Gift Annuity Reserves calculations explained

 

GiftWrap can perform annuity reserve calculations using custom or state methods. The discussion below describes each method and how they differ.

Custom method for calculating the annuity reserve

The custom method for calculating the reserve for a gift annuity offers you more flexibility than the state method. In particular, the custom method gives you a choice of interest rates and mortality tables to apply and the state method does not. This flexibility is important if your charity submits reserve reports to Arkansas and you wish to comply with its reserve requirements by computing reserves using the "IRS method" (see Arkansas reserve calculations below).

The custom method also allows you to make use of more than one mortality table of your choice in a single report. The mortality table used for each gift can be a single table selected by you or can correspond to each gift date and the state(s) you wish to satisfy as dictated in the Custom State Reserve Mortality Table.

The calculation depends on the beneficiary ages as of the reserve calculation date entered by you, the interest rate applied, the mortality table applied, and the annual annuity amount of the contract (as determined from the gift amount and annuity percentage) including adjustments for payment frequency and timing.

If you select 2000CM as the mortality table, your reserve calculations will be based on the same mortality table the IRS requires for computing investments in contract. Other aspects of the reserve calculations differ from the IRS method, however, so your reserve calculations will differ modestly from the corresponding investment in contract calculations performed under IRS rules. You can mimic IRS investment in contract calculations exactly by producing a FASB Liabilities report using Table 2000CM, but see the next paragraph for a pending change.

The IRS has announced a new 2010CM mortality table. Currently, either 2010CM or 2000CM may be used when computing an annuitant's investment in contract for a gift annuity funded from 1/1/2021 until 2010CM becomes required. The effective date for 2010CM will be established when final regulations are issued, which most likely will occur before the end of 2022. After that effective date, you will need to use Table 2010CM when producing a FASB Liabilities report to mimic IRS investment in contract calculations exactly.

The reserve amount equals the sum of the present values of every annuity payment that might be received in the future. Each payment is discounted by the probability it will be paid, and discounted by the interest rate for the years from valuation to the time that that payment is made. The probability that a payment will be paid is the chance that at least one of the beneficiaries will be alive to receive it in a given year. This probability is calculated using the mortality table applied.

State method for calculating the annuity reserve

If you choose the state method for performing reserve calculations, GiftWrap follows standard actuarial methods for determining reserve amounts. The amount calculated by GiftWrap does not include any required surplus. You may add a surplus amount of your choice to the totals at the end of the report by selecting Percentage of Total Reserve or Specific Dollar Amount under Surplus to Show at End of Report in the State Method tab. Several states require a surplus of 10% of the computed reserve, for example. See Surpluses below for more detail.

As noted above, GiftWrap uses the same actuarial method for computing reserves regardless of the states that you indicate must be satisfied by the report.

The state methods differ in several technical, but important respects, from the IRS method described above.

·  The following adjustment reflects generally accepted actuarial practices.

Modal period adjustments: Modal period adjustments are used to adjust reserves for payment frequency and dates of payment. A specific modal adjustment is applied based on whether the payments are made at the beginning or end of the standard calendar period. A beginning of period adjustment is applied to an annuity that makes payments on the first day of standard calendar periods (for example, quarterly on 1/1, 4/1, 7/1, 10/1). An end of period adjustment is applied to an annuity that makes payments on the last day of standard calendar periods (for example, quarterly on 3/31, 6/30, 9/30, 12/31). If payments are made on a date other than the first or last day of the standard calendar period, GiftWrap applies a beginning of period adjustment, which assures an adequate reserve in these cases. In applying the modal adjustment, GifttWrap computes each annuitant age as of the birthday nearest the valuation date entered for the reserve report.

·  Mortality tables:  As shown below, the states that require annuity reserve reports began requiring use of the Annuity 2000 mortality table for gift annuities issued starting in the late 1990s or early 2000s. The National Association of Insurance Commissioners adopted the Annuity 2000 table in 1996 as an appropriate table for valuing annuity interests. The 1983 A mortality table is acceptable in these states for use with gifts made prior to the dates shown.

