32 Years of American Annuity Experience: Part 5.1 of Calculating Gifts

32 Years of American Annuity Experience: Part 5.1 of Calculating Gifts

George A. Huggins and the Conference on Annuities, 1927-1959
Article posted in Charitable Gift Annuity on 24 February 2016| comments
audience: National Publication, Ron Brown | last updated: 9 March 2016
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Summary

We continue Ron Brown's exhaustive research on the history of Gift Annuities, now deciphering how the calculations were derived.

By: Ronald A. Brown

I.  Introduction

When we measure a life with a mortality table, and use earnings assumptions to value a charitable annuity, we are following a course charted by George Augustus Huggins in 1927.  

Why does it matter that actuarial science became fundamental to charitable gift planning; that Huggins’ ideas and methods were refined in a crucible of harsh experience; and that they are now ingrained in the legal and policy framework for charitable giving in the United States? 

The financial model created by George Huggins is part of the DNA of every philanthropic planner.  His legacy is a robust system of charitable fundraising that demands timely analysis of economic trends and the best available American mortality data; national surveys to assess the experiences of programs grounded in a common set of professional practices; and continuous scrutiny of Federal and state policies; all to inform the judgment of people involved with gifts to charity that return a life income.

People who enjoy managing complexities, staying current with the best strategies, and engaging donors in thoughtful structuring of gifts that make a significant difference in people’s lives, are the people who become professional philanthropic planners.  Understanding the foundations of philanthropic planning sharpens the focus of our self-awareness, makes us better at what we do, and enables us to manage change.   

To realize his “ideal plan of conducting the annuity business,” nonprofits organized a national association for charitable gift planning, and met together for ten Conferences on Annuities during Huggins’ lifetime.  The years from 1927 to 1959 were the crucible in which his new gift annuity model was refined by an economic depression and a great surge in human longevity.  Conference reports from this era are extremely important in the history of American nonprofit organizations.      

Previous essays in this series show that in the 1920s, nonprofit organizations simply did not think of their gift annuity obligations in a businesslike way.  Too often, payment rates were set using a decimal system (paying a 65-year-old a 6.5% annuity); three or more lives were covered by a single annuity contract; and reserve fund practices were either inadequate (pledging future revenue from a dormitory to safeguard annuity payments) or nonexistent (paying annuities from the annual operating budget).  Nonprofits encouraged donors to invest in “Annuity Bonds” and competed with one another by negotiating higher payment rates.

Huggins realized that raising money for charitable purposes by issuing gift annuities required a new financial model, a model he could construct.  On March 23, 1927 he called for a national committee to adopt “an ideal plan of conducting the annuity business.”[1]  On April 29, just five weeks later, Huggins outlined “the fundamental principles that underlie the whole subject” at a Conference on Annuities.[2]  His short presentation provided America with its first actuarially-determined table of payment rates aimed at providing a specific amount of money for use by the charity issuing an annuity contract.[3]  Having actuarial tools was only the start.  Conference records show how nonprofit managers sustained their efforts over many years to realize the targeted charitable residuum. 

What a time this was.  The expansionary decade of the 1920s was shattered by the stock market crash and Great Depression.  Not so well known to many people today, but bedeviling to annuity fund managers at the time, was the steady decline in interest rates from 1920-1946.[4]

The outbreak of the Second World War in 1939 made economic forecasting extremely challenging, as the Federal government exercised much greater control over inflation and interest rates than economists expected.  The aftermath of war brought a tremendous surge of new capital, and fearful new threats: an aggressively Communist Soviet Union and “Red” China. 

Concerns about the economy and political ideologies dominated the news, while a demographic reality quietly demanded more and more attention: an unprecedented lengthening of average American lives from 1900-1960.[5]  That populations are aging is not news to us.  What was surprising at the time was the scope of change and its speed.

Peter Laslett, a leading historian of mortality rates, observed that for all of recorded history, the average length of human lives was a gently sloping plateau, until a wrenching shift towards greater longevity began around the year 1900 in all industrialized countries.  Rapidly improving life expectancies curved sharply upward, resulting in the oldest human populations ever.[6]    

George Huggins’ great passion and professional expertise was the study of American mortality.  At the beginning of his pioneering career, reliable data on mortality rates was scarce.  When he presented his first gift annuity rate table in 1927, no one had collected national data on the lives of charitable gift annuitants.  There were no databases other than those produced for life insurance and commercial annuities.  What could nonprofits do?   

