Planned Giving: Dont Let Investments Drown

Volatility in the stock market might make individuals looking for security more open to charitable gift annuities (CGA) but at the same time the market might be wreaking havoc on a charity’s annuity reserves, a portion of which are usually invested in equities.

The American Council on Gift Annuities (ACGA) recommends a portfolio be invested 40 percent in equities and 55 percent in bonds, with 5 percent cash.

John Jensen, senior vice president, consultant at The Sharpe Group in Memphis, Tenn., expects more nonprofit boards will be looking to annuity reinsurance. “Is it smarter to lock in losses? If you think the market will come back, you wouldn’t reinsure. If, from a risk management standpoint, you don’t want that exposure, or don’t think the market will come back, you reinsure,” he said. For a gift annuity pool that’s invested at 70 to 75 percent in equities and reinsured today, a charity is locking in whatever losses it had in the market, he said.

“What we are hearing is charities are nervous and they’re certainly taking a look at their gift annuity programs and doing risk assessments,” said Tanya Howe Johnson, president and CEO of Partnership For Philanthropic Planning (PPP) in Indianapolis, Ind. Re-insuring gift annuities, something nonprofits do occasionally, might become more popular, she said.

In extreme cases, organizations might need to use funds from sources such as operating funds, or perhaps step up their current giving program or change rates for services they provide. “That’s a proactive step charities can take,” Howe Johnson said. “They might have to tighten belts in some other areas, and that’s what some organizations are probably looking at,” she said.

Melanie Rose, director of annuities product management for Mutual of Omaha, reported an increased interest in reinsurance of CGAs. She estimated as many as 20 organizations have contacted Mutual of Omaha during the past few months, in addition to their 45 clients. “Considering this is a niche product for us, that’s a pretty significant increase in the level of interest,” she said.

A large pool of gift annuities also can minimize the risk for a charity. If one gift annuity goes under water, the larger the annuity pool, the more the charity’s risk is spread out.

Of the 1,500 gift annuities by the American Red Cross (ARC), Rebecca Locke, senior director of gift planning, estimates that maybe one goes under water each year or so, usually the result of an annuitant outliving the annuity. “The capacity to survive that and be OK is much better if you have 1,499 others. It’s much more devastating if one out of 50 annuities is underwater,” she said.

The ARC is among those charities that segregate its gift annuities pool. “We never touch a dime of the money until the annuitant, or both beneficiaries, are dead,” Locke said. “Some organizations do that but that’s asking for trouble.”

ARC also has a diversified investment portfolio for its annuity pool, according to Locke, to reduce the chance that a negative market impacts its funds. “Nothing’s failsafe but we at least reduce the chances of a negative outcome,” she said. Still, that doesn’t mean the market hasn’t affected its annuities.

“None of us has a crystal ball but if you’re committed to offering gift annuity to donors, you have to understand there is risk here,” Locke said. “As painful as the markets are for all of us, it’s a teaching opportunity, and a reminder that this isn’t foolproof, and you need policies and investment strategies,” she said.



This article is from NPT Weekly, a publication of The NonProfit Times.

Subscribe to The NPT Weekly eNewsletter or any of our other enewsletters and get the latest news and ideas related to fundraising delivered to your inbox