Analysis of the New ACGA Annuity Rates

On April 29, 2010, the American Council on Gift Annuities (ACGA) announced new suggested maximum gift annuity rates at its bi-annual conference.  The new rates apply to gift annuities established on or after July 1, 2010, but a charity may follow the new rates immediately if it wishes.

ACGA Suggested Annuity Rates, Effective July 1, 2010 

Note: If your charity elects to adopt the new rates for use before July 1 and it is registered in one or more of the reserve states that require charities to specify the rates they will use, your charity MUST notify these states that it has adopted the July 2010 ACGA rate schedule and provide them with the effective date on which it will begin using the new rates.

Assumptions Underlying the New Annuity Rates
The ACGA has made the assumptions listed below in determining its new schedule of suggested maximum annuity rates.  Only the fourth assumption differs from those used to produce the ACGA's previous table of suggested maximum annuity rates.

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. 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 5.50% percent (up from 5.25%).
   
   
5. The rates for the youngest and oldest ages are somewhat lower than the rates that would follow from the first four assumptions.  The rates have been adjusted downward for the youngest ages in order to assure that the ACGA rates will pass the 10% remainder value requirement for IRS discount rates of 3.2% and above and for the oldest ages in order to reduce the risk from annuitants outliving the ACGA's mortality assumption.

Immediate Payment Annuity Rates Will Increase at Younger Ages
For the most common annuitant ages at time of funding, the new single-life maximum suggested rates for immediate payment gift annuities will be unchanged or increase just 0.1% - 0.2%.  The new joint-life rates will be unchanged or increase 0.1% - 0.2% for the same group.

To be more specific, the new single-life rates are 0.1% - 0.2% higher for annuitant ages 66-81 and unchanged for all annuitant ages 82 and above. At young annuitant ages, those 50 and younger, the new rates are 0.4% - 0.5% higher than the ones they will replace.  The new joint-life rates are 0.2% higher for age combinations 70 and 70 through 82 and 82.  They are 0.1% higher for age combinations 83 and 83 through 91 and 92.  They are unchanged for all joint annuitant ages older than 91 and 93.  As with the single-life rates, the new joint-life rates will increase 0.4% - 0.5% at young annuitant ages, such as 50 and 50 or 40 and 40.

In instances where the new suggested maximum annuity rate is 0.1% higher than the current rate, the payment of the annuity will be slightly greater and the deduction slightly less than under the current rates.  For example, the annuity amount on a $10,000 gift will be $10 greater and, depending on the annuitant ages involved, the federal income tax deduction will be about $75 - $125 less.  The figures in the table below are based on a $10,000 immediate payment gift annuity that makes payments quarterly, and a May 2010 IRS discount rate of 3.4%.

Deferred Gift Annuity Rates Will Increase, Too
The ACGA has increased the compound interest factor for deferred gift annuity (DGA) rates from 4.25% to 4.50% for all deferral periods.  This means that the deferred annuity rate will increase 0.25% more per year under the new suggested rates than under the current ones, compounded annually for each year of deferral.  As a result of this increase, the longer the deferral period, the greater will be the difference between the old DGA rates and the new ones.

The figures in the table below show how the ACGA suggested rate for a DGA deferred 5, 10, or 15 years will change under the new schedule.  The annuity amounts are based on a $10,000 funding amount.

Deferred annuity rates for NJ and NY
The ACGA has not issued new deferred interest factors for use in New Jersey and New York.  As now, the standard ACGA rates will be acceptable in these states at least until they announce new maximum interest rates this fall.  The earliest the ACGA might announce new tables for use in these states would be September 2010.

What if the IRS Discount Rate Dips Below 3.2%?
As a general rule, charities should avoid issuing a gift annuity that generates a deduction of 10% or less of the funding amount, since doing so can create thorny tax problems for the organization.  The new ACGA rates preserve gift annuity deduction percentages of at least 10% for all annuitant ages down to an IRS discount rate of 3.2%, which was April's rate.  Should the IRS discount rate descend well below 3.2%, the ACGA may consider revising its rates, as it did in February 2010 when the IRS discount rate hit its all-time low of 2.0%.

Note that Planned Giving Manager and Gift Annuity Manager issue a warning whenever they compute a gift annuity deduction of 10% or less.  If you find yourself in this situation, the solution is to reduce the annuity rate you have entered in the Gift Options window until the deduction exceeds 10%.

