Alliance@PND

Through an agreement with UK-based Alliance magazine, PND is pleased to be able to offer a series of articles about global philanthropy.

Is There Any Value in Imposing Annual Payouts?

Is There Any Value in Imposing Annual Payouts?

A recent headline-grabbing speech claimed British foundations should raise their spending through being compelled to spend a mandatory proportion of their annual capital assets. The claim suggested that foundations are "warehousing" assets that could be put to public use today. This call was disappointing, not least because the positive value of what foundations contribute to so many public spheres is less often heard. The speech was lacking in any evidence that a mandatory spending formula would increase foundation spending or make it more effective.

Policy speculation needs to be reined in, at least until there is more evidence. Together with colleagues, I have been analyzing figures based on financial data compiled for the recent Foundation Giving Trends 2016. Our provisional analysis shows that there is no discernible evidence of any potential benefit from imposing spending rules. Rather such rules might also put at risk foundations' ability to make larger or one-off investments.

The obvious starting point for this research was to apply the well-established U.S. mandatory distribution figure of 5 percent of the value of the foundation's endowment to published UK accounts data. However, important "health warnings" are necessary here. Results can only be notional, because the "5 percent" calculation in the U.S. is an actual audited (or auditable) figure, while research calculations based on published data are somewhat "rough and ready." The asset values used, for example, represent a single annual snapshot taken from UK annual reports and not management accounts figures, with their monthly and quarterly fluctuations. They may also include some assets not used for directly charitable purposes. Other issues include variations between the U.S. and UK in accounting practice and a lack of detailed UK spending data.

Bearing these limitations in mind, results for the largest two hundred UK foundations show an average annual charitable expenditure of 5 percent or more of the group's total asset value is consistently achieved. The figure, which includes grants, charitable programs, some support costs, and program-related investments, varied from 5 percent to 6 percent from 2010 to 2015, generally showing foundations as a group exceeding expectations.

The data also confirm what we already know, namely the substantial diversity and flexibility in foundations' use of resources, with more than half spending above the 5 percent average. One example is the Esmée Fairbairn Foundation, which, like some other large trusts, has adopted a policy of spending more than its annual investment income, particularly in times of need. And only a minority (14 percent), holding just one-tenth of the assets, spent less than 3 percent. Examples of the latter include the Gosling Foundation, which made major investments in previous years for the preservation of HMS Victory, the UK’s flagship at the Battle of Trafalgar. Factors underlying variable spending rates include lower spending levels preceding or following one or two very substantial grants, and spending down capital at an apparently high but obviously time-limited level. Indeed, the data cast serious doubt over whether formulaic spending rates have any value at all. A number of foundations spend at a relatively steady annual rate somewhere between 3 and 5 percent, aiming to provide consistent annual support for beneficiaries while preserving a funding base for the future.

It is clear that younger generations in Western Europe will be less well-off than their parents, as they struggle with higher pensionable ages and housing costs and lower savings, welfare provision, and job security (though future needs are not the only consideration). Moreover, our understanding of how to cure society's problems is highly imperfect, or we would have done it by now.

Foundations' asset base guarantees their independence and capacity to move into spaces where state policy has failed and provides future-proofing for investments in change and progress. Mandatory spending rules would not only be unlikely to generate higher spending overall but could put at risk foundations' capacity to be proactive, respond to needs and opportunities in flexible ways, and take both a long and short-term perspective.

Cathy Pharoah is co-director of the Centre for Giving and Philanthropy, Cass Business School, City University London.