Tontines are investment vehicles that can be used to provide retirement income. A tontine is a financial product that combines the features of an annuity and a lottery. In a simple tontine, a group of investors pool their money together to buy a portfolio of investments and, as investors die, their shares are forfeited, with the entire fund going to the last surviving investor. Over the years, this “last survivor takes all” approach has made for some great fiction. For example, in an episode of the popular television series M*A*S*H, Colonel Sherman T. Potter, as the last survivor of his World War I unit, got to open the bottle of French cognac that he and his buddies bought (and share it with his Korean War compatriots). On the other hand, sometimes the fictional plots involved nefarious characters trying to kill off the rest of the investors to “inherit” the fund.
Of course, tontines can be designed to avoid such mischief. For example, instead of distributing all of the contributions to the last survivor, a tontine could make periodic distributions. Historically, for example, governments issued tontines instead of regular bonds. In those tontines, the government would keep the tontine investors’ contributions but make high annual dividend payments to the tontine, dividing those payments among the surviving investors. When the last survivor died, the government had no further debt obligation. For example, in 1693, the English government issued a tontine to raise one million British pounds to help pay for its war against France. At a time when the regular bond interest rate was capped at 6%, King William’s 1693 tontine, as it is known, entitled the surviving investors to share in 10% dividend payments to the tontine for the first 7 years and to 7% dividend payments thereafter.
Over the years, tontines like King William’s became quite popular. At one point, Alexander Hamilton, the United States’s first Secretary of the Treasury, suggested that the United States could use a tontine to pay off its Revolutionary War debt. All in all, government tontines played an important role in government finances over a couple of centuries, but they have since disappeared.
After the Civil War, tontines emerged as a popular investment for individuals in the United States, but they fell out of favor at the beginning of the twentieth century. The problem was not with the tontine form but with embezzlement and fraud by the holders of tontine funds. Investigations of the insurance industry in New York led to the enactment of legislation in 1906 that all but banned tontines, and tontines have since been replaced by life insurance and similar financial products.
We believe that the time has come to revive tontines as a way of providing reliable, pension-like income for retirees. Specifically, we believe that variations on the tontine principle—that the share of each member of the tontine, at her death, is enjoyed by the survivors—can be used to develop a variety of attractive retirement-income financial products. For example, tontines could be used to create “tontine annuities” that could be sold to individual investors. These tontine annuities would make periodic distributions to surviving investors, but unlike traditional tontines, tontine annuities would solicit new investors to replace those that have died. Structured in this way, a tontine annuity could operate in perpetuity.