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| The law |
Refer to a lawyer |
Refer to an accountant |
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1. Valuation |
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1.1 Initial valuations
1.2 Aliquot portions
1.3 Subsequent valuations
1.4 Additions to the pool
1.5 Valuation dates
1.6 Routine dealing |
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1.1 Initial valuations |
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Once the assets of each participating charity have been identified, the date on which the pool is to start operating must be decided. The value of each participating charity's assets (including those of any participating special trusts) must be calculated as at that date. The value taken may be the offer or bid price (that is, the price at which shares or securities can be purchased or sold in the market) or the mid market price at that date. Whichever unit valuation is chosen, it must be the same for all participating charities (including any special trusts) and must be consistently applied at each subsequent valuation. This will give the participant's contribution value (PCV). (Historic or book costs should not be used.) |
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The sum of the PCVs should equal the total contribution value (TCV) of the pool. |
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1.2 Aliquot portions |
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This is the term used to mean that the share in the pool allocated to each participant - the participant's asset value (PAV) - is directly proportionate to that participant's contribution to the whole. It is simpler to think of it as a percentage share. |
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To determine the proportion of any participant, use the calculation (PCV , TCV) x 100 = % share. |
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For example, if Charities A, B and C were contributing the following sums to a pool with a TCV of £800,000 the percentage shares would be: |
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Participating charities* |
PCVs |
% share |
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Charity A |
£250,000 |
31.25 % |
(ie, (250,000 ÷ 800,000) x 100) |
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Charity B |
£100,000 |
12.50 % |
(ie, (100,000 ÷t> 800,000) x 100) |
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Charity C |
£40,000 |
5.00 % |
(ie, (40,000 ÷t> 800,000) x 100) |
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Other charities |
£410,000 |
51.25 % |
(ie, (410,000 ÷t> 800,000) x 100) |
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Total (TCV) |
£800,000 |
100 % |
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*all of which, at the time when any particular contribution is made to the pool must be administeredby exactly the same body of trustees which the pooling scheme appoints as the charity trustee(s) of the pool charity. |
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Some adjustment of percentages to allow for decimal rounding may be needed. (Two places is usually sufficient, but more can be used if needed.) |
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1.3 Subsequent valuations |
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The PAV for each participant' from time to time will depend on the market value of the assets in the pool. To determine the PAV of each participating charity at any time use the calculation (% share x total market value of the pool (TMV)) = PAV. |
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For instance, in the case of the pool charity described in the previous section, if, at a subsequent valuation date, the TMV of the pool was calculated as £1,200,000 and none of the charities had made any further contributions, each charity's PAV would be: |
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Participating charities* |
% share x TMV |
PAVs |
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Charity A |
31.25 % x £1,200,000 |
£375,000 |
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Charity B |
12.50 % x £1,200,000 |
£150,000 |
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Charity C |
5.00 % x £1,200,000 |
£60,000 |
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Other charities |
51.25 % x £1,200,000 |
£615,000 |
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Total (TMV) |
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£1,200,000 |
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*all of which, at the time when any particular contribution is made to the pool, must be administeredby exactly the same body of trustees which the pooling scheme appoints as the charity trustee(s) of the pool charity. |
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1.4 Additions to the pool |
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When a new participant makes its first contribution to a pool its PCV must be calculated and the percentage shares of all the participating charities must be recalculated. |
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1. |
The TMV of the pool on an agreed valuation date must be calculated (that is, before the new participant makes any contribution) |
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The PAV of all the existing participants must be calculated - % share x TMV = PAV. |
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3. |
The PCV of the new participant must be added to the TMV. This will produce a revised TMV |
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4. |
The percentage share of each existing participant must now be recalculated using the PAVs as calculated in (2) and the revised TMV as calculated in (3) - (PAV , revised TMV) x 100 = % share. |
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5. |
The percentage share of the new participant must be calculated - (PCV , revised TMV) x 100 = % share). |
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For instance, in the case of the charity illustrated in the previous sections, if a new charity contributed £50,000 when the TMV was £1,200,000, the calculations would be: |
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New TMV - £1,250,000 |
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Participating charities* |
PCV of new charity, and PAVs of existing charities |
% share |
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New charity |
£50,000 |
4 % |
(ie, (50,000 ÷t> 1,250,000) x 100) |
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Charity A |
£375,000 |
30 % |
(ie, (375,000 ÷t> 1,250,000) x 100) |
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Charity B |
£150,000 |
12 % |
(ie, (150,000 ÷t> 1,250,000) x 100) |
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Charity C |
£60,000 |
4.8 % |
(ie, (60,000 ÷t> 1,250,000) x 100) |
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Other charities |
£615,000 |
49.2 % |
(ie, (615,000 ÷t> 1,250,000)x 100) |
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Total (TMV) |
£1,250,000 |
100 % |
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*all of which, at the time when any particular contribution is made to the pool, be administeredby exactly the same body of trustees which the pooling scheme appoints as the charity trustee(s) of the pool charity. |
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Similarly, new money contributed for investment by an existing participant will require valuation of the entire pool and adjustment of percentages. Withdrawal of money for expenditure by a participant will also require valuation of the entire pool and adjustment of percentages. Thus on an addition (or withdrawal): |
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- TMV x % share = PAV for all participants (calculate the PAV for all participants before the transaction);
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- add (or subtract) transaction value to (or from) the TMV of the pool charity and the PAV of the relevant charity;
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- recalculate the percentage share of all participants (PAV , revised TMV) x 100 = % share.
