Understanding Key Metrics for a Healthy Charitable Gift Annuity Pool
Charitable gift annuity (CGA) programs are a popular component of many non-profits' planned giving programs, but there are risks involved. Understanding these risks, evaluating several key metrics and putting the right processes in place can help improve the likelihood of a CGA pool's viability over time.
Market volatility, the timing of investment returns and the makeup of the pool of annuitants can all carry risk for CGA programs. Through the analysis of key metrics, non-profits can mitigate the risk in their CGA pools.
CGAs are more sensitive to market volatility because the charity owes fixed payments to annuitants. When the rate of return for a CGA pool is not high enough to sustain payments for the annuitants' lives, the charity needs to make up the shortfall.
Related to market volatility, timing risk can also impact CGAs. If the investment returns are lower in the early years of a CGA, there is a greater chance that the gift will be exhausted before the annuity matures, even if market conditions improve.
If annuitants outlive their expected actuarial mortality, the non-profit will need to make more annuity payments than originally calculated when the gift was funded.
If a CGA pool's assets and liabilities are concentrated with a small number of annuitants, even short periods of underperformance can make meeting financial obligations to annuitants more challenging.
Calculating metrics such as the average and median ages for annuitants, the gift's effective payout and projected years to exhaustion, the projected remainder value for the charity, and the annual distributions by annuitant will help non-profits assess their CGA pools.
Certain metrics may tell one story when considered alone, but reveal something else entirely when analyzed in the context of other information.
It's important to see how the individual metrics work together to create an overall assessment of the pool. By reviewing all of the findings collectively, a non-profit can be more prepared to address any potential problems.
Analyzing key metrics alone will not result in long-term success. Non-profits should implement processes to review findings and develop appropriate action plans regarding investment strategy and gift acceptance policies.
While risk cannot be controlled, ongoing monitoring is the key to being prepared. By including CGA pool analysis as a regular part of their gift acceptance policies and investment reviews, non-profits will have meaningful, quantitative trend information to guide discussions about risk.
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