32 Years of American Annuity Experience: Part 5.3 of Calculating Gifts

32 Years of American Annuity Experience: Part 5.3 of Calculating Gifts

George A. Huggins and the Conference on Annuities, 1927-1959
Article posted in Charitable Gift Annuity on 9 March 2016| comments
audience: National Publication, Ron Brown | last updated: 10 March 2016


Ron Brown discovers surprising historical relationships among life insurance, pensions, and gift annuities in his latest essay. Why did gift annuity contracts aim to provide 70% for charitable services, and just 30% to finance life annuity payments?

III.  What Makes Annuities Charitable?  A Residuum Target

Commercial annuity business models have no charitable component.  Huggins directed America’s attention to the fact that the charitable element is the whole point of gift annuities, which are gifts of a residual interest, not investments that maximize the return to a customer.  Charities can and should know exactly how much a gift annuity means to them financially, and the money provided by donors for charitable purposes must be protected just as vigorously as corporate profits are sought through the sale of financial products. 

In the 1920s, competing for donors by negotiating the annuity payment rate was all too common.  Nonprofits willing to negotiate gift annuity rates were allowing self-interested investors to create a market, and losing sight of the charitable purpose.  At the second Conference on Annuities in 1928, Huggins warned that offering higher payment rates as an incentive to attract gifts would bring charitable annuities into competition with commercial annuities:

As we approach the condition, where the residuum is reduced and approaches the vanishing point, the organizations will find themselves encroaching upon the territory of the commercial insurance companies that sell annuities.  Their rates are so calculated that the principal and interest will, on the average, and in the aggregate be exhausted in meeting the annuity payments.[1]

Huggins urged nonprofits to recognize that unjustifiably high rates are “disastrous.”  Charities “would be fortunate indeed to break even without taking into account administrative costs”:

In other words, they would be rendering a service to their annuitants without any compensation whatsoever.

It is not the purpose of annuity agreements, issued by religious, charitable and educational organizations, to render annuity service free of cost – the purpose is to raise funds to carry on the work of the organization issuing the agreement.  The higher the annuity rates allowed, the less will be the gain to the organization; the lower the rates, the greater the gain.[2]

Huggins stressed the fundamental difference between charitable gift annuities and annuity investments:

In determining the basis, we must keep in mind the object of issuing these annuity agreements.  It must be distinctly kept in mind that these organizations are not selling annuities as they are commonly sold by commercial insurance companies.  They are simply offering to their constituents a means by which gifts may be made to the organizations, retaining for the donors a life interest in the funds . . .[3]

Throughout his life, Huggins coached nonprofits to focus on the charitable purpose, noting in his last conference report in 1959 that “we must keep in mind that we are not in the gift annuity business just to sell annuities.  We are in the business of getting gift money for the cause we represent.”[4]

In time, having a broadly accepted national residuum target derived by standardized calculations eliminated competition among virtually all charities[5] that previously had been willing to attract donors by negotiating higher payment rates than those offered by other nonprofits.  This is one of Huggins’ most important contributions.  Through his actuarially-determined charitable residuum target, he fulfilled America’s need for a hybrid conceptual model of gifts clearly motivated by love for a charitable mission, bundled with a secure life annuity contract that protects the interests of annuitants as well as the issuing charities. 

There was little room for doubt that his residuum target produced a charitable gift: on average, 70% of the original principal would be available to the issuing charity when an annuitant dies, which Huggins described in his 1927 report as “reasonable in its returns, both to the donors and the organizations, and at the same time consistent with the objects of the annuity gifts.”   

No one looking for a good financial deal would be attracted by an investment prospectus illustrating a life annuity in which 70% of the original principal is allocated to the issuing charity, rather than to the donor’s payments.  Only a donor intending to support the philanthropic mission of a charity would agree to such an arrangement.  

Many years later in 1946, facing increased gift annuitant longevity and a steady decline in investment returns, Huggins recommended reducing the residuum target to 50%:   

In the rates proposed, it is our thought that the organizations should share some of the losses under these adverse conditions that have developed. We are, therefore, proposing a set of rates with a 50% residuum as contrasted with the 70% residuum which has been the basis of our rates to date.

