Many universities have permanent endowment (PE) assets (either funds, investments or property) which are restricted to such an extent that only the income generated can be spent, not the capital. What may have started as funds with small amounts, can grow over time to be a significant amount of total assets, sometimes several millions of pounds.

Are these assets truly permanent endowment?

Historically funds were assumed to be permanent endowment unless clearly expressed as otherwise.  This inevitably led to some confusion and often it was considered to be ‘safer’ to treat an asset as permanent endowment rather than risk wrongly spending permanent endowment funds.

A statutory definition now helps clarify the distinction – ‘property is permanent endowment if it is subject to a restriction on being expended which distinguishes between income and capital’.

To determine how assets are managed, first review whether the asset in question is actually permanent endowment or not. Could PE funds be used more effectively?

If you are dealing with permanent endowment, the Charities Act 2011 (as amended by the Charities Act 2022) offers two key options:

  • borrowing against PE funds (which enables those funds to be put to good use to benefit the university and help with its finances); or
  • remove the permanent endowment restriction for some or all of the funds concerned (the most common option).

The processes involved vary depending on whether it is borrowing or removing a restriction. For example, for removing a PE restriction, the process can be fairly straightforward in setting out a Statement of Reasons explaining why the funds should be released from the restriction and what potential benefit this would have to the university as a result, together with a Resolution.

Depending on the particulars of the situation and the amounts involved, such processes may or may not involve an application to the Charity Commission for their consent.

Is it time to review your restricted funds?

We have seen an increase in the number of our university clients reviewing their restricted funds. For those with PE funds, we have also seen some instances where the funds were not actually PE in the first place and can be reclassified correctly in the annual accounts rather than continuing to treat them as PE.

Suggested next steps:

  1. Review your funds – are they restricted, designated or permanent endowment?
  2. Explore your options – could those funds be reallocated or re-designated, or can some be released from PE?
  3. Take advice – on the compliance decision-making and processes to be followed.
  4. Prepare for Council – Set out the options for your Council to consider and action any proposed resolutions.

We’re here to help

If you need any guidance or support with reviewing your PE funds then we can help; our team of dedicated education law and charity law experts can guide you through the process.

Written By

Catherine Rustomji

Partner & Head of Charities

Published: 29th October 2024
Area: Education

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Catherine Rustomji is a specialist charities solicitor who advises charities, not for profit organisations, social enterprises, charity trustees and individuals wishing to establish charities. Her particular focus is on constitutional and governance matters including different legal structures and the duties and responsibilities of charity trustees.

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