Mandatory spending rates
Kate Rogers, Portfolio Director and Head of Policy at Cazenove Charities shares her thoughts on issues faced by the charity sector in Third Sector Magazine every other month.
For as long as I have been managing investments for charities, there has been a debate about the ‘right’ amount of investment assets for a charity or foundation. How much should be saved for future beneficiaries and how much should be spent on charitable purposes today.
The debate continues. In the recent months, I’ve read and heard opposing views on whether the UK should introduce mandatory spending rates for charities with assets. In the US, Foundations are required to spend a minimum of 5% of their assets per year, in Canada this number is 3.5%.
Supporters of mandatory payout ratios suggest that once assets are ‘charitable’ there is no reason to accumulate them. In extremis, some encourage Foundations to spend out in their entirety, pointing to the c£100bn of UK foundation assets as capital that they believe could be put to better social use now.
Although I agree it is important that trustees remember that their key duty is to the mission, and that the assets serve that purpose, I don’t support the notion that a mandatory payment is necessarily the best way to improve long term social value.
Some foundations and endowments are ‘permanently endowed’, meaning the trustees have a legal duty to balance the needs of current and future beneficiaries, that the capital cannot be spent; but must be preserved through the generations. But these are the exceptions rather than the rule, as most foundations and endowments are in fact expendable. Despite this, many trustees seek to set their spending at a level that is sustainable into perpetuity, believing that this approach best supports their mission over the long term.
And it is right that spending decisions are made with the mission in mind. I can see that there would be a powerful argument for an environmental charity spending more to combat climate change now, rather than saving for the future. Whereas Foundations tackling ongoing issues, could justify spending some now and investing the rest in order to support future expenditure.
But what is this sustainable spending amount? In 2013 Richard Jenkins and I co-authored a research paper, published by the Association of Charitable Foundations, looking at how trustees could reach a decision on the most appropriate spending rate to support their charitable aims. We found that many trustees of Foundations were seeking perpetuity, basing spending rates on long term investment expectations. Analysis suggests expenditure of around 4% as a sustainable level for a multi-asset investment approach, although perpetuity is only ever a probability. This means that a Foundation with capital of £10m could spend it all today; or spend the same amount over a 25 year period whilst also retaining the original investment for the future.
I don’t think there is a right answer to how much a Foundation should spend or save, as it will depend on individual circumstances; the mission, the environment and the opportunities for creating impactful social change. In my experience Foundations are already thinking carefully about their spending, about using their assets in ways to maximising their impact, and I can’t see that a mandatory spending rate would enhance this.
Co-head of 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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