Pooling Schemes and Pool Charities OG49 A1

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OPERATIONAL GUIDANCE

POOLING SCHEMES AND POOL CHARITIES

WHAT ARE POOLING SCHEMES AND POOL CHARITIES AND WHAT ARE THEIR MAIN FEATURES?

OG 49 A1 – 27 February 2007

Purpose	to explain to caseworkers what a pooling Scheme is and, in particular:
	when a pooling Scheme is likely to be appropriate (OG 49 B1);
	when the pooling Scheme should set up a single pool charity, and when it should set up two pool charities (OG 49 B2); and
	how to deal with applications (OG 49 B3).
	OG 49 C1 explains how a pool charity operates.
	Model Schemes are provided in OGs 49 D1 to D4.
	See also OG 49 B7 which explains the effect of the Financial Services and Markets Act 2000 (Exemption) Order 2001 (SI 1201/2001).

Contents

1. What are pooling Schemes and why are they needed?
2. The Trustee Act 2000
3. What are pool charities and how do they differ from other types of common investment fund?
4. The advantages of setting up a pool charity
5. The main features of a pooling Scheme
6. Common deposit funds
7. Other legislation enabling charities to pool funds
8. How a pool charity operates
Glossary of Terms used in this Guidance

Index to further related information


The Law	Refer to a lawyer	Refer to an accountant

1. What are pooling Schemes and why are they needed?
	1.1 What is a pooling Scheme? 1.2 The law 1.3 The purpose of a pooling Scheme 1.4 Why is a Scheme necessary?
	1.1 What is a pooling Scheme?
	A pooling Scheme is a Scheme to establish a particular type of common investment fund whose main characteristic is common trusteeship – referred to in this guidance as a "pool charity", see section 3.1 below.
	Common investment funds may also be commercial investment vehicles – "CIFs", see section 3.2 below, or "hybrid pool charities" where the participating charities are connected in some way but not by common trusteeship, see section 3.4 below.

	1.2 The law
	S.24 of the 1993 Act gives us the power to establish common investment funds (see 3.2 below) by Scheme
	S.25 of the 1993 Act gives us the power to establish common deposit funds (see 6 below) by Scheme.
	Under section 24(3A) and section 25A of the 1993 Act (as inserted by the 2006 Act), where the scheme permits it, both CIFs and CDFs may now accept investments from "appropriate bodies" i.e. bodies established as charitable under the law of Scotland or Northern Ireland which are eligible for UK tax relief. Hitherto, only charities established in England and Wales had been able to invest.
	Both common investment funds and common deposit funds are charities in their own right (and if the Scheme setting them up admits only exempt charities, they too are exempt charities). Only charities may invest in them.
	(In practice, common deposit funds are extremely rare – see section 6 below.)

	1.3 The purpose of a pooling Scheme
	The purpose of a pooling Scheme is to allow trustees who administer more than one charity to combine funds from any or all of those charities for investment purposes. (Some or all of the participating charities may be special trusts.)
	1.4 Why is a Scheme necessary?
	Trust law generally requires trustees who administer two or more trusts to keep the investment portfolio of each of those trusts separate unless the governing documents of all the charities authorise them to do otherwise. Each trust must have an exclusive interest in its own investments: trustees cannot simply amalgamate the investment portfolios of the separate funds they administer and treat each fund as having a percentage interest in the portfolio as a whole.
	The basis for the requirement of exclusive ownership is that the trustees’ ability to take decisions with respect to a trust investment should not be constrained by their relationship with a co-owner whose interests are different. Trustees thus need to be able to identify the actual investments (shares, property, etc) of the trust, and the income from, and costs of, those investments at all times.
	However, trustees must have regard for the need for a diversified portfolio in so far as appropriate to the circumstances of the trust. A single investment, or too narrow a range of investments, may pose an unacceptable risk. Diversification can be achieved by making individual investments in respect of each trust but this may be difficult and expensive if each has only relatively small amounts to invest. Diversification might also be achieved by investing in commercial CIFs which provide this at a reasonable cost. However, one effective solution for smaller charities is the creation by Scheme of a pool charity in which an individual trust will, instead of having an exclusive interest in a limited range of investments, have a percentage interest in the wider range of investments held by the pool charity.
	But see section 2 below about the effect of the Trustee Act 2000

2. The Trustee Act 2000
	2.1 Wider statutory power of investment 2.2 "Shared-control" investments 2.3 Charitable companies
	2.1 Wider statutory power of investment
	The Act provides for trustees to be granted a new, wider statutory power of investment to replace the limited power given under the Trustee Investments Act 1961 (the TIA). Trustees are able to invest in the same range of investments as an absolute owner (although the legislation does not override any express powers or restrictions in a trust's governing document – these will remain in force unless the governing document itself is amended). Trustees are under a statutory duty of care in relation to the exercise of the new powers or to equivalent functions under the governing document. See OG 86.

