Financial management of trust funds

Processing of gifts
Investment of trust funds
Accounting for trust funds
Authorising trust fund expenditure
Reporting on trust funds

Processing of gifts

In accordance with the Financial Regulations, all cash gifts and grants (with the exception of gifts treated as research income) must be notified promptly to the Gift Registry. The Gift Registry is responsible for recording details of the gift and the wishes of the donor on the Development and Alumni Relations System (DARS). Where applicable it arranges for the recovery of Gift Aid through HM Revenue & Customs and adds this to the original donation. This information is exported into the Oracle Financials system.

For endowment gifts, the capital is transferred from the Gift Registry to the Financial Reporting Section of Central Finance so that it can be invested and accounted for appropriately. Where the gift is subject to its own bespoke trust arrangement, this transfer is only done after the Trust Regulation – which records the terms of the trust – has been approved by Council and published in the Gazette (see ‘Establishing new trust funds’). For gifts held in the University of Oxford Development Trust Fund (see ‘OUDT’), a Trust Regulation is not required as no new trust is being created.

Investment of trust funds

Endowment gifts can be either permanent endowment (where the capital may not be spent) or expendable endowment (where the capital may be spent, if it is considered to be in the best interests of the trust).

All permanent endowment gifts are invested in the Oxford Endowment Fund. This is a unitised investment vehicle constituted under section 2 of the Universities and Colleges (Trusts) Act 1943, which allows the University to manage collectively the assets of trusts administered both by the University itself and by other trustees for purposes connected with the University.

The Oxford Endowment Fund is managed by Oxford University Endowment Management Limited (‘OUEM’), a wholly-owned subsidiary company of the University, under investment and distribution policies set by the Investment Committee of Council. It is suitable for long-term investments of at least five years. The Investment Committee has established an investment policy and related asset allocation strategy which is designed to achieve a target 5% real rate of return over the long-term, with an expected maximum level of volatility of the MSCI World Index. The Fund aims to distribute approximately 4% of assets to investors each year, subject to a smoothing formula designed to minimise the effects of capital value volatility on yearly payouts.

The default position for all expendable endowment gifts is that they are held in the Deposit Pool – the University’s cash investment vehicle – for spending in the short-to-medium term. The Deposit Pool is invested in conventional money market instruments such as bank deposits, certificates of deposit, and treasury bills, and is managed by the Treasury Section, under delegated authority from the Finance Committee. However, if it is not intended to spend any of the capital for at least five years, then it would usually be invested in the Oxford Endowment Fund.

For some expendable endowments, the Oxford Capital Fund is used. This Fund is managed by OUEM and is suitable for medium-term investments of around 2-5 years. Its investment objective is to generate a return of 3% above CPI, but with less volatility than is usual in the equity markets.

The latest Annual Reports for the Oxford Endowment Fund and Oxford Capital Fund, which include further information about the Funds and their performance since inception, can be downloaded from the OUEM website here.

Accounting for trust funds

The Financial Reporting Section holds all endowment gifts on a central cost centre in Oracle Financials and allocates them a unique ‘Source of Funds’ code, which is prefixed with the letter B to indicate they are endowments. The natural account used depends on whether the endowment is permanent or expendable, and how it is classified in accounting terms.

The Financial Reporting Section, specifically the Trust Finance Administration Unit, is responsible for:

arranging for the capital of each trust fund to be invested in accordance with the decisions taken by the particular Board of Management;
advising Boards of Management of the number of Oxford Endowment Fund shares purchased (where appropriate) and the B source of funds code allocated;
accounting for the investment income from all sources and allocating it quarterly against expenditure claims;
providing quarterly ‘Income and Expenditure’ statements, with details of share prices and dividends
providing forecasts of income for budget purposes.

In order to claim income from a trust fund, the Boards of Management must charge legitimate costs to the appropriate B source of funds code using their own departmental cost centre. At the end of each financial quarter, income is transferred to the relevant fund to meet the actual expenditure charged during the previous quarter. The amount of income transferred each quarter will depend upon (i) the actual revenue received from shares in the Oxford Endowment Fund and other investments, and (ii) actual expenditure charged to the source of funds code.

If the revenue is equal to or greater than the expenditure, then the costs will be covered in full. However, if the revenue is less than the expenditure, then only the actual revenue will be transferred, with any overspend being recharged to the Division or Department in which the fund is held. Any surplus revenue would be rolled over to the next quarter or next year.

Authorising trust fund expenditure

In order to ensure that trust fund income is spent on legitimate costs only, payments must be authorised by the Board of Management responsible for each fund. This authority can be delegated by the Board to individual officers within a department, providing this is documented in a ‘Register of Authorised Signatories’ form. These forms are issued automatically by the Financial Reporting Section whenever a new trust fund account is opened. Once completed, they are held by the Payments Section and checked to ensure invoices and payment requests have been correctly authorised, before payments are released against the fund in question. Any payment requests that have not been appropriately authorised are referred back to the department.

In addition, the Financial Reporting Section monitors expenditure claims on an ongoing basis to ensure that the terms of the trusts are not being breached. Any issues with expenditure are referred back to the department.

Reporting on trust funds

At the end of each financial quarter, the Financial Reporting Section issues a Trust Fund Financial Statement. The statement comprises an Income & Expenditure account, providing year-to-date and prior year figures for the amount of investment income generated by and expenditure charged to the fund; and a Balance Sheet account, showing the book (original) cost and current valuation of the endowment itself. An example financial statement for a fictitious department can be downloaded from this page.

It is advisable to check financial statements carefully to ensure that the income (and capital, if appropriate) is being spent in accordance with the terms of the trust, and to plan future spend so that surplus income does not start to build up unnecessarily. Remember that it is an underlying principle of charity law that trust income is applied within a reasonable period of receipt.

Departmental Administrators and Finance Managers may wish to run their own trust fund reports, particularly as year-end approaches. This can be done providing they are set up with the appropriate Oracle Financials responsibility: Trusts GL Inquiry. This responsibility enables enquiries to be carried out on any General Ledger code, meaning that reports can be generated which show both the Income & Expenditure and Balance Sheet entries for the trust fund. Details of how to run specific reports, and how to get access to Trusts GL Inquiry should you not already have it, can be found in the Trust Fund section of the Departmental Year-End Guidance Notes.