Financial Reserves. Approved by Trust Board: October Review Frequency:

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Abel Peters
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1 Policy Financial Reserves Approved by Trust Board: October 2013 Review Frequency: Annual

2 Background Charities are required to establish a reserves policy in order to protect their operations. However, regardless of the regulatory requirement, establishing reserves that protect the operation of the Trust and contribute to its smooth running is good practice and forms part of its overall financial control and governance framework. This paper sets out some principles that the Trust is recommended to adopt and presents a detailed policy for the Trust Board to consider. The regulatory framework within which the policy has to be set is explained in the appendix. Principles The policy takes into account the following principles: 1. Reserves must have a specific purpose related to future spending or covering current and future risks 2. The size of the reserves should balance the benefit of current spending with the risks the reserves cover 3. They should be transparent and maintain the link with the purposes for which the income was given. 4. They should ensure that sufficient resources are available so that unexpected events can be accommodated without causing current year problems, generating a deficit or cash flow issues. Whilst the DfE require reserves to be limited to a level where its use in the future is known, there is an overriding need to ensure that value for money. Purposes for Reserves The following purposes are considered appropriate for a Multi-academy Trust: 1. Current Reserves that are established to manage known risks which are not insurable or where insurance does not provide value for money 2. Equalisation reserves set up to smooth out irregular spending 3. Specific Capital Reserves established in order to fund capital expenditure and other investments that would not be affordable if financed from a single year s funding 4. General Reserve to provide for unexpected and unpredictable needs. 5. Cash Flow Management Reserves used to enable variable cash demands across the Trust or specific parts of the Trust to be managed

3 Reserves Held by St Clere s Co-operative Academy Trust Current Reserves Two types of current reserve have been identified: 1) Staff Sickness Fund The premiums for insurance to protect against losses incurred by schools in covering sickness through supply and temporary staff are currently high and exclude cover in certain areas. They are not believed to be value for money. It is proposed that the Trust in future self-insures against the losses by pooling of school sickness insurance budgets to form a Trust Staff Sickness Fund.. In order to protect against unusually high claims in any year Stop Loss Insurance will be purchased. The excess on the policy will be set at the level of the fund. The fund would be managed by Trust staff. Future years contributions to the fund will be varied depending on the claims in the previous year and will be set by the Trust Board annually. Fund balances would be invested and income used to reduce future calls on schools budgets. It is anticipated that this measure will reduce overall costs to schools significantly. The actual impact will be monitored and reviewed annually. The Trust Board approved the establishment of the fund on 15 th October ) Local Authority Resource Base Reserves St Clere s and Stanford le Hope Schools are currently holding money that was provided for Visual Impairment and Audio Impairment Resource Bases but which were either not used in the year they were given by Thurrock or where expenditure was allocated against them. The Trust Board requires the appropriate Local Governing Bodies to consider how these reserves should be used and present plans at the next Board meeting. It is also recommended that carry forwards should be limited to 5% of total resource base income levels in the future. Equalisation Reserves No requirements have been identified in this category at this time. Specific Capital Reserves Currently, one reserve has been identified and is held by St Clere s School to cover the renewal of its all-weather pitches. As part of the annual budgeting process all schools governing bodies should consider whether additional capital reserves need to be established. The school condition and its development plan should be the main inputs into the process.

4 Proposals for establishing reserves will need to be agreed with the CEO and presented to the Trust Board for approval. General Reserve General Reserves are to be maintained at a level so that when added to any Current Reserves set up by the school they are at least 3% of the gross income of the schools. The level will be reviewed annually by the Board. Unspent income and/or grants not specifically identified for the other purposes will be added to this reserve. Any in year deficits will be resourced from this fund as far as possible. If deficits result in the fund falling below the 3% threshold, resources will need to be set aside in the next year s budget to restore it. Exceptionally, where the size of the short fall is large, the local governing body may propose to the Trust Board that it is restored over more than one year. Cash Flow Management Reserves The one area of the Trust operations that is likely to suffer from cash flow issues is the Trust operations. As its budget is relatively small compared to the schools, even modest fluctuations in demands on its resources will result in difficulties. The Trust is increasingly receiving invoices which cover expenditure for several schools, for example for insurance premiums, where suppliers will expect a single payment. These will need to be paid initially from the Trust bank accounts. Schools within the Trust may also encounter cash flow issues. An example could be where a fire or major incident occurs that requires urgent action. Whilst covered by insurance, expenditure may have to be incurred before claims are settled. The Trust Board has established a central cash reserve for the Trust utilising surplus cash in each of the school accounts. It has been transferred to a bank account managed at Trust level. Each school is able to apply for cash support from the reserve if required. Unused cash will be invested and income shared back across the schools Initially the cash reserve has been set at the level of the school reserves. (The cash associated with the reserves will not be required for day to day expenditure). However, this will need to be kept under review. As we enter into more Trust wide contracts in order to achieve improved value for money, the demands on the Trust account will increase. Increases to this reserve shall be determined by the CEO in discussion with Head Teachers. Ownership of Funds Regardless of the bank accounts that hold them, the reserves will continue to be owned by the schools that provided the money to establish them. The only exceptions will be where schools explicitly provide contributions to Trust wide reserves such as the Staff Sickness Reserve.

