The following six (6) assumptions were set by the Board of the American Council on Gift Annuities (ACGA) and were supplied to the actuary who used them to compute the rates. The Board approved the rates in their Spring, 2003 meeting, which became effective with new annuity agreements issued AFTER 6/30/03.
1. 50% Residuum: The annuity rates are computed using the assumption that "on average" at least 50% of the initial gift amount will accrue to the charity, if the annuitant(s) live just to their life expectancy (based on the actuarial table used in the computations.)
2. Life Expectancies:
2a. Annuity 2000 Tables: New "Annuity 2000" Actuarial (life expectancy) Tables were used to utilize the most recent known life expectancy data, since people are living longer than the life expectancy data available in the 16 year older "1983a" Mortality Table used from 1983 to the year 2000.
2b. Based on Female Ages with 1 and 1/2 year setback: To ensure the most conservative approach, FEMALE ages were used, with all ages "set back" 1.5 years (so that an extra 1 and ½ year of life expectancy was used in the computations). This is to ensure projections for increased life expectancies since creation of the Annuity 2000 Mortality Table, which are changed only about every 10-15 years.
3. Semi-Annual Payments made at End of the period:
This sets a mid point between making the initial payment immediately upon receipt of the gift and making an annual payment after a whole year of investing the gift.
4. Annual Expenses: 1.0%. It was assumed that the charity would charge the Annuity Fund 1% of the declining fund balance each year against expenses of administering the Gift Annuity Fund. This might be a bit too high for a self-administered fund and a bit too low for a fund administered by outside vendors, but this assumption was chosen as a compromise between the two approaches.
5. Total Annual Return: 6.00%. Annuity rates assume that annuity fund is invested to earn a gross annual total return of 6.0% of the Value of the Fund, from which 1.0% in expenses is charged, leaving a NET total return earnings of 5.0% a year of the remaining fund balance, assuming the charity invests 100% of each CGA gift. This is based on (a February, 2004 assumption) for a portfolio consisting of 40% equities, 55% 10-year U.S. Treasury bonds, and 5% cash, an assumed portfolio that should qualify in the most restrictive states, assuming a charity offers CGA gift nationwide. This assumption becomes effective 7-1-2004, and while it lowered the estimated net earnings to 4.8% or 4.9%, it was not enough to change the 7-1-03 rates which will remain in effect at least until 7-1-2005.
NOTE: Each charity issuing charitable gift annuities should obtain the 20 page “Explanation of the ACGA Gift Annuity Rates” paper presented at the 26th Conference on Gift Annuities (May 5-7, 2004) in Orlando, Florida, available for $20 from the ACGA office in Indianapolis, IN. Go to www.acga-web.org, click on “Order Form” (print out form and follow instructions thereon). EVERY charity offering charitable gift annuities should obtain and study this paper carefully.
6. Some rate adjustment downward at both younger and older ages. Rates adjusted downward and "capped" at both younger and older ages, with lesser adjustments at older ages.
