How Universities Can Use Permanent Endowment Funds to Manage Financial Challenges

Why UK universities are under financial pressure

As will be all too familiar to everyone working in higher education, universities across the UK continue to face significant financial pressures. Although the domestic tuition fee cap will rise slightly to £9,535 for 2025-26, it has been frozen at £9,250 since 2017.In real terms, inflation has eroded the value of tuition fee income. International student recruitment, which many universities have relied upon to cross-subsidise domestic provision, has become increasingly uncertain due to visa restrictions and global competition.

In addition, universities are also dealing with:

• increased staff costs due to higher employer National Insurance contributions
• rising pension obligations under the Universities Superannuation Scheme (USS) and the Teachers’ Pension Scheme (TPS)
• escalating estate and operational expense, including the cost of maintaining ageing infrastructure
• investment in digital transformation and meeting sustainability targets.
• challenges associated with restructure and reorganisation to seek greater efficiency and effectiveness in delivery.

These factors have created a perfect storm for higher education institutions. Many are now exploring whether their permanently endowed assets can help ease short-term financial pressures.

In many cases, these endowment assets have grown significantly over time and may now represent several millions of pounds within a university’s total asset base.

What is permanent endowment and how does it work for universities?

Permanent endowment (PE) is an asset held by an organisation, where the capital must be preserved and only the income generated can be spent. This is distinct from expendable endowment (sometimes called a ‘restricted fund’) which is held for a particular purpose, but the capital can be spent.

Historically it has been common to class restricted funds as PE, often this is not actually the case, and the situation has never been reviewed by the university.

The statutory definition is clear: property is permanent endowment if it is subject to a restriction on being expended that distinguishes between income and capital.

How to check if your funds are truly permanent endowment

Before making any decisions, universities should review whether funds classified as PE are genuinely permanent endowment. This involves checking:

• Are capital and interest treated differently?
• Is it intended that payments should only come from income?

If the answer to both questions is no, then the fund is not PE and the capital can be spent provided it is applied in furtherance of the university’s charitable purposes.

Types of permanent endowment: investment vs functional assets

There are two main types of PE. The distinction is significant as legal approaches to release or make capital available varies substantially depending on the type of PE.

Investment PE

Assets donated to be held as investments, generating income to further the university’s purposes (e.g. cash to be invested as part of a portfolio, or funds held to support endowed chairs or scholarships).

Functional PE

Assets donated to be used directly for the university’s charitable purposes, e.g. a lecture theatre or research facility donated for use by the university, sometimes referred to as ‘specie’ land.

How to distinguish between investment and functional permanent endowment

The test to determine which class of PE is held is whether, when the asset was donated to the university, if it was intended to be used by the university as an investment or directly for the university’s purposes.

By way of example, a lecture theatre or research facility donated for use by the university will most likely be functional PE (sometimes referred to as ‘specie’ land), as it is intended to be used directly for the university’s charitable purposes. In contrast, a donation of cash to be invested as part of a portfolio, or funds held to support endowed chairs or scholarships, would typically constitute investment PE, as the asset generates income to further the university’s purposes rather than being used directly.

Generally speaking, it is easier to release capital spending restrictions on investment PE than functional PE.

How universities can unlock permanent endowment funds for financial stability

There are options for making the capital of PE available for use in furtherance of the university’s purposes. The two most commonly used approaches are:

Option 1: Spending permanent endowment capital – what you need to know

Universities can release restrictions on spending PE capital so that the whole or part of the PE can be used generally for the university’s purposes (with no obligation to repay).

• The small fund fast track (£25,000 or less): There are processes set out in the Charities Act 2011 (as amended) which allow the university to pass a resolution to spend investment PE. Where the PE is small (£25,000 or less) this resolution takes effect immediately.
• The larger fund route (over £25,000): If the PE is larger, then the resolution, along with a statement of reasons, must be submitted to the Charity Commission which has 60 days to object (otherwise the resolution is effective, and the capital can be spent). The Commission can at this point request the university to carry out public consultation or to provide additional information to justify its decision.
• The governing document amendment route: Alternatively, the university can apply to amend the permanent endowment provisions within the relevant governing document, removing the wording which renders the fund PE, but in order to do this Charity Commission consent will be needed (and a thorough application made justifying the reasons for this). This process can be undertaken for investment or functional PE. However, there is no deadline for response and, given current Charity Commission turnaround times, this could take a period of months. This should be borne in mind when financial planning and budgeting are being undertaken. Universities should factor in Charity Commission response times when planning budgets, as approvals can take several months.

Option 2: Borrowing (the temporary solution) endowment – rules and limits

The university is able to spend the capital but subject to strict requirements to repay it. The university may be able to borrow from the capital of investment PE to meet urgent need.

• Statutory quick fix (Up to 25%, 20 Years Maximum): A resolution of the university which seeks to borrow from investment PE. It is subject to a value and time limitation, namely a maximum of 25% of the value of the PE fund and which must be repaid within 20 years. The funds in this case are available immediately which can be useful for urgent short-term finance needs.
• The Charity Commission application (beyond the limits): If the statutory process is not possible, the university can apply to the Charity Commission for an order to borrow above the 25% limit, or to repay over a longer term. An application justifying the reasons will be needed. This is subject to Charity Commission turnaround times.

Five key questions universities should ask before using endowment funds

To summarise, should a university wish to spend from the capital of any PE it holds there are a number of initial questions to consider:

1. Is it actually PE? Can you see a distinction between capital and income, and is there a restriction on spending the capital?
2. Investment or functional? Was the PE donated to be used directly for the objects or as a way of helping to raise funds?
3. What’s the value? Is it above or below £25,000?
4. How much do you need? Can you justify this?
5. Who needs to be consulted? Have you considered carrying out any consultation? Who are the relevant stakeholders? Is the donor still alive?

It’s also important to consider Charity Commission scrutiny and potential reputational risks when deciding to release or borrow from permanent endowment funds.

Once answers to these questions have been obtained, the way forward should be clearer.

Practical steps for universities considering permanent endowment use

• Review your funds – are they restricted, designated or permanent endowment?
• Explore whether funds could be reallocated, redesignated, or released from PE.
• Take advice on compliance, decision making processes, and governance requirements.

Get expert advice on permanent endowment strategies for universities

If your university is considering how to use permanent endowment funds, early advice is essential. The right strategy may help you access capital efficiently and avoid unnecessary delays or regulatory challenges.

For practical, tailored guidance, get in touch with Catherine Rustomji, Ruo Wu or Ellis Pugh.