Exempt - Winter 2008 - (Page 10)

COVER STORY continued from page 9 ities are designed, in theory, to leave a residuum of 50 percent but the reality for many years was that the residuum was running signiﬁcantly higher, Mann said. Most recent estimates pegged the average residuum anywhere from 68 to 72 percent. “We’re certainly working closer to 50 percent,” he said. Some annuities written by the American Red Cross just before March 2000 have not run dry, but they were put into effect right before a market decline, much like those written earlier this year, according to Rebecca Locke, senior director of gift planning. “You might not be left with 50 percent at the end, but there’s a chance of having a good outcome for everyone,” if you’re strategic and don’t spend any of that money, she said. Those nonproﬁts that acted like the tortoise (they moved slowed, were conservative, and getting ready to win the race) are in the best shape now, said Robert F. Sharpe Jr., president and CEO of The Sharpe Group. Those that have been prudent likely will reap the rewards as they push annuities in the coming months while smaller charities that were overly invested in equities with high payout rates are left without much cushion and likely will cut back. The vast majority of charities have higher equity valuation than what ACGA recommends but they must decide what’s best for their organization in concert with their risk manager, said Bryan Clontz, president of Jacksonville, Fla.-based Charitable Solutions, LLC. Model Portfolio Guards Against Drowning Volatility in the stock market might make individuals looking for security more open to charitable gift annuities (CGA), but at the same time the market might be wreaking havoc on a charity’s annuity reserves, a portion of which are usually invested in equities. The American Council on Gift Annuities (ACGA) recommends a portfolio be invested 40 percent in equities and 55 percent in bonds, with 5 percent cash. John Jensen, senior vice president, consultant at The Sharpe Group in Memphis, expects that more nonproﬁt boards will be looking to annuity reinsurance. “Is it smarter to lock in losses? If you think the market will come back, you wouldn’t reinsure. If, from a risk management standpoint, you don’t want that exposure, or don’t think the market will come back, you reinsure,” he said. For a gift annuity pool that’s invested at 70 to 75 percent in equities and reinsured today, a charity is locking in whatever losses it had in the market, he said. “What we are hearing is charities are nervous and they’re certainly taking a look at their gift annuity programs and doing risk assessments,” said Tanya Howe Johnson, president and CEO of the National Committee on Planned Giving (NCPG). Re-insuring gift annuities, something nonproﬁts do occasionally, might become more popular, she said. In extreme cases, organizations may need to use funds from some other source like operating funds, or perhaps step up their current giving program or change rates for services they provide. “That’s a proactive step charities can take,” Howe Johnson said. “They might have to tighten belts in some other areas, and that’s what some organizations are probably looking at,” she said. Melanie Rose, director of annuities product management for Mutual of Omaha, reported an increased interested in reinsurance of CGAs. She estimates as many as 20 organizations have contacted Mutual of Omaha during the past few months, in addition to their 45 clients. “Considering this is a niche product for us, that’s a pretty signiﬁcant increase in the level of interest,” she said. A large pool of gift annuities also can minimize the risk for a charity. If one gift annuity goes under water, the larger the annuity pool, the more the charity’s risk is spread out. Of the 1,500 gift annuities by the American Red Cross (ARC), Rebecca Locke, senior director of gift planning, estimates that maybe one goes under water each year or so, usually the result of an annuitant outliving the annuity. “The capacity to survive that and be OK is much better if you have 1,499 others. It’s much more devastating if one out of 50 annuities is underwater,” she said. The ARC is among those charities that segregate its gift annuities pool. “We never touch a dime of the money until the annuitant, or both beneﬁciaries, are dead,” Locke said. “Some organizations do that but that’s asking for trouble.” ARC also has a diversiﬁed investment portfolio for its annuity pool, according to Locke, to reduce the chance that a negative market impacts its funds. “Nothing’s failsafe but we at least reduce the chances of a negative outcome,” she said. Still, that doesn’t mean the market hasn’t affected its annuities. “None of us has a crystal ball but if you’re committed to offering gift annuity to donors, you have to understand there is risk here,” Locke said. “As painful as the markets are for all of us, it’s a teaching opportunity, and a reminder that this isn’t foolproof, and you need policies and investment strategies,” Locke said. – Mark Hrywna 10 | Exempt | Winter 2008

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Exempt - Winter 2008

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