	2.2 "Shared-control" investments and the continuing need for pooling schemes
	One of the effects of the Trustee Act 2000 is that charity trustees to whom the new power applies will be able to make "shared-control" investments (that is, investments in which two or more charities are joint owners). Previously, common law rules prohibited this unless the trustees had explicit authority to enter into such an arrangement – Webb v Jonas (1888) 39 Ch Div 660, Re Royal Society’s Charitable Trusts (1956) Ch 87.
	Although the Act may reduce the need to make pooling Schemes, they are still likely to be attractive. There will almost certainly be circumstances in which trustees will prefer to pool investments under the authority of a pooling Scheme rather than under the proposed general power. For example:
	Sections 4 and 5 of the Trustee Act impose certain standard investment duties on trustees. Trustees must ensure that investments are suitable to their trust and that the need to diversify is taken into account. Proper advice must be taken and each investment must be reviewed from time to time to ensure that it is still suitable. See section 5.3 of OG 86 B1.
	Where the pool is a pool charity established by a pooling Scheme, these duties must be exercised by the trustees:
		as trustees of each participating charity in respect of each contribution it makes to the pool; and
		as trustees of the pool charity in respect of the investments which the pool charity makes.
	Where the new statutory power of investment is relied upon to make shared control investments, it appears that the standard investment duties must be exercised:
		as trustees of each participating charity in respect of each contribution it makes to the jointly held investment fund; and
		as trustees of the jointly held investment fund in respect of each investment made by the fund;
	and
		as trustees of each participating charity in respect of each investment made by the fund.
	Pooling Schemes include (or provide for the creation of) specific machinery for ensuring equitable treatment between the charities contributing funds to the pool. This guidance would not be available to trustees who simply relied on the statutory power of investment. They would need to take particular care that the systems they put in place instead were suitable and adequate.
	There may be circumstances when trustees find it administratively more convenient for the investments to be held in a separate charity (or charities).
	Seek legal advice if you are unsure whether the trustees should apply for a Scheme or not.
	2.3 Charitable companies
	Generally, the directors of a charitable company will be affected by the Act only in respect of any property they hold on trust (for example permanent endowment or "special trust" property). The corporate property of the company will be affected only if the company’s memorandum of association contains an investment power which refers to the TIA.

3. What are pool charities and how do they differ from other types of common investment fund?
	3.1 Pool charities 3.2 Common investment funds which are NOT pool charities 3.3 Difference now reflected in legislation 3.4 Hybrid pool charities
	3.1 Pool charities
	The feature which distinguishes a "pool charity" from other common investment funds is that all charities eligible to participate must, at the time when any particular contribution is made to the pool, be administered by exactly the same body of trustees which the pooling scheme appoints as the charity trustee(s) of the pool charity. If a charity which has contributed to the pool subsequently comes to be administered by a separate body of trustees, it does not have to withdraw those funds from the pool but it cannot make any further contributions.
	Some or all of the participating charities may be special trusts.
	A pool charity which is set up in this way is a "pooling scheme fund" for the purposes of the Financial Services and Markets Act 2000 (Exemption) Order 2001 (SI 1201/2001). When making a Scheme ensure that contributions can only be made by participating charities which are administered by the same body of trustees as administer the pool charity . (See section 3.4 below if you come across an established Scheme, or a new one is proposed (or is being written), which does not meet the necessary requirement.)
	Unlike other common investment funds, trustees of pooling scheme funds are exempt from the general prohibition on unauthorised persons carrying out any activity regulated by the Financial Services and Markets Act 2000 - see OG 49 B7.
	See OG 49 B3, where a participating charity is a charitable company: a pool consisting of a charitable company and charities under its trusteeship would be a pool charity and not a hybrid even though, technically, the trusteeship arrangements are different .

	3.2 Common investment funds which are NOT pool charities (see also section 3.4 below)
	Some common investment funds are open to all charities (or to a particular class or classes of charity) to invest in. They are run professionally by their operators - like unit trusts - and are usually (but not always) commercial investment products. (Examples are COIF, Charinco, and Charishare.) These are not "pool charities", and they are not covered in this guidance. They are dealt with by the Large Charities Unit in London.
	Unlike the trustees of pool charities, CIF trustees are not exempt from authorisation by the Financial Services Authority to carry out regulated activities – see OG 49 B7.
	3.3 Difference reflected in legislation
	No distinction is made between pool charities and CIFs in the 1993 Act but the difference is reflected in the Charities (Accounts and Reports) Regulations 1995, the Financial Services and Markets Act 2000 (Exemption) Order 2001 (SI 1201/2001), and the Trustee Act 2000. The general power of investment referred to in section 2 above will apply to pool charities, but will not apply to CIFs.
	See OG 49 B7 which explains the provisions and effect of the 2001 Order.

