The Planned Giving Blogger

The art and science of planned giving.

Part II: Tips for stress-testing and strengthening your gift annuity program.

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Today is the conclusion of a two-part post from Jonathan Gudema of Changing Our World about how to “stress test” your annuity program and what to do if you detect weaknesses.

According to Jonathan, “Wake up now.  Ask your provider for an updated “market value” report showing the current value of every annuity.  Create an excel spreadsheet calculating what happens to the principal of each annuity under different flat rate assumptions over the next 10 to 20 years. Here is my super-secret excel formula for doing this:  =(C1*$A1)+C1-$B1,  column A is the assumed rate of return, column B is the fixed annuity payment, column C is current principal, put the formula in column D and then drag it over the next 10 to 20 columns. The $ sign keeps rate of return and payment amount fixed – the rest changes column by column – year by year.  If you have trouble doing this, get someone from the finance department to help you.

You will start to see when CGAs are approaching negative.  Maybe you will see an exceptionally large CGA that not only might run out of funds in 4 or 5 years, but will literally eat up the rest of the pool should it exhaust.  It might be time to meet with that donor to see if he or she will take a lower income stream or would even give up all of the income.

New annuities are great for struggling pools as long as the pool isn’t so far depleted that news funds will only just push off the inevitable exhaustion of the whole pool – that really is more like a Ponzi scheme.

Perhaps it’s time to ask new CGA donors if they will take less than the ACGA rate – preserves a bigger remainder gift and bolsters the whole CGA program.

The biggest change though has to be your “remainder” policy.  Dig deep enough into the CGA concept and you will find that the CGA program rests on the theory that “you win some and you lose some.”  In other words, “profits” from annuitants dying before life expectancy should cover “losses” from those outliving their life expectancies.  But most organizations pull 100% of an annuity’s funds when an annuitant passes away leaving a pool that is filled only with the “losers,” those outliving their life expectancies.  Coupled with unexpected 25% investment losses in principal this past year and this is why we’ll soon start seeing CGA programs fail.

You should consider developing a policy to leave something from every annuity in your CGA reserve account – look at it as a rainy day fund.  One large charity I know actually leaves all of the “liability” portions of each matured annuity in its reserve – creating an unrestricted endowment within their CGA reserve account.  Even after years of offering even higher than ACGA rates, this past year’s market losses didn’t have a material impact on their program.

And, in dealing with a fund currently in danger of exhaustion – or one a few years away, one solution after adding the proper reserves that the New York State Department of Insurance requires (and not a bad idea for non-New York licensed issuers either) is to leave 100% of new matured annuities in the fund until the pool has recovered.  I know that your donor’s wishes may be delayed a bit, but you also have to make sure your program and organization is solvent.

Eventually, with careful supervision and understanding that CGA programs don’t run on autopilot, your program can be back on track for providing long-term financial resources for your institution.”

Such great advice!  Thanks, Jonathan.


P.S.  If you’d like to communicate with Jonathan, post your comment here and he’ll be happy to respond or you can reach him directly at


Written by Phyllis Freedman

June 16, 2009 at 11:50 pm

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