Perhaps the primary responsibility of the ACGA is the promulgation of actuarially sound maximum suggested charitable gift annuity payout rates, which provide an income to annuitants and a gift to issuing charities.  The announcement of new rates effective on January 1, 2023 marks the second time in six months that the ACGA Board of Directors has modified its suggested maximum rates.

This has raised a few questions in some circles about the suggested maximum rates.  Dave Ely, ACGA’s Vice President of Rates and Regulations, penned a very good article on our rate-making process and procedures, which you can read here.  To amplify Dave’s article and to address some of these questions, I thought it would be helpful to examine the timing of rates changes over the past quarter century. 

Since the rates change of March  1, 1997, the ACGA has modified rates 21 times over 26 years (including the most recent change).  The ACGA modifies its suggested maximum rates only as needed, based on a complex, actuarially sound model.  

As Dave states in his article, one of the three primary inputs into our rates model is how much we expect issuing charitable organizations to earn from their investments during the lifetimes of their annuitants.  Therefore, in prior periods where interest rates have been falling, the ACGA acted quickly to bring its suggested maximum rates in line with falling investment returns.  

As a result, rates were lowered on July 1, 2002, and again on January 1, 2003 and July 1, 2003, in reaction to the fall in interest rates brought on by the popping of the “tech bubble.”  Likewise, the Great Recession resulted in the lowering of the ACGA’s recommended rates on both July 1, 2008 and February 1, 2009. Again, lower interest rates produced reduced ACGA suggested maximum rates on July 1, 2011 and January 1, 2012. 

However, due to a stable economy and interest rates, the ACGA did not modify its suggested maximum rates again for another 6½ years, with the next modification coming on July 1, 2018. 

Unless you are over the age of 50, it is likely that high inflation rates were a relic of history until the COVID pandemic.  As a result of the current spike in the rate of inflation, the ACGA now faces something it has not needed to address in nearly 40 years, the timing of raising its recommended rates.   The ACGA rates model called for the timing of the two most recent increases in rates approved in 2022.

So, what do these increases mean to issuing charities?  Do they lower a charity’s expected residuum?  Do they make it riskier to issue charitable gift annuities?  Despite some commentary that the answer to these questions is “yes”, the facts show that the answers are actually “no.”   

Rates for gift annuities issued years ago were based on a lower interest rate assumption than that of the newest rates; therefore, your gift annuity pool should be earning more than was anticipated when older annuities were issued.  Dave’s article explains the presumed investment mix that is part of the ACGA rates model. However, it is critically important that your organization consider its own unique risk and return preference and make appropriate investment decisions.  

Likewise, each set of suggested maximum rates is calculated with an anticipated 50% residuum.  So, even with higher rates, the ACGA rates model contemplates a 50% residuum.  Every five years, the ACGA conducts a survey on how gift annuities are working in practice for charitable organizations.  In seven such surveys from 1994-2021, charities report that the actual residuum from their gift annuity pools varied from 62% to 98%, well above the 50% target.

The ACGA monitors the factors that go into its suggested maximum rates on a daily basis, and it utilizes an actuary to assure that the suggested maximum rates are sound.  If you would like a rule of thumb on the interest rate component of the ACGA rates model, we suggest that you follow the movement of 10-year Treasury Notes.  

Thank you for your membership in the ACGA, which allows us to continue to provide sound rates and in-depth research to support your gift annuity program.

Joe