An old fashioned and now (probably) illegal way to raise cash

This blog post has been contributed by Amanda Taylor, Teaching Fellow for Undergraduate Laws.

Hand holding a sign 'Game Over - Thank you for playing'.

In the late 1690s and early 1700s Tontine were all the rage. A Tontine is not a trust in the strict way of our understanding of a ‘normal’ trust. However, it is a pseudo trust in that money is held on behalf of others till they die. The surviving beneficiary can then break the trust and take the money. A modern, more regulated form of this scheme could be said to be like a pension fund. A tontine is, put simply, where the last man standing, out of all the original subscribers, wins the prize.

Tontines were popular as ways to raise money for certain projects. By way of example, one of the most famous and well documented tontines was the early Freemasons’ Tontine in early 1700 which was a scheme to raise £5000 to build a Hall for the use of Freemasons in their London headquarters. The subscribers were required to pay in certain amounts of money by specific times and would be paid interest on their subscription. The capital sum never had to be repaid, only the interest. The interest was divided equally amongst all the subscribers.

The way it worked was that the subscribers nominated one person on whose life they were ‘wagering’ or betting would be the longest lived out of all the subscribers’ nominees. They could nominate themselves should they so wish or choose to nominate someone they didn’t even know. Some chose to nominate a young member of the Royal family and some chose to nominate their own new-born child. It was a gamble as no one had any idea when that person would die. Remember at that time the chances of infant mortality were high so although it sounds a clever idea to nominate a new-born it was, in fact, a risky strategy.

Each year the subscribers had to prove that their nominated person was still alive before they were paid their portion of the interest. If their nominated person died, that subscriber left the tontine, the pool of subscribers became fewer and the interest paid to each individual subscriber increased as it was divided up amongst less people. When there was only one nominated person left alive, the subscriber would be paid the whole pot of interest and this would only stop once their nominated person died; hence the last man standing idea.

As a trust a Tontine had some merits as the capital sum was quickly collected and held for the purpose. However, one disadvantage was that no one could predict how much interest would need to be paid out over the course of the Tontine. This could be much more than the original capital payment depending on how long the last subscriber lived.

The other major flaw, and reason for most Tontines becoming illegal in the UK, was that when gambling on the life of a person (other than yourself), a death or two which could further your chances of becoming the ‘last man standing’ might not be unwelcome.

The Life Assurance Act 1774 was enacted and put paid to most Tontines overnight. Not all schemes were the same and even with the Life Assurance Act in place it is still possible, in theory, to create a Tontine provided they abide by and comply with the law.

I am grateful to this article for the history of the Freemason’s Tontine.

One comment

  1. Thank you Amanda for an interesting post. Vaguely aware of these instruments. Modern defined benefit pensions are also based on a “bet”: an actuarial estimate of population longevity, which in low interest environments has put pressure on the benefit pool to meet pension claims. No last man standing, but the investment financial risk may result in insufficient funds for funding retiree benefits. This risk is not on company administrators? Is it therefore on Trustee? Something that cannot be known in advance [e.g. for interest rate risk]. Which is why that risk has been mostly transferred to individuals in defined contributions.

    From a trust law standpoint, the responsibility for the “funding” of pensions cannot be Corporate? It is separate – trustee – liability correct? As per Hastings Bass criteria in Mettoy Trust?

    I can think of numerous cases where a Company has not taken responsibility of the Pension Scheme in a corporate take-over, leaving those in acquired Co. pensions un-funded. Does change of ownership in a Pension-scheme modify Hastings-Bass? Are there statutory protections for under-funded pensions schemes that cannot be contracted away in change of ownership?

    Thank you for the excellent class discussion opportunities you provided us this year.

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