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A tontine (English pronunciation: //) 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. In a variant, which has provided the plot device for most fictional versions, upon the death of the penultimate member the capital passes to the last survivor.
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.
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 famous 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, so dissolving the trust and usually making the survivor very wealthy. This version has often been the plot device for mysteries and detective stories.
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 British 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 tontines 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, but significant losses for the governments. 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.
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.
The proceeds of the subscription were often used to fund private or public works projects. These sometimes contained the word "tontine" in their name.
- 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 Coffee House on Wall Street in New York City, built in 1792, was the first home of the New York Stock Exchange.
- Fortune's Tontine Tavern on Princes Street, Edinburgh, Scotland, was built in 1796, and was Edinburgh's first proper hotel. Matthew Fortune's father John had previously run Fortune's Tavern in Old Stamp Office Close in the High Street in the Old Town, a favourite of the upper classes. The tontine which owned this moved the business to the newly created and fashionable New Town. The five star Balmoral Hotel, built in 1902, stands on the site today.
- 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.
Broader uses of the term
In Francophone 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.
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 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.
Tontines have been featured in:
- 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.
- What Mrs. Macgillicuddy Saw aka 4:50 from Paddington aka Murder! She Said by Agatha Christie involved a will structured somewhat like a tontine.
- 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 shenanigans resulting as younger family members of the two final survivors vie to secure the final payout. The book was adapted as a film (produced and directed by Bryan Forbes) in 1966.
- In Robert Murray Gilchrist's atmospheric faux-gothic novel "The Secret Tontine" (1912), set during a snowy winter in the Derbyshire Peak District in the late C19th, those who seek to inherit from the existence of an unknown tontine plot 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. Set in nineteenth-century England, the story centres 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.
- "M*A*S*H" episode "Old Soldiers" (1980), 18th episode of 8th season, in which Col. Potter (Harry Morgan) is informed that he is the last surviving member of a tontine that consisted of several Army buddies from WWI. The tontine concerned a bottle of fine wine from an abandoned house in which they had hid together behind enemy lines one night. As the episode ends, Potter and his fellow officers in the M*A*S*H unit (Hawkeye, BJ, etc.) drink to a toast offered by Potter to his old WWI comrades and then a second one offered to the new friendships he has made with these comrades-in-arms in Korea.
- In The Simpsons episode "Raging Abe Simpson and His Grumbling Grandson in "The Curse of the Flying Hellfish"" (1996), Grandpa Simpson and Mr. Burns are the final survivors of a tontine to determine ownership of art looted during World War II.
- In the Archer episode "The Double Deuce" (2011), it is revealed that Archer's butler Woodhouse is 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 which is worth nearly a million dollars at present. The office workers at ISIS HQ, realizing that a new tontine could capitalize on the high mortality rate of field agents, began persuading people to join while remaining safely behind a desk.
- 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
- The novel Something Fishy by P. G. Wodehouse features a similar tontine, except it is the investors' sons that stand to gain from marrying late.
- Jennings; Swanson; Trout (1988), p. 107
- Chisholm, Hugh, ed. (1911). "Tontine". Encyclopædia Britannica 27 (11th ed.). Cambridge University Press.
- Milevsky 2015.
- Weir 1989, pp. 95–124
- Weir 1989, pp. 103–104
- Description des Machines et Procédés Specifies Dans Les Brévets D’Invention, De Perfectionnement et D’Importation, 1811 pp 544 et seq.
- Buley, R. Carlyle (1967). The Equitable Life Assurance Society of the United States 1859-1964. New York: Appleton-Century-Crofts. p. 291.
- Buley, R. Carlyle (1967). The Equitable Life Assurance Society of the United States 1859-1964. New York: Appleton-Century-Crofts. p. 472.
- The Insurable Interest Requirement for Life Insurance: Recent Developments
- Old Stamp Office Close
- "Balmoral Hotel". Take me to Edinburgh.
- "MQ Magazine, issue 19". United Grand Lodge of England.
- Henry, Alain (June 19, 2003). "Using tontines to run the economy" (PDF). l'École de Paris du management.
- Liev, Man Hau (November 26–29, 1997). "Tontine: an alternative financial instrument in Cambodian communities". 12th NZASIA Conference.
- Forman, John Barry; Sabin, Michael J. (2015). "Tontine Pensions" (PDF). University of Pennsylvania Law Review 163 (3): 755–831.
- Milevsky 2015, pp. 170–97.
- Coudy, Julien (1957). "La Tontine royal sous le règne de Louis XIV". Revue historique de droit français et étranger. 4th ser. 35: 128–33. (French)
- Dunkley, John (2007). "Bourbons on the Rocks: tontines and early public lotteries in France". Journal for Eighteenth-Century Studies 30: 309–23. doi:10.1111/j.1754-0208.2007.tb00338.x.
- Gallais Hamonno, Georges; Berthon, Jean (2008). Les emprunts tontiniers de l'Ancien Régime: un exemple d'ingénierie financière au XVIIIe siècle. Paris. (French)
- Jennings, Robert M.; Trout, Andrew P. (1976). "The Tontine: fact and fiction". Journal of European Economic History 5: 663–70.
- Jennings, Robert M.; Trout, Andrew P. (1982). The Tontine: from the reign of Louis XIV to the French Revolutionary era. Homewood, IL.
- Jennings, Robert M.; Swanson, Donald F.; Trout, Andrew P. (1988). "Alexander Hamilton's Tontine Proposal". William and Mary Quarterly. 3rd ser. 45 (1): 107–115. JSTOR 1922216.
- McKeever, Kent (2011). "A Short History of Tontines". Fordham Journal of Corporate & Financial Law 15 (2): 491–521.
- Milevsky, Moshe A. (2015). King William's Tontine: why the retirement annuity of the future should resurrect its past. Cambridge: Cambridge University Press. ISBN 978-110-707612-9.
- Weir, David R. (1989). "Tontines, Public Finance, and Revolution in France and England, 1688-1789". Journal of Economic History 49: 95–124. doi:10.1017/s002205070000735x.
- Wyler, Julius (1916). Die Tontinen in Frankreich. Munich and Leipzig. (German)
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