persons; (b) those held by government departments or by funds under government control. The important difference between these two classes is that an annuity under (a), once created, cannot be modified except with the holder’s consent, i.e. is practically unalterable without a breach of public faith; whereas an annuity under (b) can, if necessary, be altered by interdepartmental arrangement under the authority of parliament. Thus annuities of class (a) fulfil most perfectly the object of the system as explained above; while those of class (b) have the advantage that in times of emergency their operation can be suspended without any inconvenience or breach of faith, with the result that the resources of government can on such occasions be materially increased, apart from any additional taxation. For this purpose it is only necessary to retain as a charge on the income of the year a sum equal to the (smaller) perpetual charge which was originally replaced by the (larger) terminable charge, whereupon the difference between the two amounts is temporarily released, while ultimately the increased charge is extended for a period equal to that for which it is suspended. Annuities of class (a) were first instituted in 1808, but are at present mainly regulated by an act of 1829. They may be granted either for a specified life, or two lives, or for an arbitrary term of years; and the consideration for them may take the form either of cash or of government stock, the latter being cancelled when the annuity is set up. Annuities (b) held by government departments date from 1863. They have been created in exchange for permanent debt surrendered for cancellation, the principal operations having been effected in 1863, 1867, 1870, 1874, 1883 and 1899. Annuities of this class do not affect the public at all, except of course in their effect on the market for government securities. They are merely financial operations between the government, in its capacity as the banker of savings banks and other funds, and itself, in the capacity of custodian of the national finances. Savings bank depositors are not concerned with the manner in which government invests their money, their rights being confined to the receipt of interest and the repayment of deposits upon specified conditions. The case is, however, different as regards forty millions of consols (included in the above figures), belonging to suitors in chancery, which were cancelled and replaced by a terminable annuity in 1883. As the liability to the suitors in that case was for a specified amount of stock, special arrangements were made to ensure the ultimate replacement of the precise amount of stock cancelled.
Annuity Calculations.—The mathematical theory of life annuities is based upon a knowledge of the rate of mortality among mankind in general, or among the particular class of persons on whose lives the annuities depend. It involves a mathematical treatment too complicated to be dealt with fully in this place, and in practice it has been reduced to the form of tables, which vary in different places, but which are easily accessible. The history of the subject may, however, be sketched. Abraham Demoivre, in his Annuities on Lives, propounded a very simple law of mortality which is to the effect that, out of 86 children born alive, 1 will die every year until the last dies between the ages of 85 and 86. This law agreed sufficiently well at the middle ages of life with the mortality deduced from the best observations of his time; but, as observations became more exact, the approximation was found to be not sufficiently close. This was particularly the case when it was desired to obtain the value of joint life, contingent or other complicated benefits. Therefore Demoivre’s law is entirely devoid of practical utility. No simple formula has yet been discovered that will represent the rate of mortality with sufficient accuracy.
The rate of mortality at each age is, therefore, in practice usually determined by a series of figures deduced from observation; and the value of an annuity at any age is found from these numbers by means of a series of arithmetical calculations. The mortality table here given is an example of modern use.
The first writer who is known to have attempted to obtain, on correct mathematical principles, the value of a life annuity, was Jan De Witt, grand pensionary of Holland and West Friesland. Our knowledge of his writings on the subject is derived from two papers contributed by Frederick Hendriks to the Assurance Magazine, vol. ii. p. 222, and vol. iii. p. 93. The former of these contains a translation of De Witt’s report upon the value of life annuities, which was prepared in consequence of the resolution passed by the states-general, on the 25th of April 1671, to negotiate funds by life annuities, and which was distributed to the members on the 30th of July 1671. The latter contains the translation of a number of letters addressed by De Witt to Burgomaster Johan Hudde, bearing dates from September 1670 to October 1671. The existence of De Witt’s report was well known among his contemporaries, and Hendriks collected a number of extracts from various authors referring to it; but the report is not contained in any collection of his works extant, and had been entirely lost for 180 years, until Hendriks discovered it among the state archives of Holland in company with the letters to Hudde. It is a document of extreme interest, and (notwithstanding some inaccuracies in the reasoning) of very great merit, more especially considering that it was the very first document on the subject that was ever written.
| Age. | Living. | Dying. | Age. | Living. | Dying. |
| 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 |
10,000 9,921 9,921 9,881 9,846 9,806 9,784 9,784 9,743 9,684 9,616 9,560 9,493 9,434 9,361 9,297 9,249 9,185 9,125 9,054 8,987 8,913 8,848 8,774 8,701 8,625 8,554 8,479 8,398 8,311 8,223 8,142 8,057 7,970 7,886 7,793 7,696 7,600 7,493 7,387 7,274 7,154 7,030 6,910 |
79 0 40 35 40 22 0 41 59 68 56 67 59 73 64 48 64 60 71 67 74 65 74 73 76 71 75 81 87 88 81 85 87 84 93 97 96 107 106 113 120 124 120 119 |
54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 |
6791 6662 6509 6359 6207 6051 5898 5714 5528 5337 5137 4931 4716 4496 4276 4039 3793 3580 3358 3090 2847 2547 2306 2061 1837 1611 1392 1196 1005 832 660 541 424 332 260 186 150 116 80 44 15 15 10 |
129 153 150 152 156 153 184 186 191 200 206 215 220 220 237 246 213 222 268 243 300 241 245 224 226 219 196 191 173 172 119 117 92 72 74 36 34 36 36 29 0 5 10 |
It appears that it had long been the practice in Holland for life annuities to be granted to nominees of any age, in the constant proportion of double the rate of interest allowed on stock; that is to say, if the towns were borrowing money at 6%, they would be willing to grant a life annuity at 12%, and so on. De Witt states that “annuities have been sold, even in the present century, first at six years’ purchase, then at seven and eight; and that the majority of all life annuities now current at the country’s expense were obtained at nine years’ purchase”; but that the price had been increased in the course of a few years from eleven years’ purchase to twelve, and from twelve to
