What do you think? Would you consider a tontine investment structure for your outgoing clients? Would you consider that the lower cost and greater transparency of a tontine is worth trading the “security” of pension mortality credits? When Equitable Life Assurance moved to Australia in the 1880s, an actuary at the Australian Mutual Provident Society criticized tontine insurance as an “immoral contract” that “prioritized murder.” [26] In New Zealand at the time, another major critic of tontines was the government, which also issued its own assurance. [27] It was the ultimate lottery. When you die, you have lost everything in a tontine. But if you were the last person standing, you would stand up to collect huge annual payments. After all, all over the world, including the American tontine, has been used as a form of social security or retirement insurance. In France, short-term pension insurance (5-20 years) was called “provident banks” and was very popular with the military. They thought they didn`t need money if they died on the battlefield, but if they didn`t, they would have a well-stocked retirement. In the British Isles, tontines were used by funeral societies that offered funeral insurance (for example, decent and religiously correct funerals for their members and families).14 In the 19th century, tontine insurance known as the “deferred dividend” policy was introduced in the United States by Henry B. Hyde, one of the founders of Equitable Life (now AXA). 15 At the beginning of the American Republic, U.S. Treasury Secretary Alexander Hamilton proposed using tontines as a means of reducing public debt. The Hamilton tontine had an unusual payment structure that froze payments from investors to end recipients when the survivor pool was reduced to 20% of the original group. These beneficiaries would still receive a dividend, but it would no longer increase if their co-beneficiaries died.
However, Hamilton`s tontine proposal was ignored by Congress. The first documented proposal for a tontine was made in 1653 by Lorenzo de Tonti (after whom the tontine is named) and was proposed to the French King Louis XIV to borrow money to finance his army for his ongoing wars. Louis XIV first used tontines to finance military operations in 1689, when he could not otherwise raise the money. The first subscribers entered 300 pounds each, and unlike most later programs, this one was executed honestly; the last survivor, a widow named Charlotte Barbier, who died in 1726 at the age of 96, received 73,000 livres of her last payment. [14] [15] [16] The English government first issued tontines in 1693 to finance a war against France, which was part of the War of the Palatine Succession. [10] [16] In other words, if the government were to borrow $1,000,000 at 8% for a bond, perhaps the government could borrow money at 6% with a tontine because investors might be willing to hope/gamble that their share of the 6% payout rate of the tontine would eventually raise the 8% interest rate on the bond. While a person could receive larger tontine payments over time, dividend payments would remain at “only” 6% from the government`s perspective (as subsequent increases are redistributed by other tontine investors, not by the government making the payments). Since early tontines also did not require principal repayment (instalments should ultimately result in a repayment of principal and a return on that principal), the actual “cost of borrowing” of the tontine was even lower than the stated interest rate alone.
In other words, conceptually, a tontine has a structure very similar to that of a pension, as both pay “mortality credits” – a redistribution of the deceased`s shares to support survivor payments. The main difference, however, is that in the case of an annuity, mortality credits are paid at the outset (based on the assumption of how deaths will occur in the future, and usually guaranteed by the annuity company`s guarantee), whereas with a tontine, only basic interest is paid upfront and mortality credits are not added up until deaths actually occur (and the dollar amount to be redistributed. is based on B. about these known deaths). Today, tontine arrangements are still used in France, especially for estate planning. TontineTrust, a Gibraltar-based company, develops tontine-based products using blockchain technologies and smart contracts to prevent fraud and maximize payments.9 Ultimately, it remains to be seen whether consumers would be willing to adopt a payment structure that aims to get more money for the survival of their tontine peers. Yet Milevsky`s examination of history shows that tontine arrangements were indeed very popular in the past, and nearly 100 years ago, Americans` use of tontines for retirement was similar to the adoption of IRAs today. Which means it really can`t be too far-fetched to suggest that they should also be brought back for the 21st century as a new form of lifetime income vehicle for retirement! Finally, in 1905, the Armstrong Inquiry was set up to investigate the sale of tontines.