In April 2018, the American Council on Gift Annuities (ACGA) announced it would raise its suggested maximum payout rates on gift annuities, effective July 1, 2018. This is the first rate change since January 2012, and the first rate increase since July 2011.
After six years of all-time low payout rates, gift annuity issuers are assessing how the new rates will impact their charitable gift annuity programs. Central to the rate change is the increase in the ACGA's rate-of-return assumption from 4.25% to 4.75%.
For a single life annuity, the new suggested rates have increased between +0.3% and +0.5%, with the largest increases for beneficiaries aged 79 years and above. For joint or dual life annuities, suggested rates vary depending on the age of both beneficiaries — 1% at the youngest end of the spectrum; 0.5% at the other end, with varying degrees in between.
The largest component of the ACGA expected return calculation is based on the 10-year Treasury bond yield, which, as of April 2018, had increased significantly over the past year. The increase in yield led to an increased expected rate of return for fixed income in the ACGA model, which results in a higher overall expected rate of return and thus more room for higher gift annuity payouts.
In a word, yes. By far, the benefits of following the ACGA recommended rates outweigh the costs. The ACGA recommended rates are recognized by all applicable state regulatory agencies as the standard for annuity issuers. For gift annuity issuers, not following the ACGA recommended rates can lead to additional filing requirements or reporting in many states, and may require additional actuarial analysis to maintain compliance.
The residuum amounts for annuities issued today will not be known for 10 years or more. The impact on residuum amounts experienced by gift annuity issuers will be gradual over the next several years.
Gift annuities continue to be an attractive means for donors to fulfill their philanthropic, tax planning and estate planning goals. Increasing the payout rate may entice new or existing donors to make new gifts, effectively making up for expected lower residuum amounts with a higher volume of gifts.
We believe that charitable institutions with active, healthy gift annuity pools and appropriate gift-acceptance and asset allocation policies can continue to expect at least a 50% residuum on annuities written today with the new recommended ACGA rates.
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