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The argument for mandatory pay-out is misguided

Mandatory pay-out makes little sense within the UK context. Here's why... 

Charitable foundations provide nearly 10% of UK charity sector income through their grant-making. Therefore when the need appears greater than ever, it can be tempting for observers to cast a critical eye on endowed foundations’ spending rate and conclude that they could be giving more. Some advocate a mandatory spending rate as a percentage of the foundation’s endowment or investment income.

Research carried out by ACF in 2013 showed that around 70% of charitable foundations rely on income from their invested endowment to fuel their activity over the long-term. The report revealed that such charities adopted a range of spending rates; the most frequent rate was found to be between 3 and 4%, but some charities spent below and many spent over 5%.

A variety of circumstances, objectives and indeed legal requirements affect trustees’ decisions on how to set their spending rate. Some foundations are obliged by their trust deed to preserve the value of the endowment in perpetuity. Some trustees may judge that their endowment constitutes a unique and ongoing asset for their cause or beneficiary group, and will aim to manage the charity’s investments to enable them to continue to deliver their charitable objectives in perpetuity. In cases such as these, trustees are likely to balance their current spending rate against the needs of future generations and set their strategy accordingly. Others have a fixed timeframe in which they intend to spend out. In this case, the intention is to maximise the benefit of the endowment while possible. 

While all these approaches may be appropriate for individual foundations, ACF’s research concluded that in many cases, trustees could take an ‘open ended’ approach to the trust’s longevity. This means being flexible in setting a spending rate in response to changing needs and fluctuating markets.

And so there are many ways trustees might approach their endowments. Choosing an approach must be done in light of the foundation’s own particular context – in pursuit of the foundation’s mission and in line with its culture and ethos.

The independence of charitable foundations to make this choice is part of what makes them an enduring and irreplaceable asset within civil society. Their financial independence supports research, enables a plurality of voices that can inform public debates, and backs ‘unpopular’ causes or places where the need is great. Unlike most other types of funder, their independence allows them to take a long view free from short-term political or economic cycles, and to respond creatively to immediate need as well as take a long-term approach. 

Foundations’ deciding their own spending rate does not mean that they hoard wealth at the expense of their beneficiaries. In fact, decisions are taken in the interest of the beneficiaries, and not of the foundation itself. Accountability is ensured by specialist charity regulators who have the know-how to challenge endowed charity trustees on spending rates based on a context specific judgement call. The current regulatory regime only allows trustees to add to the capital value of the endowment if they can justify doing so, and we know that the Charity Commission has challenged endowed charities about spending rates in the past and continues to do so.

Therefore foundations’ independence is good for civil society and is already regulated and monitored. Altering foundations’ independently set spending rate, for example by setting a mandatory percentage spend, could have troubling consequences: 

  • If the rate was too high, forcing foundations to spend more than market returns, many foundations could find themselves out of business within a generation. This is a particular risk in today’s ‘low return’ environment. When setting their spending rate, trustees always need to take account of volatile markets that can see the value of the endowment rise and fall dramatically.
  • If it was too low, trustees may have to reduce spending, which could be damaging to beneficiaries and foundations’ capacity to achieve their charitable objectives.
  • Any fixed spending rate could limit trustees’ discretion to use their endowments creatively – for example using part of it to make social investments.
  • A mandatory spending rate could cause high spending foundations to reduce their expenditure. As the top 20 foundations by grant-making account for over half of all grant-making from the sector, small adjustments on just a few foundations’ spending rates could considerably affect the overall expenditure of the whole sector; ACF research shows that larger foundations tend to spend at the higher end of the range. 

A mandatory spending rate exists in other countries, for example the USA sets a rate of 5%. But it is misleading to draw comparisons between the UK and the USA. US foundations have a greater allowance of what constitutes a charitable spend, and US foundations receive money from more new donors than in the UK, where many endowments date back centuries. In Canada the rate is 3.5%.

So, is there a good argument for adopting mandatory pay-out in the UK? No, not really. There is no one-size-fits all. There is no 'correct' spending rate, other than the one which works most optimally to achieve a given foundation’s unique charitable objectives.

 

Emma Hutchins
Policy and Communications Officer

 

Members may also be interested in the evidence submitted by ACF to the House of Lords Select Committee on Charities, which included our thoughts on foundations' spending rates and investments. 

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