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They have featured in TV shows from M*A*S*H to The Simpsons and even the name of Bill Ackman’s blank-cheque vehicle. Now a growing chorus of academics and actuaries reckon tontines should make a reappearance in real life.
Centuries old, these investments once funded wars and infrastructure, including an abortive £26,000 bid to build an early Richmond bridge in London. Members pool some money and receive an annual payment until they die; the entire pot goes to the last man or (actuarially more likely) woman standing.
This mash-up of life annuity and lottery-of-life ticket provided an excellent device for fictional and cinematic black comedies. It also proved a breeding ground for fraud, corruption and embezzlement. Insurers rushed to issue tontines but found the only way to turn a profit was via toxic clauses, such as expelling members who made late payments. Spooked US policymakers brought in laws in 1906 that effectively killed the products.
Rule out the foul play — humankind has learnt something over the intervening century or so — and resurrecting tontines for the 21st century has a certain appeal. People are living longer and many pension funds are sorely underfunded. Tontines are by nature self-funded; albeit, as the Chartered Financial Analyst programme points out, this is different from adequately funded.
Some countries have already turned to tontines to help address these issues. Insurers in Japan, which has the highest rate of centenarians, have launched policies with tontine-style characteristics. They are deployed on Israeli kibbutzim and by wealthy French looking to reduce inheritance tax bills. Canada introduced a variable payment life annuity (VPLA) in its 2019 budget which has similar characteristics. Tontine-like payouts also feature in Defined Contribution plans in the Netherlands and the UK’s Royal Mail.
Strict rules would need to be applied. Members would have to commit to payments for the long haul. Otherwise, anyone diagnosed with a terminal illness would be tempted to quit. Unlike a life insurance policy, payments could not be passed to a beneficiary. Instead the income is distributed among surviving members as “mortality credits” until only one remains.
Fairness would also crucial: members need to be of similar ages and life expectancies. Future payments are not guaranteed. But researchers say tontines should pay more on average per dollar invested with less costly regulation. They are not so different to annuities, except a saver rather than an insurer benefits from residual capital. Time to give tontines a reboot.