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In the post 9/11 environment, charities are held more and more accountable as to the stewardship of the funds entrusted to them by their respective constituencies. It is no longer enough to have a sound mission. Charities must be competitive in the products they make available to their stakeholders while preserving the integrity of their institution and the safety of all involved. Board of Directors are held under a microscope to maintain financial solvency, and are in turn, holding the staff of their organizations to new standards – all in the most competitive fundraising environment yet known.
Money Managers
Perhaps the best illustration of risk is offered by Thomas K. Anderson, Principal and Portfolio Manager of State Street Global Advisors Charitable Asset Management Group, one of the nation’s leading providers of pooled income fund services. In his article entitled, “Investing Charitable Gift Annuity Assets”, Mr. Anderson writes:
“Investment and finance staff find much to worry about with gift annuity programs, primarily because of several risks that are outside of their control. In some ways, the convenience of gift annuities makes it easy to overlook some of these risks:
- Market Risk is the simplest risk that applies to investments – the risk that an investment will decline in absolute value – even as payouts remain constant.
- Interest Rate Risk is important because typically, 35-70% of a gift annuity portfolio is dedicated to fixed income assets. Interest rate risk relates to bonds and the fact that prices on existing bonds move in the opposite direction as interest rates. So, if interest rates rise – as they are likely to over the next few years – the bonds in a gift annuity portfolio could deliver weak or negative returns.
- Inflation Risk is another risk primarily linked to bonds, meaning the risk that an investment will not keep pace with inflation, reducing purchasing power over time.
- Timing Risk concerns the impact of weak or negative investment returns in the early years, making it difficult to recover market value (especially with continuing payouts).
- Payout Risk addresses the risk that the guaranteed payouts become too high, especially if market value of gift annuity declines.
- Actuarial Risk is a blanket term for several specific risks. Longevity risk is the risk that income beneficiaries outlive life expectancies, especially as people live longer and medical care advances. Individual contract risk refers to the risk that individual contracts ‘go negative’, as payouts exhaust gift value and leave no remainder value. This is a particular concern for unusually large or illiquid gifts relative to overall gift annuity assets.”
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That is a lot to digest when considering the establishment of a CGA program. Is it any wonder why public benefit corporations and their Boards of Directors are so hesitant to move forward with a donation transaction? The sad part is the fact that there are still even more risks associated with the previous business model:
- Concentration Risk: Pools with one or two disproportionately large contracts.
- Manager Risk: “Past performance is no guarantee of future results”. Ah yes, the disclaimer. Even the strongest managers can make investment mistakes from time to time.
- The Naivety Factor: closely tied to the manager risk – nonprofit staff and volunteers are pulled in too many directions on a daily basis. Their expertise in market performance is typically weak as well – allowing a silver tongued manager to confuse the issues surrounding problems in pool performance. By the time a situation is brought under control it quite possibly could be too late to recover, exposing the charity to a significant cash flow dilemma.
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Life Insurance Companies
Obviously, change in the existing transaction model is necessary if one of the largest managers of these gifts is self identifying the myriad risks associated with their own management liabilities and market uncertainties.
Metamor has developed the solution. By placing a portion of each gift with a highly rated life insurance company, who manages more money than any other group in the world, and purchasing a commercial income annuity, all of the aforementioned risks are eliminated. The actuaries of each life insurance company are experts at their trade and have set costs to ensure their companies profitability. Using ACGA defined rates, a commercial income annuity will always cost less than turning the entire corpus gift over to a portfolio manager. As well, the risk is transferred to the life insurance company.
There is no longer any speculation in market performance and concern for the issuing charity to have to puncture their reserves to fund the promised obligation to their donor. The risk that the fund could ‘go negative’ is alleviated. Each donor is an individual annuitant and the actuaries have considered them as such. Therefore, no gift can be disproportionately large!
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