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1.5 Valuation dates |
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Because it can be expensive in cost and time to value the % shares, it is generally advisable to add or withdraw funds on certain dates only, possibly to coincide with the regular portfolio valuations of the pool. This might indicate that even in the case of a pool which consists of expendable funds only, funds which are withdrawn or added to frequently, such as CMFs (Cyclical Maintenance Funds), should not be contributed to the pool but should be invested in a suitable medium by the charity to which it belongs. The charity trustees of a participating charity have discretion as to the assets they contribute to the pool. |
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Our model Scheme allows for the creation of reserve funds to regulate the distribution of income, and to meet current or anticipated expenses (see clause 9(1) of the models at OG 49 D1 and D2 and clause 8(1) of the models at OG 49 D3 and D4). |
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1.6 Routine dealing |
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Sale and reinvestment of securities within the pool does not require re-valuations. Costs of transactions are included in the contract price and are therefore directly accounted for in the TMV. |
 
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2. Meeting administration costs |
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The model schemes at D1 to D4 give the trustees the power to make rules relating to the charging of expenses. These are not required to be subject to our approval but they should, of course, be reasonable and, having made them, the trustees must conform to them. It is impossible to be dogmatic about what this involves. For example: |
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- the costs of share-dealing in the ordinary course of administering a pool charity might fairly be assignable pro rata between all the participating charities. But where a dealing takes place in order to provide liquid funds to finance a withdrawal by a particular participating charity, it might be fair to load those dealing expenses onto that charity;
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- in calculating the proportion of management fees each charity should pay, or in the amount of income it should receive, some account may need to be taken of the date a particular charity started to participate in the pool.
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These, and other similar questions connected with the administration of the pool charity, are matters for consideration by the trustees and their professional advisers. Caseworkers should not offer detailed advice but should seek legal or accountancy advice if they suspect that a pool is being operated unfairly. |
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Where a Scheme is silent on the way in which the administration costs of the pool should be met, section 31 of the Trustee Act will apply. This allows trustees to reimburse themselves (or pay) out of trust funds, expenses properly incurred in carrying out their duties in connection with the trust. |
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The pool charity itself has no source of income for activities of its own, since its only purpose is to invest money contributed by the participant charities. The main point to bear in mind when assigning expenses between the participating charities is that this should be done in a fair way in accordance with trustees’ normal duty of even-handedness. |
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Costs such as that of employing investment advisers (as distinct from contract costs), nominee services, a clerk, office accommodation, etc, may be met in a number of different ways. For example: |
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- they may be deducted from dividends and interest earned on the investments in the pool prior to distribution;
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- they may be reclaimed from participants in the same percentages as their share in the pool;
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- when first participating, a charity may pay some income to an account to meet pool costs and then top this up as necessary. (This method cannot be used for "internal" pools which are registered under the same number as a reporting charity because, in these cases, all net income and gains arising in the year must be fully allocated among the participating charities in order to be able to account properly under schedule 1 to the Charities (Accounts and Reports) Regulations 1995.)
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It needs to be remembered that expenses incurred in the administration, protection or enhancement of an endowment fund should be charged against the capital of the investments in the fund. Only where the trusts of the charity provide to the contrary or there are insufficient funds in the endowment to meet such costs can they be charged against the other funds held by the charity. Legal and/or accountancy advice should be sought if you are asked for advice in a case where this causes difficulties. |
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3. Income distribution |
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Dividends and interest payments are made to the pool charity on the due date. They should be allocated to the participants in the percentage shares that applied on that date. Therefore allocations should be made prior to any recalculation of PAVs made necessary by a receipt or repayment of capital to or from the pool by a participating charity. |
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Pool charity trustees will generally reclaim all recoverable tax (and related payments) on income earned on the pool investments before distributing it (that is paying it out) to participating charities. |
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Income can be either: |
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- distributed by being paid to each participant as and when it arises; or
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- retained by the pool charity and distributed periodically.
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Alternatively, the pool charity can keep a book record of income entitlement for each participant which can be drawn against as required. |
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The option chosen will be dictated to some extent by the nature of the participating charity and its own administrative arrangements. If the income is aggregated pending distribution or expenditure it will earn a higher rate of interest which will also form part of the income distribution. (Clause 9(1) of the model schemes at OG 49 D1 and D2 (clause 8(1) of the models at OG 49 D3 and D4) provides for the establishment of reserve funds in order to manage and regulate investment income.) |
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4. Investment assignment |
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Pool trustees occasionally think that it is necessary to assign investments to participants. This is not the case. Each participant has its aliquot portion which goes up or down in value according to the performance of the entire pool portfolio. The fact that Charity A provided the money to enable a high-performing share to be purchased is irrelevant. |
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5. Stock situations |
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This term covers rights, bonuses, take-overs, mergers, de-mergers etc. Bonus shares would automatically accrue to the pool and increase its value. The cost of taking up rights issues would normally be met by sale of other investments within the pool or from capital cash held uninvested within the pool. Similarly, any cash arising from take-overs would go into the pool for investment. |
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Occasionally, pool trustees may call on participants to provide cash to take up a rights issue. As a short-term expedient, undistributed dividends and interest could be used to take up such an issue but the additional equity investment would have to be regarded as income. (For instance, the trustees might consider it desirable to take up a rights issue but, at the time of the offer, the capital part of the fund might have insufficient cash available to take advantage of the situation.) In this situation, both the investment and any gains on its sale would have to be held available for distribution. If the trustees wished to retain the investments then they could be sold to the capital part of the fund. Additional contributions of capital or the sale of some of the investments in the capital part of the fund might be needed to generate the necessary cash for the purchase. In an endowment pool charity, care would need to be taken not to convert income to capital. |
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