The Planned Giving Blogger

The art and science of planned giving.

Part I: Gift annuities. Is the sky falling?

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“I was wondering if I am crazy or not.  Was I the only one in the planned giving world ringing the alarm, calling out to whoever would listen, that many gift annuity programs might be in big trouble?  When you are an alone alarmist, you have to start wondering.”  So begins an e-mail I received from Jonathan Gudema, Esq., of Changing Our World.   One of the questions gift planners are grappling with right now is whether it makes sense to continue to market gift annuities.  I’ll tackle that question from the donor’s point of view in a future post.  But, in the meantime, Jonathan’s e-mail about assessing your financial soundness to offer gift annuities was so smart I decided to reproduce it in its entirety in today’s blog and concluding tomorrow.  It’s lengthy, but worth the read.

Jonathan went on to say, “At Planned Giving Day in NY a few weeks ago, I presented various “doomsday” projections about exhausting CGAs but the response was quiet – too quiet, like maybe people didn’t want to hear the message or maybe I was wrong.  There was of course the misleading article in the Wall Street Journal, hardly backup for my theory that CGA programs in general could be in trouble.

Finally, Frank Minton on PGCalc’s latest webinar on Advanced Gift Annuities dedicated the first twenty minutes of his presentation, billed as a discussion on advanced and new gift annuity techniques, to “risk control.”  And, listening to Frank’s presentation and seeing that he used similar projection models to mine, I know I am not crazy.

Here is the bottom line I found with the NEW (February 2009) ACGA rate tables.  If your program returns 4% a year constant returns, I feel comfortable saying that your program will never experience (or very rarely) exhausting CGAs.  Great news if you think 4% is attainable on a consistent basis.  The problem is what are we to do with older annuities?  Under the same analysis on ACGA rates a few years ago, I figured out that you need to return 5% a year consistent returns, to be generally safe from gift exhaustion.  Less than that, not always safe.

But the problem gets even stickier.  I know from experience that even the biggest and best gift annuity investment/administration providers have seen the CGA pools on their watch drop more than 25% in principal value since January 1, 2008.  That is on the conservative side.  I am sure many have lost more.  And, as CGA payments don’t change, the rate of diminishing principal speeds up even if you return to “normal” investment returns.  What I mean is that your program may seem ok but really it’s not.  One big annuity that runs out of money could bring the rest of your pool underwater with it.  You don’t want to be hoping that your donors don’t live into their 90s because their annuity principals will be gone and perhaps eating up the rest of your pool.

In the midst of working through sticky situations for clients, I finally started feeling a ray of hope.  Not that all will be well with every annuity out there.  Certainly not, as many are paying the price now for offering rates higher than recommended by the ACGA,  or for sloppy oversight, or for uncontrolled gift acceptance policies, or for small organizations taking on CGAs when they shouldn’t have, or taking on CGAs much too large for certain organizations.

The point is that proceeding carefully from this point forward can rescue your CGA program from “doom” that might be coming.”

Tomorrow:  Jonathan’s prescription for how to assess the financial soundness of your program, how to remedy financial challenges you may be facing and how to protect yourself going forward.

Phyllis

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Written by Phyllis Freedman

June 15, 2009 at 11:50 pm

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