Spreading the Risk and Reaping the Rewards
Updated: Feb 26, 2020
I’ve spent more than 15 years working with SBMs and Finance teams in Maintained, Independent and Academy schools and, not surprisingly, the vast majority opt for an easy life when it comes to managing any surplus funds they may have, forgoing the potential to increase interest earned on cash held. Most have a good opportunity to increase the interest they earn without adding significant additional administration to their or their team’s workloads.
Whilst interest rates may still be very low, you can still aim to increase the interest returns you make from Bank cash deposit facilities.
Many schools are under the assumption that they are tied to their existing bank for their deposits.
You are NOT!
In fact, any school with surplus funds should be looking at how and where they place deposits.
Your first call should be your ‘Investment Policy’ and, if one does not exist or is rather long in the tooth, it’s an ideal opportunity to create one or bring it up to date.
As a minimum, your policy should look at the following criteria:
1. Roles & Responsibilities
2. Liquidity & Review Frequency
3. Type and term of Investments
4. Counterparty Risk
Roles and Responsibilities:
Your Board, Governors or Trustees should be agreeing the framework of the policy to ensure input from a wider group of individuals. They should also agree who has the responsibility and autonomy to implement the policy.
Liquidity and Review Frequency
When setting the policy, a decision around ‘liquidity and reserves’ should be agreed and defined. For example, your school or Trust may want to state that reserves of a certain value be kept on either instant access or short-term (sub 40 day) notice. Many schools set a value of between 1 and 3 month’s salary to be held on instant access or short term notice (or, for an Independent school, a term’s funding).
Your policy should also set a frequency for review to ensure that it continues to be ‘fit for purpose’.
Type and term of Investments:
Your policy should state the maximum term and type of investment that can be considered. Maintained Schools and Academies will have a duty of care to funds they hold as they are public funds. As such, most state-funded schools would not consider any form of deposit other than a cash deposit. Additionally, as state funded schools should ideally not be looking at very long term deposits, most would not consider a term deposit of more than 12 months.
Type of Organisation you are prepared to invest in:
That speculative investment you’ve seen advertised on Facebook may sound too good to be true (And it IS too good to be true!), therefore you will probably want to avoid any speculative investments with a high level of risk with your school funds.
Most schools I have worked with tend to limit their cash deposits to Banks operating in the UK and regulated by an organisation such as the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
You may want to further limit who you deposit with and how much you choose to place with any single organisation. Though it is worth remembering that this needs to be operationally achievable! There is no point at all in stating in your policy that you can only have £500,000 held with any one organisation if your monthly budget is £1,000,000 as your policy will be breached as soon as your monthly budget is received.
You will also want to consider how many counterparties you will need to have if you put a relatively small limit on funds held with each. A restriction of £10,000 per organisation is a challenging one to manage if you are placing £3,000,000 on deposit….
As such, you may wish to consider 2 levels of maximum deposit per organisation e.g.:
With our main bankers, we will limit the funds held to £X )(or even no limit) and, for additional organisations limit the funds deposited to £Y (ensuring that the value is sufficient to not require dozens of different providers unless you wish to spread funds very thinly).
Many schools and Trusts believe they are covered by the Financial Services Compensation Scheme (FSCS) should a deposit provider cease trading. Unfortunately, the FSCS will not confirm if a school is covered until the point a deposit taker actually fails. They point towards the guidance set out in the PRA rule book which states, amongst other criteria, that a deposit by a local authority is not eligible unless it is a small local authority (turnover of 500,000 Euros equivalent or less).
Many banks will have deposit products specifically for the education sector. It is highly likely that you will be able to use your Banking and Deposit consultant to provide rates available to you from a number of banks.
If you need a draft Investment Policy for your school or MAT, let us know and we can send you one.