Across Europe, there are no requirements for endowed foundations to donate or “payout” a proportion of their assets each year. But should there be?
Back in 2016, Civil Society reported on a proposal from British politician Lord Rooker for foundations to payout a minimum of 1.5% annually. That plan was vigorously resisted at the time.
The UK’s Association of Charitable Foundations (ACF) described it as an “attack on the independence of trustees to decide how best to use their resources”.
The Charities Aid Foundation, perhaps conscious that demands for mandatory payouts for individual donor-advised funds could be next, was also dismissive. Its then CEO John Low evoked a “British tradition to preserve the endowment” adding that such a tradition was one “which has served us very well”.
Since then, apart from debates in the philanthropy publication I edit, Alliance magazine, there has been surprisingly little discussion of whether there is a need for a mandatory payout, let alone at what level it should be set.
Minimum payouts overseas
In contrast, foundations in the US, Canada and Australia are required to donate a minimum of 5% of their assets each year. There is remarkable consensus across the philanthropic spectrum in those countries that the requirement cements a social contract – a social licence to operate according to Australian philanthropy researcher, Krystian Seibert. In US philanthropy circles, there is active debate about extending payout requirements or introducing time limits on individual donor-advised funds including at community foundations.
Yet, in the UK, there are few calls for foundations to do the same. That’s despite the post-Covid cost-of-living challenges and growing social needs. It is also despite buoyant stock markets during the Covid pandemic swelling the endowments of major foundations. The endowment of the UK’s largest foundation, Wellcome, has increased by £10bn in just three years and today stands at a staggering £38bn.
£1.3bn net loss
An Alliance analysis of donations listed in Foundation Giving Trends* suggests that the UK’s charitable foundations – taken together – could be giving well over a billion pounds more to charities each year. Based on a minimum payout of 5%, and if those minority of funders already giving over 5% maintained their giving – why would they not? – over £1.3bn more could have been donated to hard-pressed charities in 2020.
In 2020, the total amount donated would have been in the region of £3bn instead of the actual £1.7bn donated that year – an estimated net loss to charity of £1.3bn per annum.
Even a minimum donation requirement of 3% would have generated an additional £351m for charities in the same year.
One example is the Garfield Weston Foundation – the philanthropic arm of the Weston family. It donated around 1% of its endowment in 2020. A 5% payout would have required it to donate approximately £373m that year instead of the £87m it contributed.
Based on these estimates, the UK’s largest foundations could be doing far more to address the major shortfalls in funding faced by charities.
A mandatory payout in the UK?
Given these missing millions, why are there not more calls for a mandatory payout?
It’s plausible that charity leaders have simply overlooked this route to unlocking giving easier either because they are not familiar with the philanthropy debates taking place elsewhere or don’t see them as applicable in the European context. Or it could be that charities don’t want to bite the hands that feed them. Gratitude rather than scrutiny is the default.
Some foundation leaders raise concerns about curtailing donor freedom, arguing that any mandatory payout, at any level, is an unjustifiable interference. Donor freedom is an important principle, but few would argue that it is absolute or unconditional. Most would agree that there are reasonable limits placed on such freedom – indeed many are already enshrined in charity law.
Some express concern that foundation assets could be squeezed – a payout requirement could kill the goose which lays the golden egg: endowments which generate reliable, dependable, long-term funding. But this is really an objection to the level of payout rather than payouts per se. There is little evidence that a modest payout would jeopardise the long-term viability of foundations.
Some funders will rightly argue that the volume of giving is only part of the picture, the quality matters too. Certainly, efforts to improve funding practices, the Foundation Practice Rating, ACF’s Stronger Foundations and IVAR’s open and trusting grant making initiative, should be welcomed but they don’t address the elephant in the room – foundations can and should be giving more.
Practical questions about the treatment of variations in spending over a multi-year period and how to avoid regulations being circumvented are legitimate concerns too. But these are all reasons to study how the system is being improved elsewhere.
Philanthropy is a critical source of independent funding for charities and could provide millions more to charity each year. Today’s balance is wrong. Too much is invested by foundations in global capital markets and not enough in the UK’s social infrastructure.
When charities and regulators start paying attention, the question will be not whether foundations and donor-advised funds should be subject to a mandatory payout but at what level it should be set. Faced with such demands, defenders of the status quo may regret dismissing Lord Rooker’s far more modest proposals back in 2016.
Do you think a 5% payout requirement for trusts should be introduced in the UK?
— Civil Society (@CivilSocietyUK) May 17, 2023
Charles Keidan is executive editor of Alliance magazine, a nonprofit publication covering philanthropy and social investment worldwide
*For full disclosure, I was an author and funder of Foundation Giving Trends reports during my tenure as executive director of the Pears Foundation
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