In the light of not having our own experience, we must turn to the experiences of others.  Here we find that the experience of others has been studied, tabulated and put in shape for our use in the form of tables showing the rates of mortality among various groups according to the actual mortality experience among those groups.[7]

The standard table of mortality among American commercial annuitants was one based on experience before 1892, so that is what Huggins used to construct his rate table in 1927.[8]   

Demand for actuarial information exploded as people began to realize the implications of a longer-lived American population for pension systems, life insurance, and annuities.  The scientific understanding of annuitant mortality evolved rapidly between 1927 and 1959.  Actuaries published a series of new U.S.-based mortality tables to keep up with “the steady lengthening of life among annuitants.”[9]    

It is a big deal and an enormous amount of work to throw out an experience-based mortality table and create an entirely new one, yet it happened quite often during these years.  Huggins changed the mortality table at the heart of his gift annuity rate recommendations four times (in 1931, 1934, 1946 and 1959).  He also surveyed nonprofits nationwide to compare their gift annuitant mortality experience.  When he discovered that gift annuitants were living even longer than commercial annuitants, he made adjustments to the standard annuitant mortality tables by adding one or two years in his rate calculations.

Huggins knew as well as anyone in America that drastic increases in longevity meant greater risks for nonprofits issuing gift annuities, sharpening the possibility that annuitants would outlive their expected payments and exhaust the charitable residuum.  For example: according to McClintock’s Annuitant’s Table (1899) a 60-year old male had an average life expectancy of 14.65 years.  According to the American Annuitants Table (1955) a male age 60 had a life expectancy of 19.57 years.[10]  That is a vast difference in longevity risk for a nonprofit issuing a life annuity, as can be illustrated by the first reported American gift annuity. 

When the President of Yale College signed an annuity contract with John Trumbull in 1831, Yale expected Trumbull, then age 76, to live for six years, in which case Yale would send Trumbull 24 payments of $250 per quarter, a total of $6,000.  Trumbull lived for more than eleven years; the college dutifully made 45 payments totaling $11,250.[11]

The choice of a mortality table matters: if the country’s gift annuity rates in 1959 had been based on the average life expectancies in the McClintock Table, it is likely that the reserve funds of many nonprofit organizations would be exhausted.

The role of a professional actuary, Huggins wrote, is to measure longevity risk so the risk can be managed:

It does not take an actuary or a statistician to tell us that in the general population there is a steady trend towards lengthening of life, but it does take the actuary or the statistician to make studies that aid us in determining to what extent the lives are being lengthened.[12] [my emphasis]

George Huggins devoted 32 years of his life to teaching nonprofits how to think about American annuitant lives, serving as the consulting actuary for the nation’s charities.  He passed away in 1959, less than a month after the 10th Conference.

There is ample evidence of what national charitable leaders were thinking and doing in Huggins’ era, contained in reports that were published after each of the ten Conferences on Annuities between 1927 and 1959.  At the conferences, economists and bankers would survey the current economy, provide investment advice for the country’s annuity fund managers, and give earnings forecasts.[13]  Huggins reported his earnings assumptions and current mortality data, and explained how he applied the facts in his new gift annuity rate recommendations.  

Each of the conference reports will be analyzed in the next major part of this essay, focusing on the investment outlook and return assumptions from year to year, and equally important changes in annuitant mortality. 