5 Charities and Education Funding Agency Accounting Requirements The Trust is required to report in its accounts the level of reserves held split between the restricted general funds, restricted capital fund and unrestricted fund. The Trust has discretion to move resources from unrestricted to restricted funds but not in the other direction and can transfer from restricted general funds to restricted capital funds. As the Trust s entire operations are for education services all resources whether restricted or not would be used to support the same purpose. Therefore, the distinction between them has not influenced the policy below. This may change in the future particularly if community activities increase. In which case, this policy will be reviewed. Summary of Policy Staff Sickness Current Reserve to be established initially at the level of school insurance budgets and subsequently reflecting experience of costs. Annual level to be agreed by Trust Board. Resource Base Current Reserves to be maintained at 5% of grant. Capital Reserves are to be identified for specific investments in education and premises. General reserve is established for each school at the minimum level of 3% of gross income established less the value of any Current Reserves held by the school. Cash flow reserve is established by pooling school reserves cash centrally. Implementing Policy Investment programme established in conjunction with the CEO and agreed by Trust in order to establish Capital Reserves in each school and set out an effective programme in order to reduce excess reserves. Resource Base Funds to be reduced to 5% through a programme agreed with CEO and approved by Trust Board. Establish an investment policy for money held in funds.

6 Regulatory Framework The rules established by the Department of Education in relation to reserves is set out in the Funding Agreement between with the Trust and in the Academies financial handbook. The relevant paragraphs are set out below Funding Agreement 73) At the beginning of any Academy Financial Year the Company may hold unspent GAG for any Academy from previous Academy Financial Years amounting to such percentage (if any) as the Secretary of State may specify by notice in writing to the Company prior to the beginning of that Academy Financial Year of the total GAG payable for the Academy in the Academy Financial Year just ended or such higher amount as may from time to time be agreed. The Company shall use such carried forward amount for such purpose, or subject to such restriction on its use, as the Secretary of State may specify by notice in writing to the Company. 74) Notwithstanding clause 73 and additional grant provided over and above that set out in clauses and made in accordance with clauses may be carried forward without limitation or deduction until the Start-up Period or the circumstances set out in clause 52 come to an end. 75) Any savings of GAG not allowed to be carried forward under clauses will be taken into account in the payment of subsequent grant. 76) The Company may also accumulate funds from private sources or public sources other than grants from the Secretary of State for application to the benefit of the Academy as it sees fit. Any surplus arising from private sources or public sources other than grants from the Secretary of State shall be separately identified in the Company s balance sheet..80) It is the responsibility of the Company to ensure that each Academy balances its budget from Academy Financial Year to Academy Financial Year. For avoidance of doubt, this does not prevent the Company from: a) carrying a surplus from one Academy Financial Year to the next; or b) carrying forward from a previous Academy Financial Year or Academy Financial Years a sufficient surplus or sufficient cumulative surpluses on grants from the Secretary of State to meet an in-year deficit on such grants in a subsequent financial year; or c) incurring an in-year deficit on funds from sources other than grants from the Secretary of State in any Academy Financial Year, provided it does not affect the Company s responsibility to ensure that the Company balances its overall budget from Academy Financial Year to Academy Financial Year.

7 Financial Handbook Managing surplus General Annual Grant (GAG) It is important that grant is spent as needed to avoid excess calls on Exchequer funding and public borrowing. The EFA previously set limits on the amount of GAG that could be carried forward from one year to the next. These limits have now been removed so that academy trusts have the freedom to keep money aside for when it is needed most and to build up reserves, for example for longterm capital projects The DfE expects academy trusts to use their allocated funding for the full benefit of their current pupils. Therefore, it is important that, if the trust has a substantial surplus, they have a clear plan for how it will be used to benefit their pupils Budget forecasts sent to the EFA must declare any unspent funds expected to be carried forward at the end of the financial year. The EFA will also verify the sums of unspent funds when it checks the trust s accounts and highlight and report, to the relevant DfE Boards, any cases where it has serious concerns about a longterm substantial surplus with no clear plans for use.

Trust Financial Reserves Policy

Trust Financial Reserves Policy Date Published 1 st October 2016 Version 1 Approved Date 11 th October 2016 Review Cycle Every three years Review Date October 2019 Learning together; to be the best we