Planned-Giving Council Urges Charities to Trim Rates Paid to Young Donors of Gift Annuities
By Debra E. Blum
Contributor
April 18, 2002 | Read Time: 3 minutes
Charities should trim the rates they pay young donors of gift annuities, according to a
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national planned-giving organization.
The American Council on Gift Annuities has recommended that starting in July, charities lower rates for donors below age 39 by as much as 0.2 percentage points. For donors 39 and older, the council has recommended that payout rates remain unchanged.
Gift annuities allow donors to contribute cash or other assets to a charity in exchange for fixed annual payments. The percentage of the gift that a charity pays varies with the donor’s age. Younger donors receive smaller payments because they presumably will live longer than older ones.
Most charities use the council’s recommended rates, although they are not required to do so. The assumption behind the council’s calculations is that charities will receive half the value of the gift. Many charities earn much more, sometimes as much as 90 percent.
Modified Assumptions
While the council suggested that all the rates except those for the youngest donors remain unchanged this year, the group modified some key assumptions used to calculate those rates.
It now estimates the cost of administering gift annuities and investing their assets at an annual average rate of 1 percent of the annuities’ assets, up from 0.75 percent. At the same time, it raised the estimated average annual total return on investments from 6.5 percent to 6.75 percent. The council did not recommend a rate change based on those revisions because both the expense and return estimates rose by one-fourth of a percentage point.
Underlying the rise in estimated returns are changes that the council made in its assumptions about how charities invest their annuity assets. The council had assumed that an average portfolio consisted of 30 percent equities, 60 percent 10-year Treasury bonds, and 10 percent cash. Now, the council sees the average as slightly less conservative, with 35 percent of assets in equities, 60 percent in 10-year Treasury bonds, and only 5 percent in cash.
Longevity Study
The council also adjusted its life-expectancy calculations to correspond with findings from a new study it conducted on the longevity of gift-annuity donors.
Until now, the council looked at mortality data collected by insurance companies on commercial-annuity buyers and based its rate recommendations on the assumption that gift-annuity donors are likely to live longer than commercial annuitants. To account for the assumed differences in life expectancy, the council adjusted its age figures by one year. Thus, when recommending gift-annuity rates, the council used the same life-expectancy figure for a 75-year-old female donor that the insurance industry uses for a 74-year-old woman who holds a commercial annuity.
Now, because the council’s study shows that donors age 65 through 90 live one to three years longer than commercial annuitants, the adjustment will be 1.5 years.
The council examined nearly 25,000 gift annuities that were in existence during the five-year period ending December 31, 2000. It found that 4,400 gift annuitants died during the period, compared with the 4,665 deaths that could have been expected based on the insurance industry’s data.
| Old | New | Old | New | Old | New | |||
| Age | rate | rate | Age | rate | rate | Age | rate | rate |
| 20 and under | 4.8% | 4.8% | 44 | 5.5% | 5.5% | 68 | 7.0% | 7.0% |
| 21 | 4.9% | 4.8% | 45 | 5.6% | 5.6% | 69 | 7.1% | 7.1% |
| 22 | 4.9% | 4.8% | 46 | 5.6% | 5.6% | 70 | 7.2% | 7.2% |
| 23 | 5.0% | 4.9% | 47 | 5.6% | 5.6% | 71 | 7.3% | 7.3% |
| 24 | 5.0% | 4.9% | 48 | 5.7% | 5.7% | 72 | 7.4% | 7.4% |
| 25 | 5.1% | 4.9% | 49 | 5.7% | 5.7% | 73 | 7.6% | 7.6% |
| 26 | 5.1% | 4.9% | 50 | 5.7% | 5.7% | 74 | 7.7% | 7.7% |
| 27 | 5.1% | 5.0% | 51 | 5.8% | 5.8% | 75 | 7.9% | 7.9% |
| 28 | 5.1% | 5.0% | 52 | 5.8% | 5.8% | 76 | 8.0% | 8.0% |
| 29 | 5.2% | 5.0% | 53 | 5.9% | 5.9% | 77 | 8.2% | 8.2% |
| 30 | 5.2% | 5.0% | 54 | 5.9% | 5.9% | 78 | 8.4% | 8.4% |
| 31 | 5.2% | 5.1% | 55 | 6.0% | 6.0% | 79 | 8.6% | 8.6% |
| 32 | 5.2% | 5.1% | 56 | 6.1% | 6.1% | 80 | 8.9% | 8.9% |
| 33 | 5.3% | 5.1% | 57 | 6.2% | 6.2% | 81 | 9.1% | 9.1% |
| 34 | 5.3% | 5.2% | 58 | 6.3% | 6.3% | 82 | 9.4% | 9.4% |
| 35 | 5.3% | 5.2% | 59 | 6.4% | 6.4% | 83 | 9.7% | 9.7% |
| 36 | 5.3% | 5.3% | 60 | 6.4% | 6.4% | 84 | 10.1% | 10.1% |
| 37 | 5.4% | 5.3% | 61 | 6.5% | 6.5% | 85 | 10.4% | 10.4% |
| 38 | 5.4% | 5.3% | 62 | 6.6% | 6.6% | 86 | 10.8% | 10.8% |
| 39 | 5.4% | 5.4% | 63 | 6.6% | 6.6% | 87 | 11.1% | 11.1% |
| 40 | 5.4% | 5.4% | 64 | 6.7% | 6.7% | 88 | 11.4% | 11.4% |
| 41 | 5.5% | 5.5% | 65 | 6.7% | 6.7% | 89 | 11.7% | 11.7% |
| 42 | 5.5% | 5.5% | 66 | 6.8% | 6.8% | 90 and over | 12.0% | 12.0% |
| 43 | 5.5% | 5.5% | 67 | 6.9% | 6.9% | |||
| SOURCE: American Council on Gift Annuities | ||||||||
