This article examines the proposed changes to be introduced by the new Charities Bill relating to endowment funds, and how these might unlock opportunities for charities in science innovation.
Charities Bill 2021
At the time of writing, the new draft Charities Bill (the ‘Bill’) is passing through the House of Lords, having reached the Committee stage. The Bill will amend the Charities Act 2011 in a number of ways.
Many charities hold funds that are in some way restricted in terms of how they can be used. Some hold what is known as ‘permanent endowment’, which legally obliges the capital comprising the fund to be invested and only the income generated from the capital can be spent for the purposes of the fund.
The Bill proposes to alter charity law as it relates to permanent endowment in various important ways, including by introducing new powers for trustees to:
- borrow monies from a permanent endowment fund, without Charity Commission’s approval, but subject to provisos (including a borrowing limit of 25% of the value of the fund, preparation of a repayment plan and a requirement to repay within 20 years); and
- make social investments from a permanent endowment fund where a financial return is uncertain or unlikely (subject to a “total return” approach having been adopted – i.e. where any increase in the capital value of investments can be expended as well as the income generated).
- The trustees of permanent endowment funds cannot usually undertake either of the above actions.
Effect of proposed changes
New opportunities will arise for trustees to utilise permanent endowment funds for the increased benefit of beneficiaries and the more effective achievement of charitable objectives. Trustees will be able to consider:
- borrowing from a permanent endowment fund, for example in response to an opportunity or need (with the added benefit of avoiding the need to pay a commercial rate of interest); and
- the social impact of investing “total return” permanent endowment funds, even if projected financial returns are low or negligible – for example, supporting cutting-edge, untested or otherwise financially uncertain research which is relevant to the fund’s charitable purposes. (It is worth noting that this power will be subject to further regulations by the Charity Commission).
These are noteworthy developments, not just for the many charities who already hold permanent endowment funds (some of significant value), but also for those that do not, given the prospect of them receiving gifts of permanent endowment in the future.
Science innovation and charities
Charities have been playing a progressively large role in advancing science innovation. The third sector has become a major driver in scientific research: £1.9 billion was contributed by medical research charities in 2019 to UK research , and 17,000 researchers’ salaries are funded by medical research charities.
Charities have also, as a means of furthering their purposes, been able to fill gaps and support innovation where some corporate investors have feared to tread (due to uncertain economic return) – for example, in research into antimicrobial resistance.
Examples of charities leading in the field of science innovation include:
- Parkinson’s UK’s launch of Keapstone Therapeutics (a virtual biotech company combining world-leading research and the development of revolutionary drugs for the treatment of Parkinson’s);
- Cancer Research UK’s founding, via Cancer Research Technology, of more than 60 scientific start-ups ;
- the launch by LifeArc (the Medical Research Foundation’s charity) of SpringWorks Therapeutics, which advances stalled research into investigational therapies.
Some examples of established, successful partnerships, collaborations and of charities setting up a different ‘arm’ include:
- Innovate UK and Asthma UK have funded three projects relating to asthma research and have invested in new diagnostic testing that will better predict a response to asthma treatment, helping to ensure asthma patients receive better care;
- the Alan Turing Institute and the British Heart Foundation have funded six research projects, the goal of which is to produce data science solutions to transform the diagnosis and treatment of many heart and circulatory conditions; and
- Versus Arthritis has set up a social venture to help those suffering from arthritis by designing, manufacturing and selling new products.
Barriers to supporting innovation
Funding constraints, insufficient reserves or unpredictable giving patterns can often prevent charities from pursuing science innovation projects, partnerships or ventures. In challenging economic times, this is particularly the case. As a result of the Coronavirus pandemic, charities have been forced to make cuts to their research budgets; the Association of Medical Research Charities members have estimated that funding for medical research will fall between £252 and £368 million in 2020/21.
Equally, some charities can find themselves unable to support innovation because a significant portion of their assets are capital funds held as permanent endowment, which – currently – cannot be used in this way.
Opportunities unlocked by the Bill
The changes proposed by the Bill could unlock valuable and previously inaccessible funds to support pioneering activity; charities with objects relating to science, who – now or in the future – hold permanent endowment funds, will be in a stronger position to support scientific innovation, should they wish to. For example, permanent endowment funds could, where appropriate, be borrowed in order to allow for creation of a science-tech partnership/collaboration or development of a research arm. And/or permanent endowment funds could be invested into start-ups which would research or deliver treatments with significant positive impact for beneficiaries of the charity, despite having a negligible prospect of economic return.
A close eye should therefore be kept by all charity trustees on the Bill, and whether the above-mentioned proposals do ultimately become law. If this does happen, flexible new options for using permanent endowment funds to maximise impact for beneficiaries, and humanity more widely, will open up across the third sector, and encourage trustees to consider involvement in innovation technology relevant to their charity.
If any advice on the above would be helpful, please contact Hugo Walford, whose details are set out below. Withers is in the unique position of having sector-leading charity and tech expertise, and our clients include Parkinson’s UK and CRUK.