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1. What difficulties are being experienced under the current legal rules? |
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Trustees and investment managers of permanently endowed charities are concerned about the effect the inflexible nature of the legal rules can have on their ability to select investments. The principle of fair treatment for present and future beneficiaries is not criticised by these parties; it is the prescriptive rules for the allocation of different types of investment return that are in question. |
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Trustees are selecting investments which they judge should produce returns that, when the rules are applied to them, will break down into a mix of income needed by the charity to carry out its charitable purposes for the benefit of current beneficiaries and of capital growth for the benefit of future beneficiaries. This reflects their duty to maintain a fair balance between capital and income interests. |
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In theory, this approach does not seem problematic. However, the need to comply with the rules has led trustees to select investment portfolios because they will "fit" the rules for the treatment of investment returns, rather than because the portfolio’s mix of investments will give the charity the best total level of economic return. The charity’s scope for investment and the total level of returns it is able to realise can be negatively affected as a result. |
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The Lord Chancellor has announced that he will be asking the Law Commission to look at the rules governing the treatment of investment returns by both charities and private trusts. We will co-operate with the Law Commission in its examination of the present general law in this area and in the development of proposals for reform. The results of this consultation exercise will be very useful in this respect. |
