ACGA Announces Reduction in Charitable Gift Annuity Suggested Rates

ACGA Announces Reduction in Charitable Gift Annuity Suggested Rates

News story posted in Charitable Gift Annuity on 16 October 2002| comments
audience: National Publication | last updated: 18 May 2011
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Summary

At a special meeting on October 16, 2002, the Board of the American Council on Gift Annuities approved a reduction in suggested gift annuity rates, effective January 1, 2003.

PGDC Summary:

At a special meeting on October 16, 2002, the Board of the American Council on Gift Annuities approved a reduction in suggested gift annuity rates, effective January 1, 2003.

Citing market interest rates that have fallen precipitously since its meeting last spring, market forecasts, current commercial annuity rates, and mortality studies, the ACGA deviated from its normal practice of announcing rate changes at its annual spring meeting with an effective date of July 1st. The organization does not anticipate further adjustments at its meeting next spring unless market conditions change significantly.

In a memorandum to ACGA Sponsors, the full text of which follows, the organization also stated that organizations concerned with current rates may opt to implement the new rates immediately.

Full Text:

MEMO

Date: October 16, 2002

To: ACGA Sponsors

From: American Council on Gift Annuities Board of Directors

Re: Reduction in Gift Annuity Rates

ACGA Board Approves Reduction in Gift Annuity Rates

At a special meeting on October 16, 2002, the Board of the American Council on Gift Annuities approved a reduction in suggested gift annuity rates, effective January 1, 2003. The new schedule of rates can be found on ACGA's web site: www.acga-web.org. As always, the rates will be available in printed brochures, which can be ordered from the ACGA office. You can print the order form from the web site.

The effective date is deferred until the first of the year to give software vendors, publications companies, and charities time to incorporate the new rates in their programs and literature. Some charities, concerned about the current rates, may choose to implement the reduction immediately.

Ordinarily, the ACGA Board acts on rates at its spring meeting, and any changes become effective on July 1. However, for the reasons stated below, the Board has decided to act now and recommend reductions in gift annuity rates effective the first of the year.

Although the ACGA Board will conduct its normal review in the spring and could recommend a further adjustment in rates, it is anticipated that there will not be a rate adjustment on July 1 unless economic conditions significantly change in the meantime.

Reasons for Reduction in Rates

1. Based on the September CMFR of 4.6% and the October CMFR of 4.2%, the charitable deduction will not be more than 10% when the current ACGA immediate and deferred rates are offered to annuitants:

* younger than the low 60s, in the case of immediate two-life annuities,

* younger than the mid 50s, in the case of immediate one-life annuities, and

* when the current ACGA rates are used for deferred annuities with longer deferral periods.

2. Since the current ACGA rates were determined last spring, the yield on the 10-year Treasury bond has decreased from 5.25% to approximately 3.75%, and many economists are predicting only single-digit returns on stocks for the next five years or so.

3. Also, since the current ACGA rates were determined last spring, commercial annuity rates have decreased by approximately the same percentage that the ACGA rates are being reduced.

4. Based on the ACGA's mortality study, and, consequently setting female ages back by 1.5 years rather than 1.0 years, many of the current rates are .1% to .2% higher than the rates that would follow from the stated assumptions. The ACGA Board decided at the April meeting not to subject charities and vendors to a lot of inconvenience for only a slight adjustment. Meanwhile, as mentioned, interest rates have dropped precipitously, and if the rates were recalculated using the same assumptions and benchmarks as before, they would be significantly lower.

5. If charities continue offering the current ACGA rates for new annuities, the residuum in many instances will be well below 50%. Furthermore, the risk of losing money on gift annuities will increase.

6. Except for some adjustments at ages below 60, the current ACGA rates pre-date 9/11/01 and don't reflect the significant changes in economic conditions that have occurred in the past year.

Observations

Even though the rates will be lower, they should continue to be attractive to donors because interest rates on fixed-income investments have also gone down. For instance, the ACGA rate for a 70-year-old will decrease from 7.2% to 6.7%, but in the course of the year the 10-year Treasury bond has decreased from 5.25% to approximately 3.75%, and the 5-year-CD at many banks has decreased from about 4.6% to less than 4.0%.

The assumed total return underlying the current rates is based on a portfolio consisting of (1) 35% equities using the average annual return over the past 100 years (10%), (2) 60% 10-year Treasury bonds using current yields (5.25% in the spring of 2002), and (3) 5% cash using the 90-day Treasury bill rate (1.75% in the spring of 2002). The weighted average return of such a portfolio is 6.75% (5.75% net of expenses, which are assumed to be 100 basis points).

The assumed total return underlying the proposed rates is 6.25% (5.25% net of expenses). The reduction results from using 4.5% as the yield on the 10-year Treasury. This is slightly above the average yield on 10-year Treasuries sold during the year. No change was made in the assumed return on equities.

For ages 53 - 86, the rates for single-life, immediate annuities follow from the stated assumptions. For ages above 86 and below 53, they are lower than the rates that would follow from these assumptions. Rates for ages above 86 are lower because the rates are graded up to the cap. Note that the cap on single-life rates has been reduced from 12% to 11.5%.

Rates for ages below 53, in the case of both one-life and two-life immediate annuities, are lower than the rates that would follow from the stated assumptions in order to result in a charitable deduction of more than 10%. The proposed rates for immediate annuities pass the 10% test for all ages and all payment frequencies using a CMFR of 4.0% or higher. For ages 53 and above, the rates for two-life immediate annuities follow from the stated assumptions.

The Importance of an Actuarially-Sound Industry Standard

It is essential that charities operate their gift annuity programs so that they can fulfill commitments to annuitants and preserve a meaningful residuum for their charitable work. They are more likely to meet both objectives and minimize their risk if their gift annuity rates do not exceed the maximum rates suggested by the ACGA. It is also in the best interest of the charitable community if donors are encouraged to make decisions based on the charities they want to support rather than on which charities offer the highest rates.

American Council on Gift Annuities
233 MCCrea Street, Suite 400
Indianapolis, Indiana 46225
Phone: (317) 269-6271
Fax: (317) 269-6276
E-mail: acga@ncpg.org
Web: www.acga-web.org

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