23 million reasons you should review your investment policy
The March meeting of the Bank of England’s monetary policy committee resulted in Bank base rate increasing to the pre-pandemic level of 0.75%. The next MPC meeting date is Thursday 5th May. It will be interesting to see if rates move again.
The harsh reality for most Academies is that the interest rate on their deposits have not recovered to the same pre-pandemic level.
In a sector with little overall reserves, this wouldn’t be a significant challenge. However, the Department for Education released data in July 2021 showing the Academy sector has a net reserves position of £3.17bn (yes Billion, not Million).
If we make a very sweeping assumption that the reserves are held in notice accounts, with a notice period of around 3 months, then most would be getting around 0.10% per year. This would generate the sector a little over £3m in interest over a 12 month period.
This compares to UK banks that are prepared to offer the sector much higher interest rates. Indeed, as at the end of March, the same overall figure could be generating the sector over £23m interest in a 12 month period using accounts with a notice period around 3 months. The potential interest almost doubles when you look at term deposit of 12 months.
In the last few months, I’ve seen around 200 academies change their investment strategy so they can generate more interest.
So why aren’t all Trusts taking the opportunity to spread deposits across banks paying higher interest? It generally boils down to a hand of reasons:
· Out of date (or no) investment policy
A large number of trusts have either, no policy, or a policy that is overly restrictive or unworkable. If your policy hasn’t changed over the last few years, it will be worth having it reviewed
· Reserves linked to free banking
Many Academies are (wrongly) under the impression that they only receive free banking because they keep their reserves with their main bank.
If your bank has told you this, let us know, we will be happy to liaise with your bank for you without charge.
· Not enough time
Many of us have experienced the pain of searching for a deposit account with another bank. Requesting an application form and spending multiple months trying to get the account open just to find the deposit product is no longer available.
Thankfully these days are now behind us as it is possible to open and manage multiple deposit accounts across multiple banks all under 1 single mandate via an on-line portal. This is transforming the way reserves are managed, allowing Schools and Academies to open accounts and manage their deposit portfolio in a matter of minutes each month.
· Risk averse
All Academies need to manage their reserves and surplus funds under the rules of the Trust financial handbook. The handbook allows you to hold cash in bank deposit accounts. Most of the Academies we work with have restricted the banks that they can use to those with a UK banking licence regulated by the FCA and PRA. This can give Trustees the peace of mind to open up the Investment policy to a wider range of banks.
I have presented on the regulation of banks (post the 2007/2008 banking crisis) to many Trust boards as well as the MAT Summit conference as it is really important to understand the changes in regulation that have been implemented to protect customers and make the UK banking system resilient.
· Outdated Reserves policy
Often, Academies have a reserves policy that requires them to keep from 1 to 3 months operational cash on instant access or in their main current account.
The funding stream for the sector is one of the most secure short term funding streams in existence. An Academy will know exactly how much they are due to receive from the ESFA on the 1st of next month and I am yet to see an established Academy’s funding fail to come through. This negates the need to have a reserves policy of keeping 1 – 3 months operational cash on instant access which should leave you in a position to place additional funds on a term or notice deposit.
· Bloated current accounts
One of the first things we ask our Academies to do is to review their month end balance for each month over the past 12 or 18 months. The month end will almost always be the low point of the Trust’s balance each month and will give you a history of the surplus cash that is bloating your current account. If we take this knowledge and overlay it with expected income and expenditure over the next 12 months, it should give an excellent idea of the minimum surplus funds you are likely to have to deposit.
Once you have this figure, it is easier to build a strategy to deposit these funds whilst ensuring you have liquidity to cover potential unforeseen expenditure.
For example, you may wish to keep 10% of this surplus in your current account as a buffer with a further 10 – 20% on short term notice deposit accounts leaving up to 70% of the figure to place on a range of ‘layered’ term deposit accounts.
Not all Trusts have the same needs from a deposit strategy so do make sure the range of deposits you choose give you the best blend of returns and liquidity within the confines of your investment policy.
Whilst it probably hasn’t been particularly high on most Trusts agenda during the pandemic, there is up to £23m or more in interest that the sector could be generating. That pays for a lot of support for our learners.
Ian Buss has over 30 years experience in banking with the last 20 years focused specifically on the Education and not for profit sector. As part of his Banking and Lending support services, he offers complimentary deposit support to schools to review Investment policies and deposit strategies.