Uncertainties over the postwar economy caused the Conference to take no action on rate-setting in 1946.  Huggins’ recommendation was adopted at the next conference in 1955, and the residuum target remains 50% today.

The legal responsibility to provide lifetime payments to annuitants is fundamentally important, and appropriately regulated by law, but that is just the start – a baseline requirement.  If nonprofits want to be compensated for the time and expense involved in the professional management of a gift annuity program, they need to be efficient in controlling costs associated with marketing and administration, and they must find adequate investment returns to protect the value of the charitable residuum that will support their philanthropic missions.

IV.  A Consultant’s Plan for the Gift Annuity “Business”

In constructing a national plan for gift annuities issued by nonprofit organizations, Huggins did not work from whole cloth.  The rapid design and construction of his rate table was possible because Huggins was a leading actuarial consultant for life insurance companies and pension plans.  He could share his professional knowledge of mortality and investment return assumptions with confidence that they met generally accepted standards for the heavily-regulated American life insurance industry, whose business model employs actuarial risk management techniques developed in the 19th century.[6]

Given his record of leadership in the business world, it is not surprising that Huggins was a game-changer for nonprofits.  He was a pioneer in alerting major U.S. corporations and national religious organizations to the need for actuarial audits of their pension funds.[7]  In 1927 he was a well-respected expert on determining the accrued costs and projected benefits of annuity obligations.[8]  He developed a thriving professional career as an actuary, maintaining a detailed awareness of how major insurance firms and other businesses were managing longevity and financial risks in their pension and annuity programs. 

As a consulting actuary on pensions, Huggins provided advice on all aspects of defined-benefit programs, including plan design, contracts, investments, participant communications, and administration.  He guided insurance company clients in “the design, pricing, experience rating, valuation, administration, and communication” of life insurance and annuity programs.[9]    

The business model for charitable gift planning followed the lead of financial services.  A new order of complexity had been introduced into American fundraising in the 1830s and 1840s, when charities such as the American Bible Society and the American Baptist Home Mission Society began to issue annuity bonds like those offered by commercial firms.  Nonprofit charities agreed to be legally bound by a written contract to make fixed payments for an unknowable number of years, based on the lives of one or more annuitants.  These nonprofits accepted a general financial obligation to make annual payments that were more expensive than the original principal could earn, and continue making payments even if the issuing charity suffered unpredictable investment losses or if interest earnings fell below original assumptions.   

Nonprofits imitated commercial annuity contracts without adopting business management ideas and techniques.  It now seems an inevitable consequence of John Trumbull’s annuity bond contract with Yale in 1831 that nonprofits intending to raise money through a gift annuity program would need a satisfactory measure of the average longevity of annuitants’ lives.  Precise data-gathering and scientific measurements became necessary in order to manage longevity and investment risks.

Like the firms whose insurance, annuity, and pension products were based on financial commitments for a person’s life, charities issuing gift annuities were slow to recognize the need for standards of practice based on statistical analysis of annuity experience.  96 years passed between John Trumbull’s Annuity Bond with Yale in 1831 and the development of a national system of best practices grounded in actuarial science.

By 1927, a very small number of nonprofit organizations, notably the American Bible Society, collected data on the longevity of charitable gift annuitants.  Huggins pioneered the use of national mortality tables for gift annuities, and was the first to survey nonprofit organizations on their gift annuitant mortality experience. 

Today’s philanthropic planners swim in a sea of actuarial science like fish in water, paying little or no critical attention to understanding life expectancy based on changing mortality rates.  Very few planners have the mathematical skills to generate a mortality table showing the probability that people of a certain age will live for X more years.  After George Huggins, we must trust the work of professional actuaries. 

The next major part of this essay will examine each of the first ten Conferences on Gift Annuities in detail.  As we turn to Huggins’ reports, it is worth keeping in mind that he launched American fundraising on a path towards greater sophistication by way of his professional expertise as a consulting actuary.  The seven annotated schedules Huggins included in his first report are typical for a technical paper prepared for a client’s pension fund or life insurance program.  He had done this sort of thing many times before. 

Huggins stayed personally involved with the process he had started, helping the nonprofit sector think through the philosophy and structure of a national charitable gift annuity program over the next 32 years. 

