Trusts can hold reserves for a number of reasons, including cashflow, contingency, planned investment and improvement, and strategic development and growth.
Although the ESFA does not stipulate the level of reserves that a trust should hold, it does require trusts to have a robust reserves policy which mitigates financial risks in place and which is appropriate for the individual circumstances of each trust.
Holding low levels of reserves could suggest financial vulnerability if there is insufficient money held to cover unforeseen events. Trusts holding high levels of reserves need to be able to demonstrate to the ESFA how they plan to use that cash to improve the education of pupils.
The new guidance does suggest that for the majority of trusts, reserves of between 5% and 20% of total income is appropriate, and is likely to take a closer look at those trusts whose reserves fall outside of this range.
In general, the following are excluded when calculating reserves;
- Assets such as land and buildings
- Restricted funds where the donor or grantor has specified the purpose to which the grant or donation must be applied
- Programme-related investment held solely to further the trust’s purposes
- Designated funds set aside to meet essential future spending
- Commitment which have not been provided for as a liability in the accounts
Academy trusts do have a large element of freedom to establish governance and financial management arrangements that meet the needs of the trust, and within multi-academy trusts, they can direct resources across the whole trust according to overall need. But trustees must be transparent in their decision-making and reporting. This is particularly important when a new academy joins a MAT.
There are a number of factors which trustees need to take into consideration when formulating a reserves policy and deciding what level of reserves to hold within the trust:
- Size of the trust: in general single academy trusts will hold a higher proportion of total income as reserves than MATs, where the risk is shared.
- The trust’s estates strategy
- Future plans: for example, whether funds will be needed to support new schools joining the trust, or to tackle specific educational needs within the trust.
- Potential risks
- Potential future opportunities
Trustees have a responsibility to ensure that their trust’s reserves policy is clearly set out in the annual report and accounts, and that policy should be reviewed regularly to take into account changing circumstances.
- The reserves policy should set out the following:
- The minimum level of reserves the trust expects to hold.
- How funds will be managed until project delivery.
- The process for confirming the trust’s strategic and investment priorities.
- The plan for any long-term projects that will require substantial capital.
- The process for using reserves to balance in-year budgets.
- What steps the trust will take to manage risks around any pension fund deficit.
- Plans and timeframes for reviewing the policy
Trustees need to consider both short-term and long-term factors which could affect the academies in their trust, such as increasing or decreasing projected pupil numbers, curriculum or staffing changes, or premises needs.
More information about the updated ESFA guidance can be found here.