On the 29th of January, the Charity Commission published its updated guidance on charity reserves. The guidance shows a new emphasis on the requirement for trustees to justify why they have not kept reserves, and on the need to plan for so-called "unplanned foreclosures".
This is an interesting shift in focus from a requirement to justify holding reserves in the first place, to documenting any decision not to hold reserves. Overall the guidance promotes the very sensible importance of adopting and maintaining a reserves policy.
With the current (and now rather long-term) low-interest rate environment in mind, I found two sections of the guidance particularly interesting.
Section 5.1: "When significant resources are held in reserves from year to year, the trustees should consider whether some or all of the reserves can be invested to obtain a financial return for the charity."
Section 3.3: "Once a reserves policy is set, it should not be regarded as a static policy. The circumstances of a charity or the environment in which it operates will change with time and trustees should review their policy at least annually as part of a charity’s planning processes."
When the Charity Commission updates its guidance on reserves, the focus is usually on the appropriate level or range of reserves. This clearly remains a hot topic and an area of confusion and concern for many charitable boards.
However, the updated guidance has lead me to consider two separate questions:
1) How many charity reserve policies were first formalised at a time when instant-access cash deposits could be reasonably expected to have a much higher return than is possible today?
2) How many of these reserve policies have been left unchanged for years, despite the material change in macroeconomic circumstances and cash return profiles?
The Charity Commission’s guidance goes on to highlight that, when making investment decisions, trustees should consider when the reserves may be needed (liquidity of the investment) in addition to the acceptable level of investment risk. A final question is therefore:
Have stagnant reserve policies (from an era of much higher cash returns) caused many charities to lock up their free reserves in term deposits, rather than consider wider investment options which may have both greater liquidity and/or risk-return profiles?
If you have any questions or would like to discuss your options for investment management of reserves, please contact Eline Lofgren on 0141 212 9290 or at email@example.com.
This article was previously published on Tilney prior to the launch of Evelyn Partners.