Copyright Designation: This work is licensed under a Creative Commons copyright that allows the copying, distribution, and display of this material – and the ability to make derivative works based on it – if credit is given to the author and if those derivative works are distributed under a similar agreement.  This license is classified as an Attribution-Share Alike 3.0 Unported License.

Additional Installments:

5.1:   32 Years of American Annuity Experience - Introduction

5.2:   32 Years of American Annuity Experience - Public Policies on Gift Annuities: The New York Insurance Law of 1925

[1] Huggins, “Annuity Rates and Reserves,” Conditional Gifts: Annuity Agreements of Charitable Organizations, (NY: The Sub-committee on Annuities of the Committee on Financial and Fiduciary Matters, 1929), Wise Public Giving Series No. 31, page 30.

[2] Huggins, “Danger Points and Protective Essentials,” Annuity Agreements: Their Promotion and Management (Chicago: Committee on Annuities of the World Service Commission of the Methodist Episcopal Church, 1931), pages 12-13.

[3] “Actuarial Basis” page 9.

[4] Huggins, “Report on the Mortality Experience Studies,” Gift Annuity Agreements of Charitable Organizations (NY: The Committee on Gift Annuities, 1959), Wise Public Giving Series No. 49, page 16.

[5] “96% of the charities responding to the 2013 survey reported that they always or usually follow the ACGA rates, consistent with responses in previous surveys.”  2013 Survey of Charitable Gift Annuities (Smyrna, GA: American Council on Gift Annuities, 2014), second ed., page 13.

[6] William Bard, founder of the New York Life Insurance and Trust Company (NYLIT) in 1830, was the first actuary to be president of an American financial services firm.  Bard used mortality data aggressively to price and promote its life insurance policies, capturing a substantial share of the rapidly-growing market.  He tried unsuccessfully for many years to encourage insurance companies to pool their mortality data for the general good.  See Sharon Ann Murphy, “In Search of an American Mortality Table,” Investing in Life: Insurance in Antebellum America (Baltimore: The Johns Hopkins University Press, 2010), pages 22-27.

[7] “The earliest defined-benefit pension plans were established on a pay-as-you-go basis without advance funding or the assistance of actuaries.  Benefits were paid when they became due, and there were no actuarial calculations of currently accruing costs or of projected benefits and costs.  George Huggins began pension actuarial calculations in America in 1904.”  Donald S. Grubbs, Jr., “The Public Responsibility of Actuaries in American Pensions,” North American Actuarial Journal, Vol. 3, Issue 4 (1999), page 34.   Huggins was “the ranking authority of his era on clergy pensions” according to the Society of Actuaries.  See “Historical Background” at https://www.soa.org/About/History/about-historical-background.aspx

     Analysis of employee pension costs was not a priority for companies in the 19th century because “pensions were generally gratuitous in nature and employers could, at their option, choose who was to receive a pension and the scope of the pension that would be made available . . .  A second reason for the slow evolution of pension cost analysis was that early pensions generally were provided on a pay-as-you-go or assessmentism basis.  Under this scheme the incidence of cost is negligible during the early years of the pension plan when there are only relatively few retired employees.  It takes a number of years before the ultimate cost of the plan becomes apparent . . .  Since no one was concerned that the cost of a pension plan could impose a serious financial problem, an analytical solution for this problem was not sought . . .  Although the need for a detailed analysis of the implications of the accrued liability was firmly established by 1915, a considerable period of time elapsed before actuaries began to quantify systematically the approaches for dealing with this problem.”  Arnold F. Shapiro, “Contributions to the Evolution of Pension Cost Analysis,” The Journal of Risk and Insurance, Vol. 52, No. 1 (March 1985), pages 82 and 86.   

[8] Huggins testified before the Senate Finance Committee in 1935 concerning the new Social Security Act on behalf of “22 denominational pension systems, including 110,000 ministers, serving 135,000 churches, and representing 25,000,000 church members.”   See https://www.ssa.gov/history/pdf/s35huggins.pdf

[9] See Grubbs’ discussion of the actuary’s role as pension consultant and in funding insurance company contracts in “The Public Responsibility of Actuaries in American Pensions,” page 35.


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