Use of Annuity 2000 mortality table

State	Gifts on or after
Washington	July 1, 1998
Arkansas	July 1, 1998 (for use in Option 3 method, see below)
Florida	July 1, 1998 (effective for valuations on or after October 1, 2002)
Wisconsin	January 1, 1999
New York	January 1, 2000 - December
Maryland	January 1, 2000 (MD accepts NY reserve valuations)
Oregon	January 1, 2001
New Jersey	January 1, 2001
Hawaii	All gifts (effective for valuations on or after July 1, 2004)
California	January 1, 2005

 

Use of 2012 IAR mortality table

As shown below, many states have adopted the 2012 IAR mortality table for computing minimum annuity reserves for gift annuities issued on or after January 1, 2015. Only California and Hawaii have explicitly not adopted 2012 IAR for computing minimum annuity reserves for new gift annuities. In 2014, Wisconsin largely deregulated gift annuities and no longer requires a minimum gift annuity reserve.

State	Gifts on or after
Washington	January 1, 2015
Arkansas	January 1, 2015 (for use in Option 3 method, see below)
Florida	January 1, 2015
New York	January 1, 2015
Maryland	January 1, 2015 (MD accepts NY reserve valuations)
Oregon	January 1, 2015
New Jersey	January 1, 2015

 

The application of the Annuity 2000, 2012 IAR, and other mortality tables is dictated by the Standard State Reserve Mortality Table and is based on the state(s) the report must satisfy and the gift date. You can view the contents of this table under Setup > Standard State Reserve Mortality Table. Using this table, GiftWrap chooses automatically the least conservative allowable mortality table for each gift, given the gift date and the state or states that the user has indicated must be satisfied by the report.

If you elect to satisfy more than one state with a single reserve report, GiftWrap calculates the reserve requirement of each contract using the most conservative mortality table applicable among the selected states.

Unlike Table 2000CM, which is required by the IRS for deduction calculations as of 7/1/2009, the 1983 A, Annuity 2000, and 2012 IAR tables are sex-biased, with separate mortality figures for males and females. The 2012 IAR table predicts longer life expectancies than the other three tables at every age and therefore will produce the greatest reserve amounts.

In addition, the 2012 IAR table is a generational table, not a static table like the others. The generational aspect of 2012 IAR means, for example, that the minimum reserve computed for a 75 year-old using 2012 IAR will depend on the year of determination. The minimum reserve for a 75 year-old in 2015 will be lower than the minimum reserve for a 75 year-old in 2020 with an identical annuity. Using any of the other mortality tables, the minimum reserve for identical annuities with annuitants of the same age will be the same regardless of the year for which it is computed.

Also, rather than starting at 0 the way the 2000CM, Annuity 2000, and 2012 IAR tables do, the 1983 A table starts at age 5. Accordingly, in calculating reserves GiftWrap assumes no mortality occurs between ages 0 and 5 in the 1983 A table. This assumption affects reserve calculations for contracts with annuitants under age 5 only.

·  Interest rates: The states that require reserve reports dictate maximum allowable interest rates. Starting in 2020, New York began updating its maximum allowable interest rates quarterly, rather than annually. The applicable interest rate depends on the issue year and quarter of the gift, the age of the annuitant at that time, and the length of the deferral period. This approach is accepted in Hawaii, Maryland, New Jersey, and Washington, as well. For example, the New York maximum allowable interest rate for an immediate annuity a gift issued in the first quarter of 2022 to a 75 year-old annuitant was 2.00%. The maximum rate allowed for a specific gift does not change as the years pass. For both immediate payment and deferred gift annuities, it is acceptable to use an interest rate that is lower than the prescribed rate.

The maximum interest rates allowed by each state are maintained in Setup > State Reserve Percentages.

If you elect to satisfy more than one state with a single reserve report, GiftWrap calculates the reserve requirement of each contract using the lowest applicable interest rate among the selected states.

·  Surpluses: Some states require the charity to maintain a surplus in their gift annuity fund above and beyond the computed reserve amount. This surplus can be added to the total reserve amount that appears at the bottom of the Gift Annuity Reserves report. The surplus can be entered in the Gift Annuity Reserves window as either a specific dollar amount or as a percentage of the total reserve computed by GiftWrap.

State	Surplus Required Above Computed Reserve
Arkansas	10%
Florida	10 %
Hawaii	10% or $100,000, whichever is greater
New Jersey	10% or $100,000, whichever is greater
New York *	2008: 1 5.5 % if computed reserve > or = $500,000, 31.25 % if charity granted exemption 2009: 21% if computed reserve > or = $500,000, 37.5% if charity granted exemption 2010+: 26.5% if computed reserve > or = $500,000, 43.75% if charity granted exemption
Washington	10%
Wisconsin	10% or $100,000, whichever is greater

 

*  New York phased in increasing reserve surplus requirements in 2008 - 2010. The reserve surplus requirements instituted in 2010 have continued unchanged since. Prior to 2008, the New York required a surplus of 10% for computed reserves > or = $500,000 and of 25% if the charity had been granted an exemption. Only charities with a computed reserve of < $500,000 may apply for an exemption from filing for a permit to issue gift annuities.

