Rates Effective July 1, 2007 to June 30, 2008
Approved by the American Council on Gift Annuities on April 2, 2007
Assumptions & Comments Underlying the Suggested ACGA Gift Annuity Rates
Following is a summary of the assumptions on which the July 1, 2007 rates are based.
1. The residuum realized by the charity upon termination of an annuity is 50 percent.
2. Life expectancies are based on the Annuity 2000 Mortality Tables for female lives with a two-year setback in ages. This is a departure from the 2005 assumption which used a 1 ½-year setback. 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 6.25% percent.
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 5.25%. In other words, each dollar contributed for a deferred gift annuity is presumed to grow at an annual compound interest rate of 5.25% 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 1.052510.25 or 1.6896. 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 1.6896 x 6.0 percent, which equals 10.1 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 6.25% 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
At its meeting on April 2, 2007 in Chicago, the ACGA board approved the recommendation of the Gift Annuity Rates Committee to CONTINUE the CURRENT immediate and deferred gift annuity rates for another year.
Unless unforeseen circumstances should necessitate an interim adjustment, these rates will remain in effect at least THROUGH June 30, 2008. A detailed paper providing an explanation of the rates and fund earnings assumptions, as well as the reasons for the board action, is now available from the ACGA. Please see link below.
A detailed 20-page 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 (7-1-07):
| Asset Allocation: | Equities: | 40 % |
| Bonds: | 55 % (10 Year Treasury Bonds) |
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| Cash: | 5 % |
| Average Annual Total Return: (See ACGA Paper for details): |
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| Equities: | 9.00 % |
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| Bonds: | 4.68 % |
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| Cash: | 4.96 % |
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Click here to order the paper: "2007 Presentation on Gift Annuity Rates".
A complete report on the 2007 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.
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