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Charitable Gift Annuity Rates: What Has and Has Not Changed

At its semi-annual meeting in November, the Board of Directors of the American Council on Gift Annuities (ACGA) unanimously reaffirmed its current schedule of suggested maximum charitable gift annuity (CGA) rates.   From time to time, we receive questions from members and the general public about how the rate schedule is determined.  We thought it would be helpful to address the nature of the important work of our Rates Committee in this FAQ piece.  For more detailed information, please see our 2017 Rates Paper, which is available to members for free on our website.

Q: In layman’s terms, would you please explain how the Rates Committee determines the suggested rate schedule?

We assume the charity places the entire contribution received from the donor in its CGA reserve account, and then begin with a targeted amount of money expected to remain for the charity to use to advance its mission when the CGA contract terminates. This target is 50% of the funds transferred by the donor when the contract is established.

We make some further assumptions about how long the annuitant will live, what investment return the charity will earn on its CGA reserve account, and what expenses will be incurred to administer and invest the funds.  With these assumptions in place, it is really a matter of “working backwards” mathematically to determine, given the mortality and investment return assumptions, the rate for a given age that will produce the targeted 50% amount at the end of the contract.  Because the math is complex and involves actuarial calculations, the ACGA has retained a respected actuarial firm, Korn Ferry Hay Group, to perform the calculations which determine the schedules of single-life and two-life CGA rates.

Q: How is the investment return assumption calculated?

The Rates Committee uses a model portfolio with an asset allocation of 40% stocks, 55% bonds, and 5% cash to determine the investment return assumption.  We base the assumed return on stocks on the long-term average return of the S&P 500 index, discounting the return somewhat to be conservative.  The expected returns on bonds and cash are determined by reference to moving averages of yields on U.S. government securities.   The Rates Committee monitors the model portfolio on a weekly basis, and meets about four times a year to discuss the assumptions and determine when to contract with Korn Ferry Hay Group to perform additional calculations.

Q: I’ve noticed that your suggested maximum rate schedule has not changed since 2012. Why?  Haven’t interest rates increased lately?

These are good questions.  Our suggested maximum rate schedules have changed seven times since 2003, or on average about once every other year.  But the changes have not been evenly distributed.  The rate schedules changed every year from 2008 through 2012 (when interest rates were falling significantly).  They have not changed since 2012.

To understand why rates have not changed recently, it is important to note that interest rates have moved up and down a lot since 2012.  For example, the yield on 10-year Treasury bond (a common interest rate benchmark) at the beginning of 2012 was about 1.9%.  This yield drifted downward to about 1.5% in the summer of the 2012, and then began a gradual climb all the way up to 3.0% at end of 2013. Rates then reversed course and the yield dropped through the 2.0% mark in the summer of 2015, finally reaching a low of about 1.4% just after the Brexit vote in the summer of 2016. Since then, the 10-year Treasury yield has climbed back up to about 2.3% today.

Over the past five years, the Rates Committee seriously considered changing rates a couple of times—when rates were near a high or low inflection point—only to see rates turn around and head in the opposite direction. While short term interest rates have been rising in 2017, longer term interest rates have not changed much over the course of this year.

Q: How do you take into consideration the life expectancy of CGA donors? These donors live longer than members of the general public, correct?

Yes, on average CGA donors do live longer than the general public.  About every 10 years, the ACGA authorizes a study of gift annuitant mortality.  The last study was done for the years 2005 through 2009.  We gathered data from over 47,000 CGA contracts issued by a cross section of charities that were in force during that five year period, and employed Korn Ferry Hay Group to analyze the data regarding which annuitants died during the study period.  From that data, the actuaries estimated mortality rates for CGA donors, and expressed those mortality rates in terms of mortality table commonly used in the profession.  The table the actuaries have been using in our calculations for the past two years is called the 2012 Individual Annuity Reserving Table (2012 IAR).

For more information on our mortality assumptions, please see our Rates Paper on our website.

Q: When do you think CGA rates will change in the future?

It’s not possible to forecast a change in suggested CGA rates with any certainty.  The Rates Committee will continue to monitor the investment environment frequently, compare our suggested maximum CGA rates to rates on commercial annuities, and consult with our actuaries.  We do plan to conduct another gift annuity mortality study sometime within the next 2-3 years.

We can say with certainly that one thing will not change:  the commitment of The ACGA Board of Directors and its Rates Committee to provide schedules of actuarially-sound suggested maximum CGA rates that balance the dual objectives of an attractive payment stream for the annuitant and a good gift for the charity.