Encouraging charitable trusts to increase charitable giving

Recent analysis by Pro Bono Economics sheds light on family foundations (ie grantmaking charities established by private wealth). Labelled the “hidden dragons” of the charity sector, they commonly spend less than 5% of their assets each year, with minimal oversight and accountability.

The debate

In these challenging times, foundations may need greater encouragement to increase charitable giving. There have been calls to impose a mandatory minimum distribution target; a requirement that all grant-making foundations must distribute a set percentage of their assets each year. Would that be the right way to go? A minimum spend of 5% is the requirement in other countries such as the US, Canada and Australia.

This is not a new debate. Charity Commission research from 2001 (RS3) revealed that over £5.5bn was held by charities, not just grant-makers, without any reserves policy. This conversation continues to grow in the wake of the COVID-19 pandemic, the cost of living crisis and the climate emergency. The charitable sector faces significant pressures from an increased demand for services, while grappling with significant funding shortfalls.

Legal position

Broadly speaking, in the absence of express legal powers, all UK charities have a duty to spend their income within a reasonable period of time on achieving their charitable purposes.

By retaining income, charity trustees generally rely on their implicit power to hold reserves in the best interests of the charity. They must be satisfied that retaining reserves is necessary for the proper functioning of the charity and trustees must be able to justify this. Without proper justification, holding income in reserves may amount to a breach of trust.

Although some family foundations may have restrictions on spending capital, most do not and could, if the charity trustees so decide, ‘spend down’ the entire endowment.

Reporting

All UK charities must prepare accounts and all registered charities must prepare an annual report. Most charities must complete and file an annual return with the Charity Commission. The filing and reporting requirements differ according to the legal status of the charity and financial thresholds. While annual reports must include the charity’s policy on reserves, this may comprise a statement that it has no reserves policy. Only larger charities, with incomes of £500k or more, are subject to more stringent requirements, meaning that the preparation of reserve policies are merely encouraged for charities falling below the threshold.

While larger charities are encouraged to include additional information such as analysis of their policies against outcome, these suggestions are not mandatory. Only larger charities are obliged to report a summary of the charity’s plans for the future.

The Charity Commission recommends that all charities should adopt a spirit of full disclosure, and has repeatedly encouraged charities to undertake more transparent reserves management by publishing fully justified reserves policies.

Mandatory minimum distribution targets

Requiring all grant-making foundations to adhere to minimum distribution targets may provide a ‘quick-fix’ solution resulting in an influx of spending for charities with more conservative approach to spending and reserves. There may be significant benefit in this release of funds in the short term. This risk is that such targets may instead encourage a fixation on meeting these targets, at the expense of a proper future strategy.

In the US context, in which private foundations must meet a 5% distribution target, it is interesting to compare the framework against that of donor advised funds. In their 2022 DAF Report, the National Philanthropic Trust highlighted that while DAF charitable assets amount to just 18% of assets in private foundations, the value of grants from DAFs amounted to 48% of the value of grants from private foundations. Without a minimum distribution requirement, in 2021 DAFs granted 27.3% of their assets. Comparatively, US charitable foundations made grants of just 7.9% of their total assets. Perhaps DAFs help to foster a ‘spend mindset’, and it is interesting that the use of DAFs is growing in the UK as an alternative to the traditional ‘stand alone’ family foundation.

Grant-makers play a crucial role in the charity sector. While the majority are committed to the meaningful distribution of funds, recent debate has highlighted those more dormant organisations with significantly lower spending patterns. There is a need to unlock greater spending, but mandatory distribution targets should not be relied upon as a silver bullet for more effective charitable giving. Instead, there may be a stronger argument that the key is an ongoing emphasis on the good governance of family foundations, perhaps with increased reporting requirements for charities with incomes under £500k, to create greater transparency. Ultimately, responsibility should sit with the charity trustees who are best-placed to fully understand the charity’s goals, direction and the needs of its intended beneficiaries. The aim should be to encourage charity trustees to challenge themselves regarding their donation strategies, while allowing them the freedom to make bold decisions.

This article was first published in Charity Finance in December 2023.