Charities Adjust Investments, Take Other Steps to Prevent Losses to Gift Annuities

Charities are taking steps to ensure they don’t lose too much of the proceeds from gift annuities as the bad economy takes a toll on the earnings both nonprofit groups and donors receive from the contributions, according to a survey of 568 organizations by the American Council on Gift Annuities.

Donors create gift annuities by giving cash, stock, or other assets to a charity. The organization invests those assets and makes regular payments to the donor or a beneficiary for the rest of their lives; when they die, the charity receives the remaining money. Low investment returns caused by the recession have meant that charities need to make adjustments to ensure they receive an adequate amount from annuities.

Experts estimate that more than 4,000 charities offer annuities, and they total at least several billion dollars in assets.

Last year, to protect their gift-annuity investments, 16.1 percent of organizations changed the way they invested the annuities, putting more money into conservative investments. Other precautionary steps included limiting marketing to promote gift annuities (9.1 percent), requiring approval of a senior staff member or board committee for new gift-annuity contracts (7.5 percent), and limiting the dollar amount of gift-annuity payments during the donor’s life (3.4 percent). And 14.6 percent of the organizations said they took other protective measures, with some limiting the percentage of assets that can be paid to donors or beneficiaries, raising the minimum donation required to establish a gift annuity, or conducting a formal risk analysis.

Lowered Calculations

Those changes are on top of modifications that the American Council on Gift Annuities made last year. The council recommends payments charities make to donors of gift annuities—based on a percentage of the donated assets and the donor’s life expectancy; nearly all the organizations in the survey said they follow the council’s suggestions. Because of the bad economy, the council lowered its calculations for how much charities can expect to earn from invested gift-annuity assets and reduced the payments it recommends for donors accordingly (The Chronicle, January 15). Nobody knows the actual number of gift annuities and how much money is tied up in them. However, organizations in the survey reported a total of 170,347 gift annuities with a combined value of $3.22-billion. Last year alone, survey respondents issued 7,091 new gift annuities valued at $307.5-million. The median value of a gift annuity created in 2009 was $167,500, meaning that half of the gift annuities established that year were worth more and half were worth less.

Among other findings from the survey:

• The amount of money charities ultimately earn from gift annuities has shrunk in the recession. For charitable annuities whose donors or other beneficiaries died in the past five years, the share of remaining assets left to charity was a median 65.6 percent of the amount originally used to establish the annuity. That was the lowest percentage in the history of the survey. Council officials said that the figure reflects both stock-market losses and low interest rates available during the recession, which officially began in December 2007.
• In another reflection of the bad economy, gift-annuity assets earned a median return of 0 percent in 2009, although some organizations reported losing more than 30 percent. At the other end of the spectrum, a few organizations reported a 20-percent or greater return on their gift-annuity investments.

About two-thirds of organizations said that creating a charitable annuity had no effect on donors’ annual giving, and 30.6 percent reported that gift-annuity donors were likely to increase their annual support. Only 3.7 percent of organizations said that donors would decrease their annual support after establishing a gift annuity.

• Two types of gift annuities that allow donors to delay payments until a later date have become more popular since the survey was first conducted in 1994. Deferred gift annuities, which enable donors to specify the age at which they will receive payments, accounted for more than 10 percent of all gift annuities, up from 5.8 percent. And flexible deferred annuities, which allow donors to wait until later to decide when their payments will start, accounted for more than 20 percent of gift annuities, up from just 4.8 percent in 1999.

The survey is available free online for members of the American Council on Gift Annuities at http://www.acga-web.org, or they may purchase printed copies for $15. Nonmembers will be charged $15 for access to the online survey or $25 for a print version. To order, contact Gloria Kermeen, director of administration, American Council on Gift Annuities, at (317) 269-6271 or write her at acga@acga-web.org.