November 7, 2001
The Gift Annuity Rates Committee met by teleconference on October 15 for the purpose of deciding whether to recommend an interim adjustment in gift annuity rates.
In preparation for the meeting, the Rates Committee re-calculated the total return on its model portfolio of 30% equities, 60% ten-year Treasury bonds, and 10% cash, again using the average historical yield on large-capitalization equities and current yields on the bonds and cash. The Committee also obtained new quotations for commercial gift annuity rates so that the decrease in those rates since last February could be compared with the decrease in gift annuity rates that occurred on July 1.
Based on its analysis of this data, its assessment of financial markets, and taking into consideration the comprehensive review of gift annuity rates planned during February-March of 2002, the Rates Committee made the following recommendations to the ACGA board:
1. That there be no interim adjustment in gift annuity rates, and that any adjustment be effective on July 1, 2002 pursuant to a recommendation of the Rates Committee, based on its February-March review, and action by the board at its April meeting.
2. That the February-March review by the Rates Committee include a reconsideration of (a) the methodology for determining the assumed total return on gift annuity reserves and (b) the mortality assumptions underlying the rates based on the research now in progress.
The ACGA board approved these recommendations at its November 5 meeting in Chicago.
If gift annuity rates were recalculated using the same methodology that was used in determining the current rates, the rates would definitely be lower. Notwithstanding this fact, the ACGA Board decided not to recommend an interim adjustment for these reasons:
First, rate changes are disruptive and costly for charities and vendors.
Second, interim rate adjustment at this time could appear to be precipitous.
Third, and most important, the rates developed pursuant to the comprehensive review to be conducted during February and March will be more actuarially sound.
By that time we will have data that will indicate how the life expectancy of annuitants of gift annuities compares with the life expectancy of annuitants in general. The presumption is that gift annuity donors live longer than people who purchase commercial annuities, but we have no current supporting data. The research currently underway will reveal whether gift annuitants have longer expectancies and, if so, by how much.
In connection with the review of the methodology for determining the assumed total return on gift annuity reserves, the Gift Annuity Rates Committee will be consulting with a number of investment specialists from companies that manage large amounts of gift annuity reserves. Both the composition of the model portfolio and the method for calculating the yield on each component will be under consideration.
The action of the Board, based on this comprehensive review, will be discussed in detail at the ACGA biennial conference to be held in Seattle, April 10 – 12, 2002.
Meanwhile, we would like to call your attention to the following:
Immediate, single-life gift annuities do not pass the 10%-minimum-gift-value requirement when annuitants are age 38 or younger and the CMFR is 5% (the November, 2001 rate). Annuities for such young annuitants are very rare, but in the event you complete one for a young annuitant, reduce the rate if the annuity would otherwise fail the 10% test.
The ACGA publishes suggested maximum rates. A charity concerned that the rates are too high under current economic conditions may offer lower rates. However, if the charity operates in a regulated state and has previously submitted a schedule of the rates it will follow, it must submit a NEW schedule.
The residuum for the charity depends on TOTAL RETURN over the life of the contract, and interest rates in effect at the time a contribution is received for a gift annuity are NOT necessarily indicative of what that total return will be.
