In the 17th century Italian Banker Lorenzo Di Tonti proposed a new idea to the King of France as a means of raising substantial finance for the state.
Initially rejected by the French, the first “Tontine” style financing was launched by the Dutch City of Kampen in 1670 where a fixed coupon was paid every year to be split amongst surviving members of the Tontine.
Upon hearing about its success, France eventually issued the first in a series of 14 State Tontines to raise money to “fund military operations”. The last survivor of the very first French tontine was a widow named Charlotte Barbier. Before dying in 1726 at the age of 96, in return for her 300 livres investment, she had received back 73,000 livres.
Within 4 years of the first French Tontine, England raised it’s own Tontine, ironically to pay for the then ongoing war with France. Soon many other state Tontines were issued across Europe and were always wildy over-subscribed. In time, countries learned how to create cheaper ways to raise money through creating central banks and issuing bonds and started to resent the high amounts they were paying to all of the now increasingly wealthy members of the tontines.
73 years after their first Tontine, the French Finance Minister froze the rising tontine payments & converted them to lower flat payouts, thereby breaching the terms of the tontines. Within 20 years, the royal “guarantors” of the tontines had been beheaded in the French Revolution.
Across Europe, by the mid 1850s, the tontine issuing countries had switched to “penny policies” (fledgling pension schemes) which were substantially less generous to the members & so became far cheaper for the governments.
### The Emergence of Private Tontines & Tontines come to the US
By the 18th century Tontines were also being used to raise private finance for construction projects on both sides of the Atlantic.
In Britain several notable projects included Hotels, the Freemasons Lodge in City of London and the Richmond Bridge, across the River Thames west of London.
Amongst the notable US private projects was a building funded by stock dealers and ship underwriters at 82 Wall Street.
The “Tontine Coffee House” became the primary venue in New York for the trading of shares & commodities, securing Wall Street’s place in history and leading the brokers & underwriters of the Tontine Coffee House to collaborate on a new venture which became known as the New York Stock Exchange.
In 1876, seeking a means to stand out in the emerging & highly competitive insurance markets, Henry Hyde, the founder of Equitable Life, introduced the US public to tontine pensions. The product launch was so successful that it was quickly copied by his main competitors including Mutual of New York & New York Life.
Within 30 years, the Tontine business had quickly outgrown the Annuities business with over $5.77bn alone of Tontines sold by the 4 largest firms equivalent to $160 BN in spending power today.
Henry however had died in 1899 and majority control of Equitable Life had been handed to his 23 year old son James. On 31st January 1905, obviously giddy on the astonishing growth of the tontine industry, young James Hyde threw “the most extravagant costume ball” that New York had ever seen.
Subsequently it emerged that the ball and many other lavish expenses were being paid for out of the Equitable Life company and allegations were made by competitors that the reckless spending could endanger the company’s ability to meet its obligations to members.
An investigation followed which but this soon spread to the whole insurance industry & revealed widespread fraud including tampering with the tontine membership ledgers, rampant overcharging of fees/costs to the tontine pension funds & blatant conflicts of interest regarding the investments being made using member capital. in 1906, the Armstrong Commission which was investigating the scandal ultimately banned the insurance companies from selling any products containing the toxic clauses many of which had been included in the tontine policies.
Without these clauses, the insurers couldn’t see how to make money from selling tontine products which, by their nature, paid all of the profit to the members. As a result, the tontine products were removed from sale & replaced by annuities.
These much more complex products offered consumers much lower returns and were great for insurers because when customers passed away, their assets now went to the shareholders of the insurance companies instead.
In the eyes of many academics & economists, unattractive & expensive products such as annuities have served to enrich the big insurers whilst deterring generations of consumers from saving properly for retirement, a consequence of which is that the US now faces one of the lowest savings rates in history.
They believe that to get people saving again, we need to bring back the fastest selling retirement product in history but this time to make it impossible to tamper with the ledgers, to overcharge fees or to mismanage the assets.