From the December 2009 issue of Investment Advisor • Subscribe!

Checking It Out

While charities are required by the Philanthropy Protection Act of 1995 to provide a disclosure prior to accepting a donation, very little in the disclosure reveals the charities' policies and best practices. Be prepared to ask the charities several questions about their programs:

o How long has the CGA program been in operation? A newly established program with fewer contracts is subject to longevity risk.

o Does the charity follow the rate guidelines published by the ACGA?

o Does the charity have a comprehensive Investment Policy Statement (IPS) for the annuity pool? As a general rule, a smaller or midsized charity's IPS should reflect a more conservative and more liquid policy than the charity's endowment fund.

o What is the composition and experience of its investment committee?

o What are the demographics of the donors in the CGA reserve? What is the average age of the donors? A younger population adds to the long-term administration cost. Most charities will limit issuing a CGA to donors over age 70. If payments will be deferred, they might issue CGAs to donors as young as age 60.

o What measures has the charity taken to manage the fund's longevity risk? Does the charity reinsure contracts? If so, what are the criteria for doing so?

o What is the charity's gift acceptance policy? Does it accept hard-to-value or illiquid gifts? Is there a maximum donation size? An overly concentrated portfolio can be subject to longevity risk.

o Will the charity's mission be as valuable tomorrow as it is today? Will it attract new generations of donors to replenish its reserve funds?

o How current is its latest financial statement? The Philanthropy Protection Act requires the charity to provide information on its financial condition and governing structure.

o And, most importantly, has the charity ever missed an annuity payment?

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