Case Study

Over the years special gift annuity programs have been operated in Canada where donors have provided funds to their preferred charities and those charities have established agreements to provide lifetime annuities to the donor and spouse. The amount of the annuity is set at a level that will normally leave an accumulation of funds of perhaps as much as one-half of the original donation at the time of the death of the donor and spouse. This “death benefit” becomes a residual donation to the charity.

DV Associates have worked with charities in the evaluation of these types of gift annuity programs and the valuation of other special funds for charities.

Situation and Challenge

With one particular charity five special funds have been set up and have accumulated substantial assets and liabilities (commitments) requiring careful analysis to ensure the viability of the funds. In addition more rigid valuation and reporting rules with respect to the gift annuity program have emerged in the last few years. Finally, the difficult economy and investment climate of the last 5 or 6 years has compounded the pressure on the charity to manage and ensure a responsible and productive future.

Solution

In the early years of the first decade of this new century the charity’s previous consultants (a small firm whose clients were acquired by DV Associates in 2006) recommended the engagement of an investment management firm which assisted greatly in dealing with the investment program for the special funds and the gift annuity fund up to and through the upheaval in 2007 and 2008. DVA continues to monitor the investment program and maintain a balance between the assets and liabilities of the funds.

Of particular importance are the valuation and reporting rules of the Canadian Institute of Actuaries and the Canadian Charitable Annuity Association and the need to integrate these requirements into a viable process for the charity. Among other things it has become necessary to place a value on the expected death benefits payable under the gift annuity program. In the past only the annuity portion of the program was valued.

The valuation of the expected death benefits involved reproduction of each donor’s outstanding account balance which necessitated calculation of past fund investment returns. Using past fund records and estimates based on market indices where fund records were incomplete, DVA developed an inexpensive process to calculate all current outstanding account balances. The overall expected death benefit value was then put together by DVA and incorporated into the final valuation report in accordance with the Canadian Institute of Actuaries reporting rules.

Situation

L&M Precision Products Limited is a specialty manufacturer of metal products with approximately 100 employees. In 1991 the company terminated its registered pension plan and replaced it with a Group RRSP/DPSP arrangement. Originally, the Group RRSP/DPSP was managed by a life insurance company. In 1997 a large downtown brokerage firm was appointed as advisor and manager and all accounts were transferred to Mackenzie Financial and MRS Trust. The brokerage firm advisor made various changes in the investments of some of the accounts over the next 5 years usually explaining and discussing the changes with the individual plan members over the telephone.
Challenge

Unknown to the management of L&M Precision Products many of the employees, and, of course, a number of those approaching the end of their working careers, were very anxious about their savings in the Group RRSP and DPSP. After 5 years of inattention there was an under-current of discontent. The employees needed individual consultation to firstly, adjust their investment program to their circumstances and risk profile and to demonstrate and explain to them actual investment progress and expected future progress. And secondly, for those approaching retirement specific action was needed to deal with the technicalities of changing to RRIFs and LRIFs.

Solution

Immediately upon appointment in June 2002, DV Associates retrieved historical data on all plan member accounts and prepared individual statements of all contributions and redemptions since 1997. In addition DVA calculated actual individual account rates of return over the 5 year period to June 30, 2002.

The DV Associates’ advisor then met with each plan member separately and (1) reviewed all transactions that had taken place since 1997 to ensure that each plan member was satisfied that all deposits and other transactions were correct, and (2) examined and explained the actual investment results for the plan member’s own accounts. In this latter case the explanation in many cases corrected misconceptions as to overall investment returns. Most plan members were under the impression that their accounts had suffered significant losses. However, in most cases, adjusting for deposits and withdrawals, if any, most accounts had actually ended up with very small losses or very small gains over the 1997 to 2002 period.

Discussing these investment results with the plan members helped greatly in calming the atmosphere. Nevertheless, it was clear that the members’ accounts could have been managed more closely. Changes were made to the investment program of most members based on their circumstances and investment risk tolerance profile.

An important aspect of this process was to explain the cost structure of the Group RRSP/DPSP and the value of the Company’s DPSP contributions to each member’s account each year. Further it was made clear that each member’s investment program was being adjusted to provide more flexibility for future changes.

Each member now has the ability to ask the DV Associates’ advisor questions either on his many visits to the L&M Precision offices or on the telephone. Each calendar quarter DVA prepares a statement for each member summarizing the holdings and actual individual rates of return for each member’s accounts.

Every month DVA prepares special tracking charts of each investment fund used in all member investment programs with the purpose of monitoring investment results and, where appropriate suggesting changes. Such changes would only be made if there are clear reasons to do so. At least once each year meetings are held with the members to discuss progress and possible changes to the investment program.

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