From the November 2013 issue of Research Magazine • Subscribe!

October 28, 2013

Milevsky’s Tales From Annuity History: A Most Curious Will(iam)

An intriguing estate plan echoes across centuries

In the city of Lancashire, which is in the northwest part of England, in the year 1581 a very wealthy landowner by the name of Alexander Houghton died without legitimate heirs to inherit his wealth and continue his title. He was a nobleman with a large estate, a household with over 30 servants and substantial income from his properties and investments. Alexander loved the arts, theatre and music and supported a troupe of players in a local acting company in Lea Hall, also in Lancashire.

So, although by law Houghton’s half-brother and brother-in-law inherited the estate, Alexander left provisions in his will that the servants be granted employment and permanent financial support. All in all, Houghton left a substantial sum to his devoted servants and employees. As anyone who has watched the PBS television show Downton Abbey can attest, the relationship between master and servant was quite close in England, having been developed over many generations.

However—and this is where things get relevant—Houghton didn’t quite hand over a lump sum of money to his favored group of servants. Instead, he set-up a (peculiar) retirement annuity for them.

First, the will specified that the annual rents from properties contained in the estate, amounting to about 330 shillings per year, be distributed among 11 of his most favored employees. The oldest was to receive £3 (which is 60 shillings) per year, the next oldest £2 per year, etc., all the way to the youngest who was to receive 12 shillings per year, for life. These sums might seem trivial by today’s standards, but in the mid-16th century the average industrial wage was £6 a year.

Now, at this point you might be wondering about the significance of a benevolent and childless English landowner, kind enough to grant a pension to his devoted employees when he died. But, you see, Houghton added a small provision to the will that made his generosity unlike any other pension you or your clients have ever seen.

I will quote directly (in more modern English) from the 1581 document.

“The portion of those that die shall be equally divided amongst those that shall survive, so that the final survivor amongst them shall have for his life the whole rent from the property.”

Effectively, when one of the 11 servants died, the annuity income he would have been entitled to—instead of going to spouses, and children, like today’s pension—would be redistributed to the other servants who were still alive. So, the annual pension of those who were still living would increase as other members of this very small group died off. A nice inflation hedge, if you will.

Why Houghton chose this particular structure—you die and I win—to disperse the assets in his estate isn’t quite clear. And, at first glance this might appear to be a most unfair and ghoulish arrangement. Why should the survivors benefit from the death of others? Shouldn’t the income continue to beneficiaries and loved ones? The cynical reader might worry about shenanigans to accelerate the demise of others (a.k.a. moral hazard).

But when you think about it very carefully and through the prism of financial economics, there are some good reasons why a pension annuity should be structured this way. It creates greater predictability of the liability, shares longevity risk across the cohort that stands to benefit the most and provides a natural inflation hedge. I will try to convince you that this is “optimal” in future writing and would be glad to reply to challenges. But, even if you disagree with the merits or fairness of such a scheme, it was Houghton’s will. He should be free to do with his wealth, income and property as he pleased, regardless of the perverse incentives it might create.

Enter the Tontine

Readers familiar with the history of insurance—or Victorian crime novels—might recognize this arrangement as a tontine, named after the famed Italian entrepreneur Lorenzo Tonti (1602–1684), which is a financial scheme that has enthralled me of late.

In a tontine annuity, a fixed, predictable, known amount of income is allocated among survivors, and the last remaining member of the pool receives all the income until he or she dies. This is exactly how Houghton structured his will. But, as you might note from the dates at the very beginning, Houghton wrote his most peculiar will and last testament in 1581. He initiated a tontine scheme among his 11 servants almost a century before Tonti “invented” and named tontines in the mid-1650s. Perhaps this is yet another example of Stigler’s Law of Eponymy stating that no scientific discovery is named after its original discoverer.

Surprisingly, private tontine schemes were quite prevalent in England well before Tonti ever thought of naming them. They were also used by governments in England during the 17th and 18th centuries as a way of financing the national debt, but they weren’t called tontines until many years later. They were referred to in official documents as “life annuities with group survivorship benefits.”

But the bigger surprise lies in the actual beneficiaries to Houghton’s will in 1581, and in particular one of the 11 servants named, curiously, Will or William. He was one of the younger ones, being 17 years of age, and was quite fortunate to benefit from his master’s largesse of 40 shillings a year for the rest of his life. From the will it appears that William was employed as an entertainer, musician and actor. It is not clear whether he was part of the acting troupe that Houghton supported, or whether William entertained other employees and servants. A pension of 40 shillings a year for life was extremely generous for a 17 year-old, so one might therefore speculate that he was quite the entertainer.

What we do know for certain was his last name. It was Shakeshaft. This makes him one William Shakeshaft and—hold on now—the person most historians now believe was William Shakespeare.

The surname Shakeshaft was William’s paternal grandfather’s name, and a common variant he used. Much evidence suggests that Shakespeare spent part of his teenage years entertaining in the household of Alexander Houghton, after his early childhood at Stratford-upon-Avon. Indeed, his connection to Lancashire has been linked to his Catholic and popish sympathies, a subject of much controversy in his plays.

Soon after his employer died in 1581—and the will’s generosity was put into action—William married the by-then pregnant Anne Hathaway in 1582, had twins, moved to London and the rest, as they say, is history.

Let’s pause and enjoy this for a moment. One of the first documented tontine annuity schemes in history involved the greatest playwright and author in English history. It is not, therefore, unreasonable to assume that the income from the tontine annuity helped to finance the creation of Hamlet, Macbeth and my personal favorite, The Merchant of Venice.

William Shakespeare died at his home in Stratford-upon-Avon at the age of 52, having enjoyed his income for almost 35 years, quite possibly outliving the other 10 servants who were much older than him in 1581, perhaps even winning the tontine by the time of his death in 1616.

So, next time your clients question your annuity allocations and recommendations—or perhaps inquire about your commission from the annuity—you can now reference a literary deity: “For I can raise no money by vile means,” said Brutus in Julius Caesar.

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