CHARITIES are finding their incomes significantly reduced as the UK economy continues to struggle – but not just because of a drop in the number and level of donations.
Like many people who relied on savings to provide additional income, many charities are finding that low interest rates are having a detrimental effect on their funding and are turning to alternatives.
Investment management firm Brewin Dolphin said many charities were turning to investment for the first time, but they had to be very cautious about the degree of risk.
Chartered wealth manager Matthew Wells said: “Charities have always kept a fairly large balance in cash for day to day workings or just as a resource.
“In the past they could receive gross interest on that – typically, they could receive five per cent from their charitable funds.
“Now interest rates have gone down to a base rate of 0.5 per cent, some charities only get one to two per cent and there’s an obvious shortfall in income. That just compounds the fact that people aren’t putting money in boxes.”
Charities which receive all or much of their income from donors and other funders are naturally also cautious about the value of their investments because they are reluctant to show a loss in their first year as a stock market investor in their annual report and accounts. It brings both a public relations problem and, more significantly, may impact upon their work.
In recent years, the level of inflation has been high and, unfortunately for charities with cash, it has coincided with very low interest rates. A number of charities have therefore had to pay greater attention to the extent to which inflation may erode the value of their money.
For some charities, the income from interest could have been funding salaries for staff, so the significant decrease may have put their positions in jeopardy – and consequently reduced the organisation’s ability to support the people who rely on it.
However, moving to investments rather than the “safe” banks is still a big step.
“Our existing clients have got portfolios and tend to run their cash reserves a bit lower,” said Mr Wells.
“Those charities have been with us for 10 or 20 years and know what to expect. When they add a bit more to an existing portfolio, they know what they are getting.
“Other charities which rely on accounts are used to getting a good amount of income from their interest. Now they have been cut, in order to replace that income they have got to take more risk – or live without it.”
Far from encouraging charities to turn to investments, Mr Wells said it was vital for them to feel comfortable with any risk and recommended they speak to the Charity Commission first. Its guidance, CC14 – Charities and Investment Matters: A guide for Trustees, summarises charity investment law and good practice and details all the issues that trustees must include with an investment policy statement.
Although not all charities are required to have an investment policy, Dolphin Brewin said working with trustees and financial staff in drafting one could lead to a very useful debate about appropriate investments, risk tolerance, level of income needed and related decisions.
Charities are being affected by the drop in interest rates just as pensioners are.
However, for charities handling money donated by the public it is even more vital to make the right decisions.
Although charities with lower profiles are reported to have been hardest hit by the drop in donations, Mr Wells said the problems with interest rates were hitting them all.
“It’s all charities,” he said. “They have all got to look at their allocations to cash. Some have larger numbers in terms of funds, but they would have more if interest rates weren’t so low.
“All charities are having to look to work their assets a lot harder. The investment route isn’t the holy grail, but it can help.”