The reports are seasoned with emotionally fraught comments by national leaders struggling to act reasonably in the face of tremendous economic shocks.  At the 4th Conference in 1931 a speaker remarked that “investment earnings have decreased to a serious degree, and no one dare foretell the date or extent of their restoration.”[14]

Investment conditions worsened in 1934.  The conference that year was convened in response to an “urgent request” for lower gift annuity payment rates:

The task has become increasingly difficult in these days of exceedingly low interest rates . . .  It seems impossible to be certain that bonds which are high-grade today will continue to maintain that status.  There appears to be an element of risk in every investment.[15]

1939 was a year of crisis.  On September 1, a Blitzkrieg ignited World War II.  When the Sixth Conference met on October 4, people knew that fundamental economic changes were likely, but no one could anticipate the horrors of the next six years.  A speaker warned of the likely effects of war:

All of you must be conscious of the very great change that has come about in recent weeks because of the belligerency abroad.  You probably will agree that the frightfulness of it all will have a very definite effect upon not only our psychology, but very definitely upon our economy.[16]  

Another marveled that “Bond yields reached a new all-time low this summer, and . . .  yields are still so low, that a few years ago they would have been considered fantastic.”[17]

Remarkably, interest rates continued to fall for seven more years.  By 1941 the investment outlook for fixed annuity obligations was desperate.  Explaining “Why the Conference Was Called,” Gilbert Darlington said a main reason was “to consider the question of adopting a lower standard of uniform annuity rates,” since “interest rates on all classes of securities have declined very substantially.”[18]

The Allied victory in 1945 brought an unparalleled economic explosion and a resurgence in fixed-income yields and the values of common stocks.  Happier days returned for America, as reported in 1955 at the 9th Conference by Dr. Marcus Nadler, Professor of Finance at New York University:

Right now we are in the midst of the greatest boom that we have ever had in peace time in our history.  To prove my point, employment is over 65½ million people.  The total number of unemployed is less than 2½ million.  The demand for credit is very great.  Building activity is at a high level.  The demand for mortgages is very great.  Business activity is in the midst of a boom.[19]  

The process of gift annuity rate-setting demands careful judgments by national leaders who must weigh and consider projected improvements in annuitant longevity, future earnings, investment and administrative expenses, caps on payment rates at older ages, and whether donors will find payment rates attractive. 

George Huggins identified the core elements of rate-setting, made nonprofits aware of the relationships among these elements, and demonstrated how to recognize and adapt to new experiences over time.  His actions provide a window on a rapidly-changing America, crystallized in the Gift Annuity Rates Chart, 1927-1959     (see Chart 1).

Huggins functioned as a one-person Rates Committee for 32 years, though participants in the Conferences on Annuities did not always adopt his recommendations.  Prime examples are the rate cap imposed at the very first conference; delayed implementation of his substantially revised set of assumptions at the start of WWII (Huggins turned out to be right); and postponed action right after the war in case the economy improved faster than Huggins predicted (the optimism of  conference participants was justified). 

The rates recommendations that George Huggins presented for consideration at the Conferences on Gift Annuities are now worked out by eight volunteer members of the ACGA Rates Committee with professional services provided by the actuarial firm founded by Huggins, and approved by a 25-member ACGA Board.[20]

Contemporary managers of gift annuity programs realized the enduring practical value of the conference reports, which were “circulated quite widely.”[21]  They provided unique and accessible guidance for applying the new actuarial principles in the face of extremely challenging conditions.  The reports show steady progress over time in constructing best professional practices for nonprofit organizations, thus documenting the historical development of a major source of funding for America’s nonprofit sector.[22]

Many of the reports went out of print as long ago as 1952,[23] but in 2014 the American Council on Gift Annuities (ACGA) made the conference publications available online as a service to researchers.[24]  They are an indispensable record of the world’s oldest continuous series of charitable fundraising conferences. 

We should keep in mind that a major part of the story is missing.  What matters most about gift annuities is that they are used to serve people in need of help.  Lives were saved or made more tolerable by nonprofit shelters and soup kitchens, churches and synagogues, hospitals and nurseries, private schools and colleges.  Letters and diaries with stories of Depression-era families helped by gift annuities may never be found, because by design, annuities involve years of separation between an act of charity and the fruits of a gift.  A life annuitant will not see a hungry child fed or taught, nor ever know the beneficiaries of her gift.             

There is a more accessible set of untold stories relating to the annuitants themselves and annuity program managers.  Safeguards introduced by George Huggins benefitted thousands of families whose regular annuity payments provided a financial lifeline amid bank failures, the loss of a job, or the death of a breadwinner.  And wouldn’t gift planners find it useful to uncover and share minutes and reports illuminating how the managers of nonprofit organizations grappled with the challenges of maintaining a healthy annuity program during the Depression and World War?