	3.4 Hybrid pool charities
	Some s.24 schemes have been made in the past which (although made as pooling schemes) fail to meet the conditions in section 3.1 above - the trusts establishing the investment fund charities do not require that contributions can only be made by participating charities which are administered by the same body of trustees as administer the investment fund charities. (The investment fund charities are, however, like pool charities - and unlike the CIFs referred to in section 3.2 above - in that the charities permitted to participate will all be connected in some way). The charities created by such schemes are technically not pool charities, and are in principle subject to the same regulatory and accounting obligations as the "commercial" CIFs referred to in section 3.3 above.
	The general power of investment conferred by the Trustee Act 2000 will not apply to hybrid pool charities and the effect of the Act will be that they will have no default power of investment.
	It is essential that the trustees of these charities are made aware of their position - see section 2.3 of OG 49 B7 - but staff in other operational divisions should check with CIFs and CDFs Monitoring Section in London before giving advice or taking any other action involving a hybrid pool charity. (See also section 7 below – some universities and colleges have a statutory power to pool certain funds.)
	If a Scheme is being drafted for an existing hybrid pool charity, you should not complete the process until the trustees have supplied evidence that the fund trustees are "authorised persons" for the purposes of the FS& MA 2000, or that they do not have to be authorised persons - see OG 49 B7. Because they will have no default power of investment, the Scheme must include an explicit power of investment.
	Legal advice should be obtained in the case of any proposal to establish a new hybrid pool charity.

4. The advantages of setting up a pool charity
	For charities which are managed by the same body of trustees, pooling their funds for investment purposes will usually have clear benefits. Allowing individual charities to have a joint interest in all the investments in a pool, rather than the exclusive interest in a smaller portfolio of investments, for example may:
	enable the trustees to reduce the overall cost of their share-dealing; there may also be savings in costs of investment advice and in the administration of many individual investments;
	enable each individual charity to obtain a more diversified portfolio of investments. This will reduce overall investment risk;
	mean that the use of professional fund management becomes more cost effective.
	However, when contributing to a pool charity, the trustees of participating charities must consider the standard investment criteria (section 4(3) of the Trustee Act). See OG 86 B1. This is no different from any other form of investment and is why, where trustees have both "capital" and "spending" funds available for investment, two (or more) separate pool charities may need to be established - see OG 49 B2.
	(The trustees do not have to pool the investments of the participating charities simply because they have the power to do so - they have discretion as to the assets they contribute to the pool.)

5. The main features of a pooling Scheme
	A pooling Scheme:
	authorises the trustees to:
		pool the investments belonging to the participating charities (any or all of which may be special trusts);
		invest any other funds belonging to those charities in the pool;
		add to the pool investments belonging to any other charities they may subsequently come to administer (unless the trusts of that charity expressly prohibit investment pooling);
	should, if the trustees request, create separate pools for funds which require different investment aims - that is, for permanent endowment and income funds. (Expendable endowment may be combined with either permanent endowment or income funds, depending on the conditions attached to it and the intentions of the trustees - see OG 49 B2);
	creates at least one new charity which needs to be registered - either under its own number or under the number of its reporting charity (see OG 49 B5);
	where appropriate, may include a uniting direction under s.96(6) of the 1993 Act enabling the pool charity and the participating charities to be linked for the purposes of registration and accounting.

6. Common deposit funds
	Under s.25 of the 1993 Act we are able to establish common deposit funds by Scheme.
	The difference between a common investment fund and a common deposit fund is that:
	an investment fund invests the property contributed by the participating charities in a range of suitable investments, eg, stocks and shares, gilts, land, etc. Each participating charity owns a percentage share of the capital and is entitled to a percentage share of the income of the fund based on the value of the property it has contributed and the total value of the fund (see OG 49 C1 for a detailed explanation of how such a fund operates);
	a deposit fund deposits money contributed by the participating charities in suitable income yielding accounts. Each participating charity is entitled to repayment of the sums it has deposited plus interest.
	The trustees of common deposit funds are subject to the special accounting regime referred to in article 4 of the Charities (Accounts and Reports) Regulations 1995.
	Common deposit funds do not have the general power of investment set out in the Trustee Act.
	Applications for a pooling Scheme to set up a common deposit fund under s.25 are likely to be extremely rare but, if you do receive one, you should refer it for legal advice.

7. Other legislation enabling charities to pool funds
	The Universities and Colleges (Trusts) Act 1943 permits certain institutions to establish by Order in Council regulations for pooling:
	funds under the trusteeship of the college; and
	funds established for the purposes of the college which are under different trustee arrangements.
	Such Schemes must be laid before Parliament and approved by Order in Council.
	These funds could not be pooled in a pool charity because they do not have identical trustee bodies. Any pool set up by pooling scheme would be a hybrid pool (see section 3.4 above). If any of the institutions listed asks us to make a pooling Scheme in respect of funds covered by the 1943 Act, you should suggest that they use their own powers instead (unless, of course, the particular funds they had in mind were all administered by the same trustee body and we could establish a pool charity in the normal way).

8. How a pool charity operates
	OG 49 C1 explains briefly how a pool charity operates.

Glossary of Terms used in this Guidance
• • • • • • • • • • •	1993 Act 2001 Order CIF charity trustees exempt charity expendable endowment governing document participating charities permanent endowment pool charity (see section 3.1 above) trustees

Index to further related information