·  Arkansas reserve calculations
For many years, Arkansas regulators have accepted reserves computed using standard actuarial valuation methods, an interest rate of 6%, and the 1983 A mortality table for all gifts. An actuary's signature has not been required.

As of 2007, Arkansas began requiring a more formal approach. State regulators have described for us three options for computing an acceptable reserve amount.

Option 1: IRS method: Compute reserves using the "IRS method." By this they mean to use the IRS discount rate and mortality table in effect at the time of the valuation. For example, a 12/31/2021 valuation would be calculated using Table 2000CM and an interest rate of 1.6%. You can apply this approach in GiftWrap by choosing the Custom Reserve method.

Option 2: Deposit face amount: Deposit the face amount of each gift annuity into a segregated reserve fund and do not remove any amount connected with an annuity, including annuity payments, until the annuity terminates. Here is Arkansas exact wording:

"The entire amount (both gift amount and investment amount) must be deposited in a separate account for the sole interest of the annuity contract and free from claim of any other source. No withdrawal shall be made from the separate account in connection with an annuity contract until such contract is terminated."

Option 3: Follow Standard Valuation Law : Compute reserves following Standard Valuation Law. This method requires an actuary's signature and opinion. This is a costly and time-consuming endeavor that is not comparable to the actuary "sign-off" allowed by some other states.

Recommendation : If your charity deposits the full face value of each gift annuity into a reserve fund, does not withdraw funds until a gift terminates (Option 2), and makes annuity payments from other sources, you are all set. Just note this is your policy in your annual filing.

If your charity does not practice Option 2, we recommend using Option 1, the IRS method. It is easy to do and ordinarily won't force you to add to your reserves, especially if you are complying with reserve requirements of states other than Arkansas. In contrast, unless yours is the rare charity that routinely obtains an actuary opinion on the adequacy of its reserves, using Option 3 is likely to add significant time and expense to your charity annual reporting process.

·  Reserve calculations for commuted payment gift annuities
The method for computing reserves for commuted payment gift annuities depends on whether or not the annuitant has commuted the annuity payments as of the reserve valuation date.

If the annuitant has not commuted the annuity payments as of this date, the reserve calculation is the same as it is for a standard deferred gift annuity and GiftWrap can perform the calculation correctly.

If the annuitant has commuted the annuity payments, however, the reserve computed using the standard deferred gift annuity approach will be insufficient. In this case, GiftWrap can compute the reserve by determining the net present value of the payments based on the amount of the commuted payment (the annuity rate store for the gift must reflect the commuted annuity amount), the start and end date of the payments, and the applicable reserve interest rate.

Computing the reserve for a commuted payment gift annuity after payments are commuted

·  Reserve calculations for flexible gift annuities
The method for computing for flexible gift annuities (FGAs) depends on whether or not the annuitant has elected an annuity starting date as of the reserve valuation date.

If the annuitant has elected a date of first payment as of this date, GiftWrap can perform this reserve calculation correctly as long as the elected date of first payment and the annuity rate that goes with it are entered in the Gift Information screen for the gift.

If the annuitant has not elected a date of first payment as of this date, the minimum reserve equals the highest reserve calculated among all of the elective combinations of first payment date and annuity rate. In this case, the only way to determine the minimum reserve for a flexible gift annuity with absolute certainty is to compute the reserve for a deferred gift annuity based on each elective date/rate pair, determine the greatest reserve among the results, and then enter that elective start date and annuity rate in the Gift Information screen for the gift. In many cases, the earliest date of first payment and annuity rate will result in the greatest reserve. The New York Department of Insurance has made this approach an explicit requirement in its instructions on computing minimum annuity reserves.

More details on computing the reserve for a flexible gift annuity

·  Gift information used to compute gift annuity reserves
In addition to the interest rate, valuation date, and mortality table used to compute a reserve, the Gift Annuity Reserves routine uses the following information in performing its calculations for each gift annuity:

gift date
gift amount
payout %
beneficiary birth dates
beneficiary gender
payment frequency
date of first payment

 

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