

Tontines were often used to raise funds for private or public works projects. These sometimes contained the word "tontine" in their name.

Some notable tontine-funded projects included:

• The Assembly Rooms, Bath, were built between 1769 and 1771, funded by a tontine.
• Richmond Bridge, across the River Thames west of London, was financed through a tontine authorised by an Act of Parliament in 1773. Once the bridge was completed in 1777, it was the toll charged to cross the bridge that was shared between the investors, each receiving a larger share as the others died. The last survivor received the entire toll income until his death when the toll booth on the south bank was demolished and the bridge became free to cross. Although the bridge was widened on the upstream side in 1938 using the original facing stones, the bridge remains the oldest bridge crossing the Thames.
• The Tontine Hotel in Ironbridge, Shropshire, stands prominently at one end of the Iron Bridge from which the town takes its name: it was built in 1780–84 by the proprietors of the bridge to accommodate tourists who came to view this wonder of the industrial age.
• The Tontine Hotel and Assembly Rooms, Glasgow, were funded through two tontines of 1781 and 1796.
• The Tontine Coffee House on Wall Street in New York City, built in 1792, was the first home of the New York Stock Exchange.
• The first Freemasons' Hall, London. Subscribers were able to nominate someone other than themselves as the person on whose life the share was staked. On the subscriber's death they could leave their share to that person, or to anyone else. The scheme raised £5,000, but cost £21,750 in interest over its 87-year life.
• The Tontine Hotel, Greenock, Inverclyde, Scotland, was built in 1803.
• The Cleveland Tontine hotel, near Ingleby Arncliffe, North Yorkshire, originally a coaching inn on the Yarm to Thirsk turnpike road, was financed using a tontine in 1804.
• The Theatre Royal, Bath, was erected in 1805, funded through a tontine, with the Prince Regent and his brother Prince Frederick among the subscribers.

Tontine pensions in the US: 1868–1906

Tontines became associated with life insurance in the United States in 1868 when Henry Baldwin Hyde of the Equitable Life Assurance Society introduced them as a means of selling more life insurance and meeting the demands of competition. Over the next four decades, the Equitable and its imitators sold approximately 9 million policies – two-thirds of the nation's outstanding insurance contracts. During the Panic of 1873 many life insurance companies went out of business as deteriorating financial conditions created solvency problems: those that survived had all offered tontines. However, the contracts included an obligation to maintain monthly payments, and as a result spawned large numbers of policy owners whose life savings were wiped out by a single missed payment. The profits produced by the tontines' deferred payout structures proved tempting for the issuers – especially the profligate James Hyde. As the funds in the investment account accumulated, they found their way into directors' and agents' pockets, and also into the hands of judges and legislators, who reciprocated with prejudicial judgments and laws.

Finally, in 1905, the Armstrong Investigation was set up to enquire into the selling of tontines. It resulted in the banning of the continued sale of any tontines which contained toxic clauses for consumers. In essence, these toxic versions of tontine pensions were effectively (though not literally) outlawed in response to corrupt insurance company management.

Criticism from competitors

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, another of the chief critics of tontines had been the government, which also issued its own insurance.

Modern regulation

Until recently, the First Life Directive of the European Union specified tontines as a class of insurance business however the new Pan-European Pension legislation coming into force in August 2020 specifically paves the way for other types of financial service providers to create new pension products that abide by the "tontine principle".

In most places in the United States using tontines to raise capital or obtain lifetime income is consistently upheld as being legal; however, outdated legislation in two states has fostered the false perception that selling tontines in the broader U.S. is not legal.

Tontine pensions in the 21st century

In 2015, John Barry Forman and Michael J. Sabin, using modern actuarial techniques to calculate fair transfer payments when participants are of 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. In March 2017, The New York Times reported that tontines were getting fresh consideration as a way for people to get steady retirement income.

In 2017, Dean McClelland, Richard Fullmer and Jon Matonis and others published a whitepaper to deliver secure low cost Tontine Pensions based loosely upon the Forman, Sabin and Milevsky format under the brand Tontine Trust. In 2018, Richard K. Fullmer and Michael J. Sabin expanded on the ideas presented in Forman and Sabin (2015) by showing that participants in an actuarially fair tontine need not be confined to a common investment portfolio or to a common payout method. Their paper introduced the concept of individual tontine accounts (ITAs), which they envisioned as complementary to individual retirement account (IRAs).

In 2019, the CFA Institute Research Foundation published a research brief titled Tontines: A Practitioner's Guide to Mortality-Pooled Investments noting that "the study of fair tontine design is a specialty all its own—one that has emerged only recently." Fullmer and Sabin showed that it is possible to engineer payouts within a tontine structure that are immune to interest rate and reinvestment risk.

Several new pension architectures have been designed or deployed which partially or fully utilise the tontine risk-sharing structure including:

• Collective Defined Contribution (CDC) pensions which will soon be offered in the UK,
• Pan-European Pensions which can be offered in 27 EU member countries plus Switzerland, Canada, Norway Iceland & Liechtenstein,
• Pooled Annuity Funds
• Group Self-Annuitization Schemes.

Variant 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 UK 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.

In Singapore, the Chit Funds Act of 1971 defines the application of legislation to the operation of chit funds, which were also known colloquially as tontines but which operated on a different principle more commonly known as a ROSCA (Rotating Savings and Credit Association).

