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Key Metrics for Charitable Gift Annuity Pools

Crystal Thompkins, CAP® ,CSPGCM
National Director, Gift Planning Services, BNY Mellon Planned Giving

Charitable gift annuities (CGAs) are a popular component of many non-profits’ planned giving programs. Non-profits benefit from long-lasting donor stewardship that can result in impactful gifts, helping to further the organizations’ missions. CGAs are appealing to donors because they are simple to understand, establish and fund, and they provide the security of a lifetime fixed income stream. 

While CGA programs can benefit donors and charitable organizations alike, there are risks associated with these programs. Understanding these risks, evaluating several key metrics and putting the right processes in place can help improve the likelihood of a CGA pool's viability over time.

CGAs Are Highly Sensitive to Market Volatility

CGAs are more sensitive to market volatility because the charity owes fixed payments to annuitants. When the rate of return for a CGA pool is not high enough to sustain payments for the annuitants' lives, the charity needs to make up the shortfall. Timing risk can also impact CGAs. If the investment returns are lower in the early years of a CGA, there is a greater chance that the gift will be exhausted before the annuity matures, even if market conditions improve. Non-profits can mitigate risk in their CGA pools by adopting a long-term approach to investing that includes diversification and a consistent review of how market conditions may impact the CGA pool.

The Pool of Annuitants Introduces Risk for CGA Pools

Longevity risk is a key consideration for CGA pools. If annuitants outlive their expected actuarial mortality, the non-profit is obligated to make more annuity payments than originally calculated at gift funding. Concentration risk may also affect the pool’s long-term health. If a CGA pool's assets and liabilities are concentrated with a small number of annuitants, even short periods of underperformance can make meeting financial obligations to annuitants more challenging. These risks can be mitigated, however, by setting appropriate gift acceptance policies, adhering strictly to those policies, and conducting ongoing reviews of the policies and their actual impact to the CGA pool.

Key Metrics Can Help Non-Profits Manage Risk 

Calculating metrics such as the average and median ages for annuitants, the gift's effective payout and projected years to exhaustion, the projected remainder value for the charity, and the annual distributions by annuitant will help non-profits assess their CGA pools. By including CGA pool analysis as a regular part of their gift acceptance policies and investment reviews, non-profits will have meaningful, quantitative trend information to guide discussions about risk. In turn, this will help the various stakeholders at the charity understand the role CGAs play in the organization’s financial, investment and fundraising goals.

Read Crystal’s article, Understanding Key Metrics for a Healthy Charitable Gift Annuity Pool,to learn more about the key metrics for analyzing CGA pools.