When Covid first hit, foundations were generous in putting out more money fast to help charities respond. But as another wave washes over Europe, it’s clear this crisis is nowhere near past us. We are still suffering and will be for some time yet.

What charities want to know now is: what foundations plan to give in 2021 and 2022.

The MSCI world index was up 16 per cent in 2020, with many commentators expecting similar returns in 2021 if the pandemic recedes. Photo credit: Unsplash

Endowments are ok – even growing

Foundations’ endowments have been hit less hard than first feared. The MSCI world index was up 16 per cent in 2020, with many commentators expecting similar returns in 2021 if the pandemic recedes. The Wellcome Trust, Britain’s largest foundation, managed to grow their endowment to a spectacular £29 billion.

The contrast with the charity sector is stark; event fundraising cancelled, face to face work restricted, government money threatened. The buoyancy of the global investment market means many foundations have been able to increase their giving. Although others will have to make tougher decisions, particularly those more exposed to the UK investment markets which fell substantially in 2020.

As I have argued previously, all foundations should regularly review their payout ratio and whether it is at the right level for their charitable ambitions. Some charitable missions such as eradicating diseases lend themselves to larger payout ratios in the short term; the foundation hopes that this money will not be needed by future generations. Other objectives like advancing education will always be with us, so foundations pursuing those should have lower payout ratios. If this thinking about future and present need was happening, we might expect to see more variation in payout ratios than we actually do. Instead, as ACF research shows, foundations tend to lean towards a strategy of perpetuity for endowments even when this isn’t a legal requirement.

Payout ratios are always a judgement about the good you can do now, versus the good you can do in the future. Foundation trustees are used to making that trade-off. But how does Covid-19 complicate the situation?

The greatest need is now

Covid-19 has increased need on an unprecedented scale. In the UK, data from the Trussell Trust shows foodbank use to be up by 50 per cent. There have been huge rises in calls to domestic violence helplines during lockdowns. Whilst we cannot know what the future holds, it’s reasonable to hope that things will be better in five or ten years. So, there is an argument that increasing payouts now at the cost of future beneficiaries is the right thing to do.

For some beneficiaries, the pandemic will have long-lasting consequences. For people suffering trauma – be they frontline medical professionals, people who have been bereaved, or those who find lockdowns traumatic – early intervention can help prevent long-term mental health problems. Similarly, saving a family from losing their home and having to go into unsuitable accommodation can save a fortune by preventing later health problems and poorer educational outcomes. Foundations can prioritise the now to reduce future needs and the rising costs of tackling those needs.

Payout ratios are always a judgement about the good you can do now, versus the good you can do in the future. Foundation trustees are used to making that trade-off. But how does Covid-19 complicate the situation?

For some charities, Covid-19 has caused an existential loss of income. Although giving extra money now takes away from what future organisations could have, that must be balanced by the cost of losing experienced staff and institutional knowledge, plus the cost of closing down and setting up organisations. Letting organisations go under risks campaigns and policy work losing momentum, with more people in poverty as a result.

With everything changing, there are opportunities to take advantage of current momentum. The renewed debate about race, particularly in the US, is one where spending to make progress now could have great impacts in the future. There are similar discussions about the environment, where more money in the future may be too late to have the impact that we want.

Time to be open

There are, therefore, compelling reasons to think that foundations should be increasing their payout ratio now. The role of the foundation trustee is to guard against seeing the argument purely as one of affordability from an investment point of view rather than a mission perspective.

So, as foundations and operational charities work together on delivering their missions, foundations should continue to be mindful that their decisions about how much to give now will have knock-on effects both today and tomorrow. This partnership is why foundations should regularly review their thinking and, just as importantly, explain their thinking to the sector. Any foresight about what foundations are likely to do will help charities plan their own response.

Coronavirus is too big and too fast for anyone to think they can navigate it alone. Instead, we must work through these problems with others, discuss our thinking, and give as much notice as we can about what we might do.

Angela Kail is Director of Consulting at charity think tank and consultancy NPC.