ACGA may modify two assumptions used in determining future rates
In its "Explanation of the ACGA Gift Annuity Rates Effective July 1, 2010," the ACGA Gift Annuity Rates Committee discussed two modifications to its methodology for determining maximum suggested rates that it will continue to consider.

Update mortality assumptions:  One is to conduct with the help of an actuarial firm a mortality study based on the experience of actual gift annuitants.  The ACGA last conducted a study of this kind in 2001-2002.  The results of that study confirmed that the typical purchaser of a charitable gift annuity lives longer than the typical purchaser of a commercial annuity, the population on which the Annuity 2000 mortality table that the ACGA uses in its rates determinations is based.  Consequently, the ACGA has been applying a 2-year setback to ages in the Annuity 2000 table for females as a way to account for the greater longevity of gift annuitants.  As mortality generally has been improving every decade for over a century, the ACGA feels it would be prudent to re-evaluate the mortality experience of gift annuitants now that almost ten years have passed since its most recent study.

Adopt a present-value residuum approach:  For several decades, one of the ACGA's assumptions in calculating maximum suggested annuity rates has been that its rates will on average result in a residuum, an amount remaining for the issuing charity, equal to 50% of the funding amount for most annuitant ages (and somewhat more than 50% for the youngest and oldest ages).  For example, rates are calculated with the goal that a gift annuity funded with $10,000 will leave $5,000 for the charity when it terminates, regardless of the age of the annuitants at the time of the gift.

While its current approach is very simple to explain to potential donors, the ACGA also appreciates how much the value of a charity's residuum depends on when the charity receives it.  Under the present method, a gift annuity for a 60 year-old is worth far less in current dollars than a gift annuity for a 90 year-old because the charity is likely to receive its residuum far sooner from the annuity for the 90 year-old than from the annuity for the 60 year-old.

Adopting a present value residuum methodology would put annuities for beneficiaries of different ages on more equal footing from the charity's perspective.  Given the many considerations that enter into the calculation of ACGA rates, we won't attempt to predict how rates based on a present value residuum methodology will differ from the rates going into effect on July 1, 2010.  The ACGA has stated that it will continue to evaluate moving to a present value residuum methodology in the coming year.

Using the New ACGA Rates in Planned Giving Manager
We sent an email to all current Planned Giving Manager and Gift Annuity Manager clients on the day the ACGA announced its new suggested rates, informing them that the new ACGA rates were available on request.  We called this optional update PGM 6.2B.  PGM 6.3, which we expect to release within days, includes the new ACGA rates, as well as numerous other enhancements.  Once you have installed PGM 6.2B or PGM 6.3, PGM will continue to pick gift annuity rates from your current gift annuity rate table.  If you wish to use the new rates at any time prior to July 1, 2010,

1. Open Customize – Gift Annuity Rate Tables in the PGM Menu Bar.
2. Select "ACGA Rates Effective 7/1/2010," then click Done.  PGM will now set default annuity rates using the new ACGA rate table.
3. To continue to use the new rates in subsequent PGM sessions, open File – Save Configuration, then click Save.

Regardless of the gift annuity rate table you have selected in PGM, you will be prompted to choose a gift annuity rate table the first time you launch PGM 6.2B or PGM 6.3 on or after July 1, 2010.  "ACGA Rates Effective 7/1/2010" will be the default choice, unless you use a custom gift annuity rate table, in which case your custom table will be the default choice.  At this time, click the rate table you wish to use going forward, and then click Done.  Again, be sure to save your configuration change.

Note: PGM 6.3 replaces all previous versions of PGM, including PGM 6.2A and 6.2B.  Whether or not you have installed PGM 6.2B in order to gain immediate access to the new ACGA rates, you should install PGM 6.3 as soon as it is available.

Conclusion
The new gift annuity rates have changed little, if at all, for the range of ages into which almost all gift annuitants fall. Immediate payment gift annuities will remain an attractive option for supporters in their 70s and older who are interested in making a charitable gift and receiving fixed payments in return.  The increase in deferred gift annuity rates may be enough to attract a few additional donors, but probably no more than a few.  Most importantly, gift annuities will continue to be good gifts for charities.