Hey, How’s That PIF Doing Lately?

We write about pooled income funds (PIFs) from time to time. Pretty much the same old story – no one is creating new PIFs, and if you’ve got a PIF, it’s probably languishing. The income distributed each year is just a fraction of what was distributed in the heyday of PIFs – the glory days of the 70s, 80s, and 90s. Since PIFs can only distribute net income, and since interest rates have been relatively low for decades, there seems to be no appeal anymore. There have been no new gifts in years, and the participants are slowly dying off. Death by a thousand cuts, as they say.

But there is still something to say about pooled income funds. For organizations that have large and robust PIFs, the benefits are significant, and they are still coming in. We took a random look at some actual PIFs and found that the charitable remainder amounts distributed to their sponsoring charities are astounding. Remainders ranged anywhere from 110% to 250% of the original gift amount. How can that be? How is it possible that PIFs can still achieve extremely successful results in spite of all the bad press?

The nature of a pooled income fund allows for much greater variability than a charitable gift annuity (CGA) program. Each CGA has a contractual payout amount that never varies. Regardless of the underlying principal, the payment amount is a specific dollar amount each year that can never change, and that must be paid until the death of the annuitant. With a PIF, on the other hand, the income distributed is limited to the net income earned by the PIF’s investments. A PIF’s distributions each year go up and down with the PIF’s net income each year.

Limiting distributions to net income preserve’s a PIF’s principal for the benefit of the sponsoring charity. While there are a few exceptions, PIF income is generally the total of dividends received from stocks and interest received from bonds. Note that this amount does not include realized capital gains. Once the true accounting income is tallied, any management fees or expenses are subtracted from it to arrive at the net accounting income. When a PIF’s income goes down, it does not affect the PIF’s principal, because unlike with gift annuities, the PIF never invades principal to make payments to its participants.

Here’s a small random sampling of results for PIF gifts that terminated in 2023. In the first example, an $8,000 gift made in 1994 provided $8,829.24 to the charity. In the second example, a $5,885 gift made in 2008 provided $8,174.35 to the charity. And in the third example, a $4,403.78 gift made in 1999 provided $8,683.24 to the charity. Are results like these outliers, or are they representative of the overall environment for pooled income funds sustained over the long run?

The investments for PIFs tend to be weighted more heavily on the bond side, as compared to the investments for CGAs and CRTs, so let’s use a 6% return assumption. If we assume the management fees and other operational expenses are around 1% of the value of the portfolio each year, that leaves us with a net average annual return of 5%. And, if we assume that half of the net average annual investment return is earned income (net of expenses), that gives us an income yield of 2.5% and a principal return of 2.5%. We’ve put together this table showing the long-term results of the 2.5% income yield being paid out each year and the 2.5% principal return being reinvested each year.

These theoretical results are compelling. After 10 years, the principal value of the original $10,000 gift has risen to $12,488.63, and it continues to grow year after year, reaching $18,087.26 after 25 years. That’s a 180% increase over 25 years. We are assuming the investment fees have already been taken along the way. Moreover, we’ve made no assumptions for the increasing values of assets in the real world. In addition, we’ve allowed for no purposeful weighting of asset classes and no strategic choices for specific asset selection. These theoretical numbers are on the low end of the spectrum of possibilities. And this growth also benefits the participants: the distributions to the participants increase as the principal amount grows.

The analysis above assumes a PIF invested in a balanced portfolio of stocks and bonds. The principal of a growth-oriented PIF would likely grow at a faster pace over the long term than a balanced PIF, providing even more benefit to the sponsoring charity than a balanced PIF. An income-oriented PIF, on the other hand, would tend to earn greater income and generate less growth than a balanced PIF, providing more income to the participants and distributing less principal to the sponsoring charity. Even an income-oriented PIF, however, will preserve principal for the benefit of the sponsoring charity.

Many organizations talk about closing down their PIF, and if the PIF is down to a handful of participants – unless the gift amounts are very large – it probably doesn’t make sense to prolong the misery. The sponsoring organization can try to convince the remaining PIF participants to relinquish their life income interests – and in doing so, get additional charitable deductions. For those participants who refuse to relinquish their life interests as gifts, the organizations could try to arrange a cashing out – the PIF participants would receive a cash payment for the value of their life income interests. Through a combination of these approaches, the sponsoring organization can essentially shut down the PIF.*

Let’s face it – this is not the most exciting story in the world of planned giving, to be sure. The typical PIF crawls along like the proverbial tortoise. Inch by inch, little by little, the principal is reinvested, and the value of each gift grows at what might seem to be a snail’s (or tortoise's) pace. But for those organizations that have pooled income funds large enough to sustain the carrying costs, one might question the logic of summarily closing them down.

Perhaps with the right messaging, the sponsoring charity could make the case to certain potential new donors that its PIF functions exactly how a split-interest life income gift is supposed to work. Perhaps by demonstrating the combination of modest income to the beneficiaries and substantial benefit to the charity over the long run, the charity might be able to pique the interest of a certain group of donors – not the donors chasing the latest payout rate of gift annuities, but rather, the donors who take a longer view of the benefits of a life income gift.

If you are interested in having a discussion with PG Calc about your pooled income fund, please feel free to call us at 888-474-2252 or email us at support@pgcalc.com. We’re always happy to hear from you.

*Note: Because each pooled income fund is created as a type of charitable remainder trust, the PIF is not officially terminated with the exit of the final participant. The charity would still need to go through a legal process to terminate the actual trust.