OPERATIONAL GUIDANCE

ENDOWED CHARITIES: A TOTAL RETURN APPROACH TO INVESTMENT

DIRECTIONS RELATING TO THE USE OF THE POWER

OG 83 B2 25 February 2002

Purpose: This guidance explains how the power to allocate returns in a flexible way is subject to a number of directions made under section 26(3) of the Charities Act 1993.

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For information:

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Contents

1. How present and future beneficiaries are protected
2. Directions

Meaning of expressions - list of Glossary terms used in this Guidance
Index to further related information

1. How present and future beneficiaries are protected

The power we will give trustees to allocate investment returns in a flexible way is subject to a number of directions made under section 26(3) of the 1993 Act. These accompany the power in the model Order. The purpose of the directions is to ensure that the interests of both present and future beneficiaries are properly protected and that the donor's wishes to establish an enduring charity are respected. The directions are set out below.

2. Directions

2.1 Direction placing a duty of care on trustees
2.2 Direction placing trustees under a duty to identify the total return
2.3 Direction that the power must be used within the duty of even-handedness
2.4 Direction placing trustees under a duty to obtain advice
2.5 Direction placing trustees under a duty to follow Charity Commission guidance
2.6 Direction placing trustees under a duty to disclose publicly the use of the power

2.1 Direction placing a duty of care on trustees

This direction applies the same duty of care as in section 1 of the Trustee Act 2000 (see OG 86 B6) to the exercise of the power to allocate an appropriate part of the unapplied total return to the trust for application (income).

2.2 Direction placing trustees under a duty to identify the unapplied investment return

This direction requires trustees at the time the power is first used, to identify and record which part of the existing assets of the charity represent its unapplied investment return.

2.3 Direction that the power must be used within the duty of even-handedness

This direction applies the duty of even-handedness to the exercise of the power. Trustees may only use the power in a way that is consistent with this underlying duty to be even-handed in their treatment of all beneficiaries. The amount to be allocated to the trust for application (income) should not prejudice the ability of the charity to meet the needs of present and future beneficiaries.

2.4 Direction placing trustees under a duty to take advice

This direction requires trustees to obtain and consider proper advice before exercising the power to allocate part of the unapplied total return to the trust for application (income), unless they reasonably conclude that in all the circumstances it is unnecessary or inappropriate to do so. "Proper advice" is defined in terms similar to those used in section 5 of the Trustee Act 2000.

Whilst this operational guidance provides general advice for trustees in respect of the use of a power to adopt a total return approach to investment, this advice is not a substitute for professional investment/actuarial advice which is tailored to the circumstances and needs of the particular charity. Such advice should give trustees confidence that their overall pattern of investment and expenditure is sustainable and will be able to meet both present and future demands on the charity’s resources.

2.5 Direction placing trustees under a duty to follow Charity Commission guidance

This direction requires trustees to act in accordance with any guidance given generally or specifically by the Charity Commission. This follows the approach of section 19 (4) of the Trustee Act 2000 – see OG 86 B4, section 4.2, and CC42.

Within this operational guidance the text in the larger font is our guidance for the purposes of this direction.

2.6 Direction placing trustees under a duty to disclose publicly the use of the power

This direction requires that trustees who make use of the power, include particular information about its use in their annual report and the notes to the charity’s accounts in the relevant financial year. The annual report* in the relevant financial year should:

(a)

state the policy adopted by the trustees for making the identification referred to in section 2.2 above. Where trustees have chosen a particular date for the commencement of the analytical process (see section 1.2 OG 83 B1) the policy statement should include reference to that date;

(b)

give an explanation of the considerations and policies relevant to the trustees’ determination of the part of the unapplied total return that is allocated to the trust for application (income) in that financial year;

(c)

identify the person(s) who provided the advice referred to in paragraph 2.4 above.

^* If the trustees of the charity concerned are not, or may not be, required to prepare an annual report, all this information should be provided in the notes to the charity’s accounts in the relevant financial year. The model Order reflects this.

The notes to the accounts for the relevant financial year should give particulars of:

(1)

the aggregate value of the assets representing the unapplied total return at the beginning of the financial year;

(2)

any increase or decrease during the year in the value of the assets representing the unapplied total return;

(3)

the part of the unapplied total return which the trustees have, in the financial year, allocated to the trust for application (income) for the purposes of the charity;

(4)

the aggregate value of the assets representing the unapplied total return at the balance sheet date.

The following words and phrases are defined in the Glossary of Terms:

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Annual report
Order
Trustees

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