Kate Rogers: Is there a 'right' level of investment? It depends

Mandatory payments may not necessarily be the best way to improve long-term social value, writes our columnist

Kate Rogers
Kate Rogers

For as long as I have been managing investments for charities, there has been a debate about the "right" level 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 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 must spend a minimum of 5 per cent of their assets each year; in Canada, it's 3.5 per cent (see Carol Mack interview).

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 circa £100bn of UK foundation assets as capital they believe could be put to better social use now.

Although I agree it is important that trustees remember their key duty is to the mission, and 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, and 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 there would be a powerful argument for an environmental charity spending more to combat climate change now, rather than saving for the future. By contrast, 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 2015 Richard Jenkins and I co-authored a research paper, published by the Association of Charitable Foundations, about 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 about 4 per cent is a sustainable level for a multi-asset investment approach, although perpetuity is only ever a probability. This means a foundation with capital of £10m could spend it all today, or spend the same amount over 25 years while retaining the original investment for the future.

There is no right answer to this question, because it will depend on 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 maximise their impact, and I can't see that a mandatory spending rate would enhance this.

Kate Rogers is head of policy at Cazenove Charities

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