Exempt - Winter 2008 - (Page 11)

When the stock market was booming in the ‘80s and ‘90s, being heavy in equities was the right decision, but in this market, “you’re worse off by far,” he said. Though he’s still a “true believer” in CGAs, Clontz expects annuities to have a tough time over the next ﬁve years. That’s because the worst time to write annuities was March 2000, just before several years of declines in the stock market. Couple that with the average life expectancy for annuitants of 14 years, and annuities should continue to degrade until 2014, he said. The worst thing for annuities is early, successive losses as charities make payouts into those losses, Clontz said, because it results in “negative compounding.” If return assumptions are signiﬁcantly off from the start, with guaranteed payouts during mar- ket declines, it’s much more difﬁcult for a charity to catch up, he added. The autopilot approach to investing that might have worked in the booming 1980s and ‘90s, “created some sloppiness around these particular gifts and the market is punishing that a bit,” Clontz said. “It’s causing some charities to consider or stop gift annuity programs when really the risk had been there all along; it’s a matter of how you manage that. Some charities are going from doing nothing to manage risk to getting out of it altogether,” he said. Having the balance there is particularly important for charities, Clontz said, especially those that can meet their reserve requirements now but are uncertain in the next year or two. E ACGA Reafﬁrms Existing Rates A mid-term review prompted by the stock market plunge yielded no changes to rates on charitable gift annuities (CGA). The 21-member board of the American Council on Gift Annuities (ACGA) unanimously approved a recommendation from its rates committee on Nov. 17 to reafﬁrm existing rates that took effect in July. “When we look at the long-term assumptions that we use in establishing the rates, they have not changed from recommendations made in April,” said Lindsay Lapole, chair of the ACGA’s board and territorial planned giving director of The Salvation Army’s Southern Territory. The board considered whether it should recommend a new schedule of rates, which were adopted in April. The suggested maximum rates approved by ACGA for asset allocation were: equities, 40 percent, bonds, 55 percent, and cash, 5 percent. The average annual total return suggested 9 percent for equities, 3.81 percent for bonds and 2.42 percent for cash. The board offered three “immediate future considerations” for its decision: • CGAs are long-term agreements that often span several economic cycles. • Changing rates now will not have an impact on existing annuities. • Annuities funded now are being invested at current market levels, which have greater opportunity for favorable long-term returns than in many past years. The board will engage an actuarial ﬁrm to review its current model portfolio asset allocation as well as assumptions and methodology used for arriving at its current schedule of rates for both immediate and deferred payment gift annuities. The results of that study will be considered in future rate recommendations. Organizations must be careful when they raise or lower their own annuity rates, as they might be subject to state regulation implications, including requirements such as notifying the state or submitting actuarial veriﬁcation, Lapole said. “One of the beneﬁts of using the rates we recommend is the fact that they’re tested,” he said, based on sound actuarial backup, and seen in many states as the industry standard. ACGA reviews its recommended rates on an ongoing basis, with a speciﬁc recommendation from its rates committee during the spring board meeting and any potential adjustments taking effect in July. The next potential rate adjustment would take effect July 2009, Lapole said, depending on the committee’s recommendation this spring. “We’re going to be doing extensive work between now and then,” he said. “We didn’t want to overreact to a situation that is still very volatile.” Lowering rates would have no impact on existing charitable annuities, since those are locked in, nor would they have any impact on a charity’s underlying obligation to make those payments. The last time ACGA examined a mid-term recommendation was in 2003 when it lowered rates, Lapole said. That would have reﬂected the end of another economic downturn that started in 2000. The change in 2003 was in response to a fairly extended period of more than two years, Lapole said, adding that the factors that drive rate recommendations have not changed based on the events of the last two months. Also, rates had not been adjusted for some period of time in 2003 and it seemed appropriate to do mid-term, he said. Another consideration in reafﬁrming rates, Lapole said, is the cost for charities to update marketing materials and potential donor confusion of changing rates every six months. – Mark Hrywna Winter 2008 | Exempt | 11

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