Opinion: Charities must be more open about their reserves

Julia Neuberger, a Liberal Democrat peer and chair of the Commission on the Future of Volunteering

The Charity Commission is reportedly critical of a lack of accountability in the reserves policies of those charities that sit on their reserves - about £35.5bn in total - and do not spend it on the causes they are there to promote or the services they are there to provide, and fail to explain why not.

Everyone accepts that service-providing charities need sufficient reserves to be able to pay staff and continue services when times are hard. Equally, everyone accepts that donations are, by their very nature, unpredictable.

But what the Charity Commission is really getting at is that about 10 per cent of that money is not properly accounted for. Donors and supporters have no idea why charities are holding on to so much cash. They might well ask, in the face of recent stories of charities being awash with cash when they simply do not have the capacity to provide additional services.

Andrew Hind, the Charity Commission's chief executive, is calling on charities to behave more professionally and to tell donors what the money is held in reserve for and how they calculate those requirements.

The commission is quite right. A few years ago, when I was at the King's Fund and looking at grant applications, we often found that the organisation appealing for funds had plenty of money stashed away in 'reserves'. When we asked about it, it usually became clear it was not earmarked for anything in particular and was far more than the six months' or year's salaries bill total that a prudent organisation reasonably holds. Equally, we would look more favourably on appeals from other organisations with huge reserves - to cover expenditure on salaries or a planned building project, for example - because we could understand why the money was being held back. But remarkably few larger charities and organisations that came to us had a clear reserves policy.

And few could understand why we felt so strongly that our role, as a charitable foundation with a clear 5 per cent total return policy on our investments for our spending, was to support the smaller, poorer organisations, if they were providing essential services on the ground. Charities with substantial reserves tend to be bigger and better known, and find it easier to raise money. The double whammy is that the offenders on this issue tend to be the bigger charities with more obviously appealing causes. Little community organisations - doing valuable work - rarely have the pleasure of worrying about their reserves as they agonise about how they will meet next month's bills.

The commission is right to ask charities with reserves to be more professional, but this is part of a bigger issue. Big charities are big business, and it is time they realised that they need to be truly professional and accountable. The commission may criticise, but I hope it will do more than that if we do not see the charities themselves becoming much more transparent about what they do with the money that is generously, and wholeheartedly, given.

AND WHILE WE'RE ON THE SUBJECT ...

- New research by the Charity Commission shows that only 40 per cent of UK charities have a policy that outlines how they would use their financial reserves to cover running costs if their income were to be disrupted (Third Sector, 8 November). The commission says this is unsatisfactory.

- Commission chief executive Andrew Hind stresses the importance of being transparent about reserves. "Charities have never been more under the spotlight and it's vital that they are open and account for their reserves," he says.

- The commission says there isn't a generally accepted level of reserves. It advises trustees to strike a balance between their legal duty to spend their income on the objects of their charity within a reasonable time and the need to guarantee the future financial stability of the charity.

- In 2004, RNIB treasurer David Gadbury resigned after he thought reserves levels had dropped too low. In 2001, the RNLI was criticised by a group of accountants for holding £200m in reserve. This fell by more than half, however, after a fall in the stock market.

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