Technical briefing – Total Return

The Charity Commission has published its review of the Charities (Total Return) Regulations 2013. Although there are no major changes, we thought a quick reminder might be useful for trustees of permanent endowments who may be considering adopting a total return approach


Kate Rogers

Kate Rogers

Head of Sustainability | Co-Head of Charities

Cazenove Charities

At the end of last year the Charity Commission published its review of the Charities (Total Return) Regulations 2013. They concluded that the regulations achieve the policy aims which were threefold; to facilitate the adoption of total return investment by charities; to decrease the regulatory burden - as permanently endowed charities don’t need the Commission’s authority to adopt this approach; and to introduce safeguards to ensure the permanent endowment is not misused.

For some, this is a missed opportunity for simplification as the regulations are perceived as over engineered in parts. This is noted in the Commission’s response but has not been prioritised ‘given the small number of charities that would benefit, the ability of those charities to access professional advice and pressure on our resources.’

So it seems that the regulations are staying as they are. Time for a quick reminder?

Permanent Endowment

Some charities have assets that are ‘permanently endowed’. That means trustees are legally obliged to hold these assets permanently - either to further the purposes of the Charity, or to generate an income. The income can be spent, but the capital cannot.

Most charities are not permanently endowed; although many wish to exist in perpetuity. Investing charities without permanent endowment restrictions can choose to spend income or capital to further their charitable purpose and will therefore invest to maximise their ‘total return’ irrespective of whether the return is from capital appreciation or income. Conversely, invested permanent endowments are only able to spend income which tends to bias investments towards income producing assets.

This difference has become particularly pronounced over the last decade; with interest rates and bond yields falling significantly. Permanent endowments seeking income have needed to focus their investment assets in higher yielding areas; restricting their investment universe and hampering diversification.

Total Return Investment

The Trusts (Capital and Income) Act 2013 added a new power to the Charities Act 2011. This power allowed trustees of permanently endowed charities to adopt a total return approach to investment, without having to seek the Charity Commission’s authority. The Regulations set out the rules that trustees must follow in adopting a total return approach and focuses on safeguarding the original permanent endowment.

Adopting a total return approach gives permanently endowed charities greater flexibility. Under a total return approach, the form in which investment return is received does not matter. Instead, investments are managed to make the most of the total investment return that they generate. This enables charities to focus on investments that are expected to give the best performance, rather than on investments which will give the ‘right’ balance between capital growth and income. The trustees can allocate whatever portion of the total return they consider appropriate as income, which is then spent furthering the aims of the charity. The balance remaining is carried forward as ‘unapplied total return’.

1. Identifying the ‘original endowment’

Trustees wishing to adopt a total return approach must first identify the permanent endowment assets and their ‘original value’. This is likely to be the most important step, and may determine the tolerance of the endowment investment approach to volatility of capital value. For a permanent endowment, invested in long term assets, trustees will want to make sure the ‘original endowment’ value is significantly less than the current value, to provide a buffer for any short term equity market falls and to enable spending to continue in times of market stress.

This identification exercise can also be an administrative headache; particularly if multiple endowments exists. The regulations do talk about a ‘reasonable estimate’ and the fact that ‘trustees won’t be expected to carry out an elaborate tracing exercise’. In practise trustees adopt a range of approaches, and many take advice from their accountant, lawyer and investment manager. This original endowment value is referred to as the ‘investment fund’.

2. Passing a resolution

Once trustees have identified the original endowment, and therefore the current balance of ‘unapplied total return’, they must pass a resolution. They do not need to notify the Charity Commission, and the regulations don’t contain any specific instructions on its wording.

3. Allocating unapplied total return

The unapplied total return balance will vary according to the market value of the endowment. This should be invested in the same way as the ‘investment fund’. In order to spend unapplied total return, the trustees will need to allocate a portion of these assets to the ‘income fund’. Trustees can also allocate unapplied total return to the investment fund – to increase the value of the permanent endowment, and reduce the unapplied total return balance. This is less frequently used in practise. The regulations do also allow for the reverse; up to 10% of the investment fund can be released to the income fund for spending, although this is subject to recoupment.

Whilst the regulations do allow more freedom for permanent endowments and have undoubtedly increased the uptake without adding to the Charity Commission’s work, they do place further burden on trustees who must decide how to balance the needs of the current and future beneficiaries. These spending decisions can have a significant impact on the long term value and spending power of the endowment and trustees are encouraged to take professional advice.

A version of this article appears in the March 2019 edition of Charity Finance


Kate Rogers

Kate Rogers

Head of Sustainability | Co-Head of Charities

Cazenove Charities

Kate specialises in investment on behalf of charities, endowments and foundations and has over 20 years of experience, with 15 years at Schroders and Cazenove.  She is a CFA charterholder and has a BSc (Hons) in Natural Sciences from the University of Durham, is Chair of her local community foundation, Vice-Chair of her local primary school and Chair of the Finance Committee of the Cripplegate Foundation.  She won a Women in Investment Award for her work with the Charity Commission and FCA creating a new charity investment vehicle.

She has researched and co-authored a series of publications on Charity investment best practise including 'For Good and Not For Keeps', which examines sustainable expenditure, ‘Intentional Investing’, which researches how charities can align their investment policy with their aims as an organisation, and more recently ‘Time and Money’, which explores how charities can make the best use of longevity.  Kate was chair of the Charity Investors' Group for 12 years, standing down in 2019.  In this role she collaborated with CFG and authored a guide to written investment policies.  Kate also regularly writes on charity investment in the charity sector press.

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