The topic of reserves has been discussed within the sector for many years. A number of colleges and universities have set formal or informal reserves policies over the years, but few have chosen to publicise them within their Annual Reports; indeed the wording in the majority of college accounts states that the college does not have a formal reserves policy. However, we are starting to see more and more colleges want to implement a formal reserves policy and accordingly we have assisted a number of our clients achieve this aim. This article sets out some key practicalities.
There are a number of considerations to make when looking to create a formal reserves policy. Firstly, the need for such a policy. Whilst many colleges have taken comfort from the strength of cash reserves, substantial asset bases or the lagged funding model, many institutions are now seeing finances stretched more than ever. Secondly, the reclassification of the sector has now removed the ability for colleges to take on additional debt in order to manage cashflow. The removal of this safety net has been mitigated in part by a potential change to the insolvency regime that public ownership brings, however there are no changes to the fiduciary duties of Governors in this regard, so insolvent trading is not to be taken lightly.
The hallmarks of a good reserves policy are:
- The policy fully justifies and clearly explains the need for keeping reserves.
- The policy identifies and plans for the continuance of essential education services for beneficiaries.
- The policy reflects the risks of unplanned closure associated with the college’s business model, spending commitments, potential liabilities and financial forecasts.
- The policy helps to address the risks of unplanned closure on their beneficiaries (in particular, vulnerable beneficiaries), staff and volunteers.
In order to demonstrate that the Governors have discharged these duties it is recommended that a formal reserves policy is drafted and approved by the Corporation.
We are strong advocates of using the college’s existing risk management framework in making an assessment for the amount of reserves the college requires. This process involves the monetisation of the college’s risk register such that an underlying calculation is performed for each risk in order to assess the financial consequence of that risk crystalising. For example, if a college’s risk register contains the risk of a significant drop in commercial income then the financial consequence would be the need to hold working capital in order to weather the dip in income or to wind down that particular activity.
Once monetised, the risk register should then be used to calculate a reserves requirement, which should then be assessed against the likelihood and impact of the risks crystalising. This process can be performed in order to achieve a reserves range based on a low or high likelihood/impact. This calculation should then sit alongside the formal reserves policy.
The policy should be reviewed regularly in order to monitor its effectiveness in light of the changing funding and financial climate and other risks. The monthly management accounts should then report back on the level of reserves currently held by the college and how these are held (e.g. as readily available cash or in less liquid funds)
In summary the reserves policy should set out:
- how much your college needs to hold in reserve and why
- how and when your college’sreserves can be spent
- how often the reserves policy will be reviewed
We have developed a pro-forma reserves policy based upon Charity Commission guidance. Our team would be happy to assist any institution in developing and implementing such a policy.
