Charitable foundations reject call for mandatory payout rate

22 May 2023 News

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Charitable trusts in the UK have rejected a call for them to be required to pay out at least 5% of their assets each year in grants.

Analysis published last week estimated that UK charities could receive £1.3bn more a year if foundations were required to donate a minimum of 5% of their assets each year.

In the article, Alliance magazine executive editor Charles Keidan argued that a mandatory 5% payout should be introduced for UK foundations, as is in place in the US, Canada and Australia.

British foundations have now said they would not support the introduction of a mandatory payout, arguing that current charity sector regulation is sufficient.

New Philanthropy Capital (NPC), which has called on foundations to give more to charities in recent years, also disagreed with the call for a mandatory requirement.

However, two-thirds of respondents to a poll by Civil Society said they would like to see a 5% mandatory payout requirement introduced.

Advisory firm the Good Ancestor Movement, meanwhile, supported the introduction of a minimum payout but said it should be raised to 10%.

Foundations: ‘We already have regulation in place’

Carol Mack, chief executive of the Association of Charitable Foundations (ACF), said a mandatory payout ratio should not be introduced in the UK.

“Unlike the US, Canada and Australia, we already have regulation in place that does not allow charities – including foundations – to accumulate resources without a good reason for doing so,” she said.

“This encourages foundations to focus on what is the most effective use of their funds, rather than meeting an arbitrary financial target in any one year.

“This flexibility enables foundations to step up their support in times of crisis – as we saw during the Covid-19 pandemic when grant-making increased in response to the need.”

Paul Ramsbottom, chief executive of the Wolfson Foundation, similarly argued that current UK regulation of foundations was sufficient and negated the need for a mandatory payout requirement.

“The Charity Commission ensures that all charitable funds are being used appropriately for charitable purposes and, unlike some jurisdictions, there is no tax advantage to maintaining an endowment, as opposed to spending it,” he said.

“Foundation endowments are not passive treasure chests to be raided at whim. The careful stewardship of a foundation’s endowment is the goose that keeps laying the golden egg.”

Ramsbottom said the Wolfson Foundation sets an investment target of inflation plus 4%.

“By any investment standard, this is an exacting long-term target for a medium-risk portfolio. Spending above 4% of our endowment makes little sense if we anticipate being around for the long term,” he said.

He added that endowments were “increasingly being used thoughtfully for social investment – alongside active shareholder action”. 

NPC: ‘A legal requirement may be too blunt’

Angela Kail, director of consulting at NPC, also did not support the introduction of a mandatory payout requirement.

“There is definitely room for many foundations to give out more money than they currently do,” she said.

“That said, a legal requirement may be too blunt, given that circumstances may mean foundations aren’t always able to meet it.

“A better approach would be for foundations to have to report on their payout ratio each year and explain in their annual report why it’s set at the level it is.”

Good Ancestor Movement: Requirement should be 10%

In contrast, Stephanie Brobbey, chief executive of the Good Ancestor Movement, called for trusts and donor-advised funds (DAFs) to be compelled to donate 10% of their assets each year.

“Both foundations and DAFs should be required to pay out a minimum of 10% of their assets each year, in line with what advocacy groups across the pond are currently campaigning for,” she said.

“It is essential that any new rules apply equally to DAFs, as in the US grants from private foundations to DAFs count towards their 5% distribution, which enables continued accumulation of assets ostensibly allocated for public benefit.

“At a time in which we face ecological collapse, extreme wealth inequality, and multiple other crises, the idea that the ‘British tradition to preserve the endowment’ is one ‘which has served us very well’ is deeply problematic and outdated.”

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