OPERATIONAL GUIDANCE

ENDOWED CHARITIES: A TOTAL RETURN APPROACH TO INVESTMENT

OVERVIEW

OG 83 A1-30 May 2001

Purpose: To explain the background and key points of the Commission's policy on using its powers to give the trustees of endowed charities flexibility in the way that they allocate investment returns.

Divisional responsibility

For action:

All operational divisions

For information:

All operational divisions

Contents

1. What is this guidance about?
2. Background
3. Key points

Meaning of expressions - list of Glossary terms used in this Guidance
Index to further related information

1. What is this guidance about?

This series of operational guidance:

• Provides guidance for trustees in the use of the power we are willing to give them to allocate investment returns in a flexible way.

• Explains the issues surrounding the use of the power to allocate investment returns in a flexible way. It details those areas staff will need to consider in granting trustees the power and those areas trustees will need to take into account when using the power.

• Within this document the text in the larger font is our guidance.

• We will review the advice set out in this guidance as a result of experience in its application.

2. Background

The trustees of charities that have assets held on trust for investment(capital) must be even-handed in the way they treat current and future beneficiaries. Trust law underpins this duty with a series of rules for the allocation of investment returns. These have been developed to ensure the interests of all beneficiaries (present and future) are protected. In this guidance these rules are referred to as the "standard" rules.

Without a specific power in its governing document setting out how it should allocate investment returns, a charity must comply with the standard rules for this. The standard rules dictate that particular types of investment return should be added to the trust for application (income) and that particular types of investment return should be added to the trust for investment (capital). Legislation will be needed to change the standard rules to affect all trusts (including charitable assets held on trust). The Law Commission is examining the present general law in this area.

The difficulties trustees have been experiencing under the standard rules were discussed in the Commission’s consultation document "Endowed Charities - A Fresh Approach to Investment Returns?", launched in July 2000. This part of the consultation document is reprinted at OG 83 C1.

The general thrust of responses to the consultation was overwhelmingly in favour of the Commission’s proposals to offer trustees flexibility in the allocation of investment returns. Taking the responses into account, we are willing to offer the trustees of endowed charities a power to allocate the investment return derived from assets held on trust for investment (capital) at their discretion, rather than in the way dictated by the standard rules. We are able to do this on an individual charity basis.

The power we will give will only be exercisable within the trustees’ underlying duty to be even-handed in their treatment of present and future beneficiaries.

3. Key points

The policy set out in this guidance only applies to the assets of charities which are held on trust for investment (capital) and to the returns from such investment. It does not apply to other assets of charities.

The policy:

• Enables trustees to invest charitable funds in a way they judge will produce the best returns for the charity, regardless of the form in which the returns are received.

• Recognises the need for trustees to take a long-term view on the generation and the allocation of investment returns. The policy draws trustees’ attention to the fact that investment returns and inflation fluctuate from year to year – markets can go down as well as rise. It also explains their duty to make fair decisions about the resources to be spent on current and future beneficiaries.

• DOES NOT undermine the principle of permanent endowment nor the right of founders to establish a charity with a trust for investment (capital). Instead, it highlights the core principle of taking full account of the needs of present (not past) and future beneficiaries in an even-handed way that is consistent with the objects of the charity - and which recognises that the charity is intended to be permanent.

The following words and phrases are defined in the Glossary of Terms:

•
•

Permanent endowment
Trustees

Go to: Index to further related information