In Malaysia, chit funds are primarily known as "kootu funds", which again are ROSCAs and which are defined under the Kootu Funds (Prohibition) Act 1971 as "...a scheme or arrangement variously known as a kootu, cheetu, chit fund, hwei, tontine or otherwise whereby the participants subscribe periodically or otherwise to a common fund and such common fund is put up for sale or payment to the participants by auction, tender, bid, ballot or otherwise..."

In popular culture

Tontines have been featured as plot devices in many stories, movies and television programs, including:

• La Tontine (1708), a comic play by Alain-René Lesage. A physician, hoping to raise the funds to give his daughter a dowry, buys a tontine on the life of an elderly peasant, whom he then strives to keep alive.
• The Great Tontine (1881), a novel by Hawley Smart
• The Wrong Box (1889), a comic novel by Robert Louis Stevenson and Lloyd Osbourne. The plot revolves around a tontine originally taken out for some wealthy English children, and the resulting shenanigans as younger family members of the two final elderly survivors vie to secure the final payout. The book was adapted as a film, The Wrong Box, produced and directed by Bryan Forbes, in 1966.
• The Secret Tontine (1912), an atmospheric faux-gothic novel by Robert Murray Gilchrist, set in the Derbyshire Peak District during a snowy winter in the late 19th century. The plot involves the potential beneficiaries of a covert tontine, and their scheme to murder their ignorant rivals.
• Lillian de la Torre's short story "The Tontine Curse" (1948) features mysterious deaths related to a tontine in 1779, being investigated by Samuel Johnson.
• The Tontine (1955), a novel by Thomas B. Costain, illustrated by Herbert Ryman, is set in nineteenth-century England and tells a story centered around the fictional "Waterloo Tontine", established to benefit veterans of the Napoleonic wars. Among other plot twists, shareholders hire an actor to impersonate a dead nominee, and conspire to murder another member.
• In 4.50 from Paddington (1957), a Miss Marple murder mystery by Agatha Christie, the plot revolves around the will of a wealthy industrialist, which establishes a settlement under which his estate is divided in trust among his grandchildren, the final survivor to inherit the whole. The settlement is described, inaccurately, as a tontine.
• Something Fishy (1957), a novel by P. G. Wodehouse, features a so-called tontine under which the investors' sons stand to gain from marrying late.
• In the U.S. television series The Wild Wild West, Episode 16 of Season Two (1966–67) – "The Night of the Tottering Tontine" – finds James West and Artemus Gordon protecting a man who is a member of a tontine whose members are being murdered one by another.
• "Old Soldiers", an eighth-season episode of the television series M*A*S*H, focuses on a tontine set up among Colonel Potter and several of his Army buddies from World War I. While taking shelter in a château during an artillery barrage, they had found a cache of brandy and drank all but one bottle, which they set aside for the last survivor. After the only other surviving member dies, Potter receives the bottle in the mail and shares it with his staff, drinking first to his departed friends and then to the new ones he has made at the 4077th.
• In the Barney Miller episode "The Tontine" (1982), one of the last two surviving family members who invested in the tontine attempts to kill himself so that the other can have the money before growing too old to enjoy it.
• In The Simpsons episode "Raging Abe Simpson and His Grumbling Grandson in "The Curse of the Flying Hellfish"" (1996), Grampa Simpson and Mr. Burns are the final survivors of a tontine to determine ownership of art looted during World War II. Grampa eventually kicks Burns out of the tontine for trying to kill him, but before he and Bart can do anything with the art, a descendant of the original owner shows up to claim it.
• The Mystery of Men (1999), a TV film starring Warren Clarke, Neil Pearson and Nick Berry, deals with four friends in a tontine scheme suddenly realising they will benefit from each other's deaths.
• In S. L. Viehl's science fiction multi-volume novel Stardoc (2000), the title character is accused of spreading a plague to several colony worlds, on one of which the colonists had established a tontine. The sole survivor, a little girl, consequently becomes so wealthy that in the second book of the series – Beyond Varallan (2000) – she buys the bank behind the colonies to free the Stardoc from the debt she now owes.
• The 2001 comedy film Tomcats features a variation on a tontine where the last investor to get married gets the full amount of the invested funds.
• In the Archer episode "The Double Deuce" (2011), Archer's valet Woodhouse is revealed as one of three final survivors of a group of World War I Royal Flying Corps squadron mates who each put £50 into an interest-bearing account, now worth nearly a million dollars. The office workers at ISIS HQ, realizing that a new tontine could capitalize on the high mortality rate of field agents, begin persuading people to join.
• The Diagnosis: Murder episode "Being of Sound Mind" (Season 8 Episode 16) features a tontine as a motive for murder.
• The Brokenwood Mysteries episode "Tontine" (Season 5 Episode 3) centres on a tontine.

See also

• Life estate

External links

• "The Great Tontine Gamble", one of a series of articles by Burton J. Hendrick appearing in McClure's Magazine in 1906
• The Straight Dope: "What's with tontines, the odd annuities in which you benefit when others die?"
• Baker et al. (Winter 2009-2010) "Tontines for the Young Invincibles", Regulation
• "Forbes Pensions Research Council (Jan 18, 2018) "Fintech's Answer To The Global Retirement Crisis"