Charities take stock

At the end of December 1999, the FTSE 100 index stood at 6,930. In
July this year, it was down to 3,777 – the lowest level for six
years. The fall in the UK’s stock market has affected not only big
corporations’ assets. Social care charities, too, are finding that
millions have been wiped off the value of their investment
portfolios.

The Children’s Society was one of the first charities in the sector
to take drastic action, following financial problems partly caused
by the fall in the stock market. Last November, it cut £6.4m
from its projects in England and Wales and closed down all 13 of
its schemes in the principality.

So serious is the situation that City fund manager Close Wealth
Management (CWM) estimates that the financial viability of about
two-thirds of all charities with long-term capital investments is
under threat.

CWM charity development manager Clive Paine says today’s economic
climate is very different from the early 1990s, when many charities
first invested in equities. “The sun always shone on their
investments. Charities rarely looked at their investment portfolios
with a critical eye.”

Subsequently, he says, the expectation that their reserves would
always increase led to some charities missing early warning signs
in their portfolio reports.

Over the past 18 months, CWM has worked with the trustees of 60
organisations to help them become more knowledgeable about their
assets. Paine says such an approach has proved a “reality check”
for trustees.

Ron Green is a senior marketing executive at the Charities Aid
Foundation, the non-governmental financial advice service. He
agrees changes in the equities market have caught some charities
unawares. “For years many equity-linked investments experienced
gain upon gain. Now there have been two years of negative returns
and this has come as a shock for some charities.”

Children’s charity Barnardo’s is one social care charity that has
seen its stock market reserves shrink over recent years. It lost
£6.8m in the financial year to March 2001 and expects to
report losses of £1.3m in the year to March 2002. As of last
June, it still had £52m invested in stock markets in the UK
and across the world.

Andrew Nebel is Barnardo’s UK director of marketing and
communications. He says while the reduction in the charity’s
investment portfolio is substantial, it is in the fortunate
position of not having to draw down on its reserves and is working
off a balanced revenue account.

Since March this year, the disabled people’s charity Scope has
experienced paper losses of about £3m, according to chief
executive Richard Brewster. He says many organisations of its size
have experienced similar dips in the value of their
portfolios.

The Family Welfare Association (FWA), which gives emergency grants
to families facing hardship, is a charity trustee to more than 60
grant-making trusts and provides mental health, and children and
families services. It has an investment income of about
£300,000 a year and during the past year the capital value of
its trust funds has decreased by £1m.

So what are the consequences of their shrinking assets for social
care charities? Will they have to shed staff and cut services to
remain competitive and attract those all-important statutory
contracts?

Not necessarily. Nebel says an organisation’s response depends upon
where it is in its business plan and how reliant it is on its
reserves. He does, however, admit that the stock market’s weakness
has forced Barnardo’s to think about its cash flow management. This
has not included reducing services or firing staff.

Brewster says the dip in the value of Scope’s assets has not led to
any operational changes or redundancies. The charity’s executive
council and executive management board regularly review its
portfolio to ensure it remains financially viable.

One charity that is in a weaker position is the Centre for Policy
on Ageing, founded in 1947. Two months ago, it announced it would
close in May 2003 because of financial difficulties, in part
because of poorly performing investments. All 11 staff will lose
their jobs when it closes its London office. The charity is in
merger talks with older people’s charity the Beth Johnson
Foundation.

CPA’s annual report reveals that a £303,000 deficit in 2000
rose to £438,000 last year. In 1990 the charity had an
accumulated fund of around £3m, which now stands at under
£1m.

While CPA’s interim director was unwilling to comment further, CPA
member and former director Eric Midwinter says the final straw for
the charity came after the stock market’s recent falls. He says:
“The CPA had spent so much out of the accumulated fund that revenue
from the interest was automatically lower and it was in a much
poorer position to withstand stock market fluctuations.”

The fall in the equities market has also hit the pensions funds of
some social care charities. Helen Dent, chief executive of the FWA,
says its pension fund has recently dropped from a surplus of
£80,000 to a deficit of more than £200,000. The charity’s
trustees have adjusted the scheme to tackle this and will bring the
fund back into the black over the next five years.

However, Dent says the charity’s pensions deficit may worsen to
almost £1m when the Accounting Standards Board’s finance
reporting standard 17 comes into effect. The standard requires
companies to recalculate their pension fund’s liabilities on the
basis of corporate bonds, which tend to have a lower rate of return
than equities. This will effectively cut the projected value of
many pension funds. The standard also includes a requirement for
companies’ annual accounts to show any pensions deficits for the
first time.

Some organisations had already started to work to the standard
which was due to start early next year. Its introduction has now
been postponed until 2005.

Scope’s pension fund is showing a small shortfall because of the
changing stock market. Brewster says the charity intends to correct
this over the next four or five years.

So what can social care charities do to come out of the stock
market decline with their heads above water? Handing over the
management of their portfolios to professional fund managers will
certainly help them, argue both Clive Paine and Ron Green.

The FWA did this six years ago and now has quarterly investment
strategy meetings with its fund managers. “I would not want a
banker to manage social services, and acknowledge there is a lot of
skill in managing a portfolio,” Dent says. “We would be
irresponsible if we were not treating the £8m capital
portfolio we have wisely.”

Adopting a cautious approach to financial planning is also
sensible, says Brewster. Scope is doing this and will focus on
gaining more restricted funding for specific projects rather than
relying on massive increments in voluntary, unrestricted
funding.

Nebel recommends charities keep a close eye on financial management
plans: “This is essential to the good conduct of a business.”

Despite the roller coaster ride the stock market has put some
social care charities through, the National Council for Voluntary
Organisations argues it could be a whole lot worse. “We are not in
a full-blown recession,” an NCVO spokesperson says. “There is no
real evidence that charities are going to be falling over en masse
or having to limit their services.”

He says larger organisations should be able to weather the
financial storm and advocates charities diversify their income
streams. “By increasing charities’ earned income they are far less
likely in times of economic difficulties to get into trouble
because they have other pots of money to dip into.”