A classic concept

Most agree that the Roman’s were first to the annuity party, but some financial archaeologists argue that annuities actually existed in Egypt from 1100 to 1700 B.C. when a prince from someplace called Sint in the Middle Empire created the first annuity payment plan.

In Rome, annuity solutions for Roman citizens were simple lifetime income strategies that became the genesis for today’s Single Premium Immediate Annuity structure.

For the annuity buying Romans, the Latin word “annua” actually meant annual payments. Obviously, that’s where the word annuity came from.

Roman soldiers were paid annuity lifetime payments as a form of compensation for their military service. Back then, and really up to 1952 when the first variable annuity was introduced, the only annuity structure available was the Single Premium Immediate Annuity (SPIA). The SPIA is the original design, and in many people’s opinion, still the most pro customer. Some call SPIA’s income annuities or pension annuities, and they are correct on both accounts.

Trans Atlantic annuities from the 17th century

After the Roman’s started it , the trail gome cold.

I had thought there had been a “dark age” for annuities between the decline and fall of the Roman empire and the 17th century. But it looks like there’s a pension time team out there!

Chris Lewin had uncovered evidence of clergy being “bought out” of jobs for life with lifetime annuities in the 12th century (see below)  but Groetzmann’s suggestion that there was  an organised annuity market in the time of King John is even more radical.

The renaissance of the annuity – after the flickering of the flame in the 13th century, started in the 17th century

Here’s a timeline curated by Stan Haithcock in 2013. It is written from an American point of view!

1600s — European governments started to use annuity type strategies to pay for wars and public works type projects. Early individual annuities were called “tontines.” These were “life only” annuity payments to a family and the lifetime income actually increased to surviving family members.

1700s — After the British Parliament approved annuity sales to the public, the British elite and other rich Europeans were the primary users of annuities as transfer of risk strategies to hedge riskier investments.

1759 — The first fixed annuities arrive in America as a lifetime retirement payment plan for church pastors in Pennsylvania.

1776 — The National Pension Program for Soldiers was passed even before the Declaration of Independence was signed. These early annuities provided lifetime income payments to the soldiers and their families.

1812 — The first time commercial annuities became available to the public began with the founding of The Pennsylvania Company for the Granting of Annuities.

1905 — All around smart guy Andrew Carnegie founded the Teachers Pension Fund, which in 1918 turned into the Teacher’s Insurance Annuity Association (TIAA). Teachers still benefit from these annuity offerings through the same company now known as TIAA-CREF.

1930s — When the Great Depression hit, investors started turning to annuities as a safe place from volatile markets.

1952 — The first deferred variable annuity was introduced by TIAA-CREF.

1986 — Congress passed tax law that allowed people to benefit from tax deferral using annuities with no limitations on the amount of money invested.

1995 — The first Fixed Index Annuity was offered by Keyport (now Sun Life). No, they weren’t inappropriately called “hybrids” back then! However, I do think this could be the start of the bad annuity lunch seminar.

2004 — The first Longevity Annuity was introduced by MetLife.

The rise of UK pension schemes

For those who want to delve deeper into the history of UK pensions there is the Pensions Archive Trust which gives us a history of pension scheme development British style.

In his book Pensions and Insurance before 1800 Chris Lewin outlines the range of pensions provided before the modern period, which included:

• Royal pensions awarded for service to the king, either in the form of money, a grant of land or appointment to a lucrative office;
• Corrodies purchased from religious houses and providing food, drink and accommodation;
• Owners of tenements giving the use of their land to their children or a third party in return for a pension of cash or crops, an exchange overseen by the local Manorial Court;
• Pension or almshouses provided by Guilds;
• Pensions for members of the clergy (the earliest example from the medieval period identified by Chris Lewin is an agreement reached at the Exchequer Court in 1180 that two clerics, who held the church of Black Bourton in Oxfordshire, should be dispossessed and consideration given to awarding them a pension); and
• A pension scheme for maimed soldiers and mariners, established by Act of Parliament in 1601 and paid for by the parish. (as referred to above

The first pension schemes: Chatham Chest and the Civil Service

In the early modern period, a small number of pension schemes were available for select groups. One such scheme was the Chatham Chest, established in 1590 to provide pensions to disabled seamen. This was followed in 1672 by a pension scheme for retired Royal Navy Officers provided by the state. More information on these schemes can be found here.

One of the first groups of workers to have pensions made available to them were government civil servants. The first civil service pension was provided to Martin Horsham, an official in the port of London, in 1684 . Further pensions were granted during the early eighteenth century in the Custom and Excise department, as a means of retaining staff and encouraging an ethos of duty and probity with the civil service. It replaced an informal system of government officers receiving payments from their successors, a system open to corruption. A Superannuation Fund for the lower ranks of the department was established in 1712, with officers receiving a third of their final salary on the conditions of making a regular yearly contribution, 7 years’ service and good behaviour, which was payable when staff were unable to continue regular employment. This system was extended to all grades of the department in 1806-7 and across the civil service in 1810. A separate pension scheme for senior officials was established in 1803.[2]

Poor Law

Prior to the twentieth century, which saw the establishment of the state pension and the widespread provision of occupational pensions by companies for their staff, most people were dependent on the support of family members, charities, or the parish poor relief system to support them in old age.

The 1601 Poor Law made parishes responsible for the care of their aged and needy, and until 1834 assistance generally took the form of ‘out-relief’ (payments or support enabling recipients to stay in their home) or ‘in-relief’ in a local workhouse.

However, the reforms enacted by the Poor Law Amendment Act of 1834 led to a much harsher regime aimed at deterring the so-called ‘undeserving’ poor from relying on support from the parish. The Act grouped parishes together into Poor Law Unions, with Union’s operating central workhouse for groups of parishes. Inmates of the workhouse experienced harsh conditions, a plain diet and were expected to work, often at menial tasks, if capable of doing so.

From poor laws to a state pension

We have come a long way from the concept of the undeserving poor. The State Pension  now provides a floor which is supposed to lift all citizens away from poverty. We have a bewildering array of private pensions from SIPPs to DB plans.

But the fundamental concept of a lifetime income – paid by a third party, remains. Pensions are in our DNA.