Although we can only imagine the impact gift annuities had at a personal level, what we know about national policy development is extraordinarily interesting.  Our world of philanthropic planning is based on ideas introduced in the 1920s and refined during the Great Depression.  The historical territory of the conference reports is virtually unexplored, though the Tax Reform Act of 1969 and the Philanthropy Protection Act of 1995 can be understood fully only by knowing what happened during the actuarial revolution in charitable gift planning guided by George Augustus Huggins.

Copyright Designation: This work is licensed under a Creative Commons copyright that allows the copying, distribution, and display of this material – and the ability to make derivative works based on it – if credit is given to the author and if those derivative works are distributed under a similar agreement.  This license is classified as an Attribution-Share Alike 3.0 Unported License.

Upcoming Installments:

5.2:   32 Years of American Annuity Experience - Public Policies on Gift Annuities: The New York Insurance Law of 1925
5.3:   32 Years of American Annuity Experience - What Makes Annuities Charitable? A Residuum Target & A Consultant's Plan for the Gift Annuity "Business"


[1] Cooperation in Fiduciary Service: Papers Presented at a Conference on Financial and Fiduciary Matters (NY: The Abbott Press & Mortimer-Walling, Inc., 1927) edited by Alfred Williams Anthony, Wise Public Giving Series no. 14, page 97.        

[2] A note on terminology: the volunteer group known in 1927 as the Sub-committee on Annuities became the Committee on Annuities in 1946 and the Committee on Gift Annuities in 1955.  This body changed its name to the American Council on Gift Annuities and incorporated as a nonprofit charity in 1993.  The Conference on Annuities changed its name to the Conference on Gift Annuities in 1955.

[3] The founding document introducing George Huggins’s actuarial system is his presentation “Actuarial Basis of Rates” at the first Conference on Annuities.  See Annuity Agreements of Charitable Organizations, ed. Alfred Williams Anthony (NY: Abbott Press & Mortimer-Walling, 1927), Wise Public Giving Series no. 18, pages 7-17. 

[4] The yields of long-term high-grade American bonds turned down in 1920, “declined most of the time for twenty-six years, and reached their all-time lows in 1946.”  Sidney Homer and Richard Sylla, A History of Interest Rates, Fourth Edition (Hoboken, NJ: John Wiley & Sons, 2005), page 334.  In a message to me in June 2015, Mr. Sylla noted that the economic crisis of 2007-2009 has resulted in even lower yields than in 1946. 

[5] “From 1900 to 1960, the elderly [i.e., age 65+] increased 10-fold, while the population under age 65 was only 2.2 times larger.”  Aging in the United States – Past, Present, and Future (Wash DC: National Institute on Aging, 1997), page 6 (https://www.census.gov/population/international/files/97agewc.pdf), downloaded January 8, 2016.  “In 1900 average life expectancy at birth for the world as a whole was only around 30 years, and in rich countries under 50.  The figures are now 67 and 78 respectively, and still rising,” though not nearly as rapidly.  Special Report: Ageing Populations, The Economist, June 25, 2009; downloaded 1/19/2016.

[6] “The populations of developed societies have grown old at an amazing pace.  Within the last hundred years . . .  the populations of Europe, North America, Australasia, and Japan have become far and away the oldest human populations of which we have knowledge . . .  this represents a unique occurrence in human history.”  Peter Laslett, “Necessary Knowledge: Age and Aging in the Societies of the Past,” Aging in the Past (Berkeley and Los Angeles: University of California Press, 1995), pages 3 and 27. 

[7] Huggins, “Actuarial Basis of Rates,” page 8.

[8] Huggins used the first American annuitant mortality table, which was published by Emory McClintock in 1899 “based on experience of fifteen American companies on their annuity policies before 1892.”  Edwin C. Hustead, “The History of Actuarial Mortality Tables in the United States,” Journal of Insurance Medicine, Vol. 20, No. 4 (1988), page 14.

