New Gift Annuity Rates Announced

New Gift Annuity Rates Announced

News story posted in Charitable Gift Annuity on 4 May 2001| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The American Council on Gift Annuities has announced new suggested annuity rates for immediate and deferred payment charitable gift annuities that are effective July 1, 2001. The new rates have been reduced for most ages.

PGDC SUMMARY:

The American Council on Gift Annuities has announced new suggested annuity rates for immediate and deferred payment charitable gift annuities that are effective July 1, 2001. The new rates have been reduced for most ages. The reduction is greatest for annuitants between the ages of 60 and 80, at about .3%. Reductions for younger annuitants are less. The highest rate remains at 12.0%.

In addition, the new rates are being integrated into the PhilanthroCalcs for the Web deduction calculator. The software will automatically select the rate to be used based on the date of transfer. We will issue a News Alert when the new calculations are available.

FULL TEXT:

The following statement was issued by Frank Minton, Chairman of the American Council on Gift Annuities Rates Committee:

The board of the American Council on Gift Annuities (ACGA) has reduced suggested gift annuity rates for most ages, effective July 1, 2001. The new rates can be found on the ACGA website at www.acga-web.org Except for a reduction in rates for the youngest ages (ages 20-60) in 1999 to ensure that all rates at all ages passed the 10% requirement, even when the CMFR is quite low, there has been no rate change in three years. During that three-year period, interest rates on Treasury bonds and other fixed-income investments have declined significantly.

How the Gift Annuity Rates Are Determined

The ACGA suggested rates are based on the following assumptions:

1. A 50 % residuum (amount of contribution remaining at the death of the annuitant(s)).

2. Life expectancies based on the Annuity 2000 tables, using female life expectancies and setting ages back one year.

3. A yearly cost of 75 basis points for administering gift annuities.

4. Total return on gift annuity reserves for immediate gift annuities, and for deferred annuities with deferral periods of up to 20 years, of 6.50% (5.75% net of expenses).

The return assumption is based on an assumed portfolio consisting of 30% equities, 60% 10-year Treasury bonds, and 10% cash equivalents, using historical averages on large-cap equities and current yields on the bonds and cash. Although many charities invest reserves more aggressively, this portfolio is attainable by nearly all charities, even by those that issue gift annuities in states that restrict the types of investments.

In 1998, the year that the current schedule (with the exception of an interim adjustment for the youngest ages) was adopted, a portfolio of 20% equities, 70% Treasury bonds, and 10% cash would have produced a return of 6.75%, and increasing the equities to 30% would have produced a return of 7.10%.

Following a consistent methodology for computing the rates, it is necessary to reduce the return assumption, and this, in turn, leads to a reduction in the rates. In calculating the rates, the ACGA actuary also factors in projections for increased life expectancies since the Annuity 2000 tables were determined. While the gift annuity rate reduction results mostly from the reduction in the return assumption, the projected increases in life expectancies do have a slight effect as well.

It should be noted that the gift annuity rates for the oldest and youngest ages are somewhat lower than would follow from the above assumptions. The rates for the youngest ages are based on lower assumed returns, and the rates for the oldest ages are based on more conservative mortality assumptions.

Size of Rate Reduction

For people aged 60 through their mid-80s, the rate reduction in most instances is about .3%. The reduction for the youngest ages is smaller, partly because those rates had already been adjusted downward two years ago. For the oldest single-life ages, there is no reduction. The cap on gift annuity rates remains at 12%, the same as it has been for several years.

Part of the process of reviewing rates entails comparing gift annuity rates with commercial rates, using a representative, highly-rated company. These commercial rates fluctuate daily, and they vary somewhat from company to company. Yet, we are able, when doing the comparison, to observe that the gap between commercial and gift annuity rates is much greater at the oldest ages. That was one consideration in the decision to reduce rates for the oldest ages to a lesser degree, if at all.

Considerations for Charities

No one likes to see frequent rate changes -- neither charities nor vendors. Likewise, the board of the ACGA does not want to suggest changes more often than necessary. At the same time, the board feels a responsibility to adjust rates when there is a significant change in financial markets to protect charities and ensure that there will be a significant residuum for their charitable work. This has always been the board's practice and will continue to be so.

Even though gift annuity rates will be a little lower, they should continue to appeal to donors because the rates they are receiving on CD's, bonds, and commercial annuities are correspondingly lower. Charities might also note that a lower rate increases the deduction, which somewhat mitigates the effect.

Over the years the ACGA rates have achieved credibility with certain state insurance departments, and so long as a charity does not exceed them, it does not have to provide an actuarial justification for its rate schedule.

If the information you seek about the rates is not sufficiently addressed on the ACGA website, you may call the ACGA office for information and clarification.

New Methodology for Calculating Payments from Deferred gift Annuities

When you look at the schedule of new gift annuity rates, you will discover that a new methodology for calculating payments from deferred gift annuities was also adopted at the recent ACGA board meeting. This message is already too long, so I won't go into an explanation at this time. That will follow in a few days. Suffice it to say now that the new methodology will be (1) more fair to donors, and (2) will bring the annuity starting date for determination of the payments into sync with the annuity starting date for calculating the charitable deduction.

Frank Minton
Chair, ACGA Rates Committee

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