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Rates Effective February 1, 2009

Approved by the American Council on Gift Annuities on December 29, 2008

Assumptions Underlying the Suggested ACGA Gift Annuity Rates

Following is a summary of the assumptions on which the February 1, 2009 rates are based.

1. The residuum realized by the charity upon termination of an annuity is 50 percent.
Read about the residuum based on present value.

2. Life expectancies are based on the Annuity 2000 Mortality Tables for female lives with a two-year setback in ages. The rates also incorporate projections for increasing life expectancies.

3. Annual expenses for investment and administration are one percent of the fair market value of gift annuity reserves.

4. The total annual return on gift annuity reserves is 5.25% percent (down from 5.75%).

5. The rates for the youngest and oldest ages are somewhat lower than the rates that would follow from the first four assumptions.

Additional Assumption for Deferred Gift Annuities

The annual compound interest rate credited during the deferral period for deferred payment gift annuities is 4.25%. In other words, each dollar contributed for a deferred gift annuity is presumed to grow at an annual compound interest rate of 4.25% between the date of contribution and the annuity starting date.

If payments will be made at the end of the period, which is usually the case, the annuity starting date would be at the beginning of the first period for which a payment is made. For example, if payments will be quarterly, and the first payment will be made on September 30, 2014, the annuity starting date would be July 1, 2014. If payments will be made semi-annually, the annuity starting date in this case would be April 1, 2014.

Assuming that the annuitant would be nearest age 65 on the annuity starting date and that the period between the contribution date and the annuity starting date is 10.25 years, the compound interest factor would be 1.0425^10.25 or 1.532. To determine the deferred gift annuity rate, this factor is multiplied by the immediate gift annuity rate, now in effect, for the nearest age of the annuitant at the time payments begin. In this example, the deferred gift annuity rate would be 1.532 x 5.3 percent, which equals 8.1 percent (rounded to the nearest tenth of a percent).

The compounding rate during the deferral period is simply the assumed net return (total assumed return of 5.25% less one percent for expenses). The compounding rate applies to the entire compounding period, whatever its length. In the past, the compounding rate for periods in excess of 20 years was less than the compounding rate for the first 20 years of the deferral period.

In two states, New York and New Jersey, it is sometimes necessary to apply a slightly lower compounding rate when the deferral period is relatively long in order not to exceed those states’ maximum allowable deferred gift annuity rates. The ACGA website contains information about New York and New Jersey requirements at any given time.

Comments on Gift Annuity Rates

The Board of Directors of the American Council on Gift Annuities (ACGA), at a called meeting on December 29, 2008, approved a recommendation from the Rates Committee to reduce the expected return assumption from 5.75% to 5.25%. A new rate schedule has been developed reflecting this change.

Recommended rates have been lowered by .4% to .7% at each age with a maximum rate of 9.5% at ages 90 and above. The new rates will qualify at all ages at a CFMR of 2.4% or above. The new rate recommendations are effective on February 1, 2009. In the case of deferred gift annuities, there may be a few instances in which rates based on the ACGA's suggested schedule and methodology do not qualify when the CMFR is quite low. In those instances, the deferred rates would have to be reduced to qualify.

A detailed paper providing an explanation of the rates and fund earnings assumptions, as well as the reasons for the board action, was provided to conference participants. It is now available from the ACGA, see link below.

The paper begins with a discussion of historical gift annuity rates. Next, it explains the assumptions underlying the rates and provides a rationale for each of them, (including the gift residuum, life expectancy, expenses, investment returns, and asset allocation.) Then it compares gift annuity rates with those offered by insurance companies (“commercial rates”). Finally, it shows why it is prudent for charities NOT to exceed the recommended maximum rates.

Assumptions for ACGA Suggested Maximum Gift Annuity Rates (7-1-08):

Asset Allocation:	Equities:	40 %
	Bonds:	55 % (10 Year Treasury Bonds)
	Cash:	5 %

Click here to order the paper: "2008 Presentation on Gift Annuity Rates.

A complete report on the 2008 ACGA suggested gift annuity rates is available to our sponsors at no charge in our online Sponsors’ Forum section. A hard copy of the report is available for purchase, please Contact Us.

Click here to access the Sponsors’ Forum.