[9] “As mortality studies were made from time to time, the steady lengthening of life among annuitants was revealed.  This caused the preparation of later tables of mortality.”  Huggins, “Gift Annuity Rates and Mortality Experience,” Gift Annuity Agreements of Charitable Organizations (NY: The Committee on Gift Annuities, 1955), Wise Public Giving Guide No. 48, page 28.  Mortality tables used for life insurance and for annuities during these years are summarized and described in Principal Mortality Tables, Old and New (St. Louis and Kansas City: Nelson and Warren Consulting Actuaries, (1961?)).

[10] Principal Mortality Tables, Old and New, pages 25 and 27.

[11] See “Benjamin Silliman: The Gift Planner Behind the First Modern Charitable Annuity” at http://www.giftplanninghistory.org

[12] Huggins, “Report on the Mortality Experience Studies,” Gift Annuity Agreements of Charitable Organizations (1959), page 16. 

[13] Other common conference topics included marketing, law, taxation, and accounting.

[14] Lewis T. Reed, “Uniform Annuity Rates,” Rules, Regulations and Reserves in Using Annuity Agreements (NY: The Sub-Committee on Annuities, 1931), Wise Public Giving Series No. 38, page 20.

[15] John H. Gross, “Investment of Funds for the Safeguarding of Annuities,” Annuity Agreements of Charitable Organizations (NY: The Sub-Committee on Annuities, 1934), Wise Public Giving Series No. 43, page 22.

[16] Wilton A. Pierce, “Investment Planning Under Revised Insurance Law of the State of New York,” Annuity Agreements of Charitable Organizations (NY: Federal Council of the Churches of Christ in America, 1939), Wise Public Giving Series No. 44, page 45.

[17] Richard P. Cromwell, “The Outlook for Interest Rates,” Annuity Agreements of Charitable Organizations (1939), page 25.

[18] Darlington, Annuity Agreements of Charitable Organizations (NY: Federal Council of the Churches of Christ in America, 1941), Wise Public Giving Series No. 45, page 6.

[19] Nadler, “Interest Rates,” Gift Annuity Agreements of Charitable Organizations (1955), page 11.

[20] The formal title of the current ACGA Rates Paper is: Explanation of the ACGA Gift Annuity Rates Effective January 1, 2012 (Smyrna, GA: ACGA, updated June 2015).  This and previous Rates Committee reports are available on the ACGA website at: http://www.acga-web.org/surveys-reports-conference-papers-and-brochures/76-suggested-maximum-rate-schedules

[21] In his preface to the third conference report, Alfred Williams Anthony noted that after the first two conferences, “booklets containing the papers presented have been published and circulated quite widely, which have had an important effect upon standardizing and stabilizing policies and methods in harmony with sound principles of law and of ethics.”  Anthony pointed out that the third report “penetrates somewhat more fully into the principles and details of methods and plans than its predecessors have done.”  Methods and Plans in Using Annuity Agreements (NY: The Sub-committee on Annuities, 1931), page 4. 

[22] At the second conference in 1928, Huggins noted that his presentation will “take up the discussion at the point where it was left off” in 1927.  The preface to the fourth conference reported that “These conferences, while dealing with the same essential matters, are related to each other as a continuing, progressive series, and the booklets which follow, each its conference, are similarly related.”  Alfred Williams Anthony, “Preface” to Rules, Regulations and Reserves in Using Annuity Agreements (NY: The Sub-Committee on Annuities of the Committee on Financial and Fiduciary Matters, 1931), Wise Public Giving Series no. 38.  The Foreword to the fifth conference report encouraged people to buy the whole series: “Previous conferences had considered various phases of the annuity business, the reports of which were printed and copies of which are still available.  They constitute a valuable compendium of information on the annuity plan as used by religious, charitable and educational organizations and institutions for securing gifts.”  Annuity Rates and Federal Taxation of Annuities (1934).

[23] Gilbert Darlington described the first nine conference reports as “still authoritative” but noted that “Unfortunately, some of these Reports are out of print.”  “Taxation, Legislation, and Regulation,” Conference on Wills, Annuities, and Special Gifts (NY: National Council of the Churches of Christ in the United States of America, 1952), page 110.

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