Annuities On The Comeback Trail

Historically low interest rates are driving up interest in Charitable Gift Annuities (CGA) around the nonprofit sector. For example, the na­tional office of Easter Seals in Chicago, Ill., reported an increase of some 20 percent in CGAs last year.

“We’ve seen a significant increase…just because interest rates are so low while annuities are paying out at a much higher rate,” said Chief Financial Officer LeMonte Booker. “We’ve really stepped things up the last three years and become much more aggressive,” he said.

“Where can you put your money and make 4 percent? If you’re 80-something years old, and want to use your principal to actually live off of, there’s really no greater benefit at this point,” said Booker, because bonds and CDs are paying interest rates that are often less than 1 percent.

Lindsay Lapole, territorial planned giving director for The Salvation Army’s Southern Territory, strongly discourages charities from marketing that directly compares CGAs with other investments, such as Certificates of Deposit (CDs). That’s because CGAs should be treated as gifts, primarily for donors to support the organization’s mission, said Lapole, who also serves as chairman of the American Council on Gift Annuities (ACGA), which periodically reviews and sets CGA interest rates.

If CGAs are consistently compared with CDs while interest rates are down, when CDs rates eventually recover, a donor might go back and compare the improved CD rates that might be better than their CGA. “If you want to create repeat gifts from people to create ongoing financial support, you don’t want dissatisfied donors talking to their neighbors and friends,” said Lapole.

“We have a new normal now,” said Julie Feely, direct of gift planning at Oregon Public Broadcasting (OPB). After the stock market tech bubble popped in 2000, she said the organization examined why someone would do an annuity: because they believe in the mission. “We have changed our strategy, from fiscal to more of an emotional strategy,” said Feely. “We’re not a financial institution. We want to be more mission focused,” she said.

In some ways it’s an investment to get an income stream, but you also have to have charitable intent. “We want the right audience and donors to take up this idea. We don’t want to just take anybody’s gift. There are some people I sit down and talk to very carefully, make sure they realize, if you need this for medical or other expenses, we can’t give it back to you,” Feely said.

“Doing a gift annuity was a service to our members, who had the means to do this and were interested, and not about making money for them or for the station,” she said.

Feely has seen gift amounts significantly larger in recent years than five or six years ago. “Now people are investing larger sums, I’m not sure what that’s about,” she said. In the past two years, the Portland, Ore.-based nonprofit has done two $100,000 annuities, as well as a $300,000 annuity in the last six months.

OPB has about 10 to 15 annuities that close in a year, with a minimum of $10,000. The program was started in the mid-1990s and today has about 70 annuities with an aggregate value of almost $2 million. The average annuitant for OPB is usually a 78-year-old woman who’s widowed or single with grown kids (or no kids), giving at the $100 level to the organization’s other fundraising asks, according to Feely.

Some organizations decided to stop issuing gift annuities a few years ago, said Lapole, because they were concerned about reserve funds. As the stock markets cratered in 2008, the value of assets of charities’ reserve funds diminished to the point where it left some annuities under water.

“Each annuity is a contract; a well-run program will have that gift in reserve, invested in such a way that it will fully cover that liability,” said Lapole. “If not, an organization’s assets cover that liability,” he said.

“The reality is there is not a whole lot you can do about an agreement you signed off on years ago,” said Booker. “When you do sign an agreement, you do have some room within financials in those agreements. If the market turns sour, at least you have a period of years before an annuity goes under water,” he said.

“We have some that are pretty tight,” said Booker, but when agreements are set up, there’s always a desire to withstand several years of potential market downturns.

With interest rates low and the financial markets surging, it’s a good time for annuities since assets are likely to appreciate much faster than costs, said Booker. The opportunity to have a positive ending for an annuity is much better than two or three years ago, when assets were declining while payments were set. “That’s starting to reverse: payments are staying the same, but we’ve seen our assets increase,” Booker said. “It’s still a good time for donors. It’s still a great deal for them.”

If annuities are done consistently, the highs and lows of the market and interest rates “will take care of themselves,” said Lapole. The highest payout on an annuity is about 12 percent and the lowest is 3 percent, and The Salvation Army’s pool also includes one from the 1960s.

“This idea out there that if you do a gift annuity, it will last forever is not accurate,” he said, citing ACGA survey results indicating that 85 percent of annuities terminated at an average age of 79. There will be some exceptions, with annuitants living beyond 100, he said, estimating about a half-dozen annuitants older than 100 among its 1,600 active annuities.

A well-diversified asset allocation strategy can weather the ups and downs of financial markets as well as interest rates, Lapole said.

“If we never got another nickel in charitable gift annuities, we could make the payment obligation on every annuity we have and have several million left in that reserve at the end,” said Lapole, estimating that the organization is funded at about 130 percent of reserves.

On average, The Salvation Army’s Southern Territory has 120 to 150 gift annuities per year, at a minimum of $5,000. The historical minimum for most organizations is $10,000 while the average is about $36,000, he said. The Southern Territory covers about 15 states in the Southeast, which comprise about 44 percent of the nation’s population.

Another strategy to protect against hurting an organization’s reserves is to not discontinue annuities, Lapole said, because new money constantly going into a program can continue to build and grow under the right asset allocation. ACGA also has guidelines on asset allocation of reserve funds.

“It’s more than the AFR (Applicable Federal Rates) and what it’s been that’s caused us concern than the economy itself,” said Lapole.

“We don’t move rates except when there’s significant movement” long term, he said, keep­ing an eye on the 100-year history on equi­ties, and a 13-week rolling average on fixed income. “It’s an expensive proposition for charities, vendors and software companies to change rates,” said Lapole. “If it crosses a certain line of adjustment, we adjust, but if it’s close enough…we try to be reasonable when we do it.” If rates were changed, they would be announced in the second week of April and take effect on July 1.  E