Guidance

Academy trust reserves

Published 23 October 2024

Applies to England

This guidance:

• sets out principles for an effective approach to managing academy trust reserves
• aims to complement the Charity Commission’s guidance on reserves by:
  • positioning it in the context of the academy sector
  • drawing on the Academy trust handbook (ATH) requirements on reserves
• supports trustees and trust leaders to make the best strategic financial decisions in the interests of their pupils
• makes suggestions for things trustees and leaders should consider as they come to these decisions

This guidance does not prescribe a required level of reserves. Trustees and trust leaders are best placed to:

• set the level of reserves that reflects the needs and particular circumstances of their individual trust
• agree a reserves policy and clear plan to show how they intend to use those funds to meet the needs of their pupils

Total income as defined in this guidance is taken from trusts budget forecast returns. This is calculated by adding:

• total Department for Education (DfE) and Education and Skills Funding Agency (ESFA) revenue income
• other revenue
• revenue transfers in or out of the trust
• revenue transfers between revenue and capital income

Definition of academy trust reserves

The Charities statement of recommended practice (SORP) defines reserves as “that part of a charity’s unrestricted income fund that is freely available to spend on any of the charity’s purposes”. These are often referred to as ‘free reserves’.

When applying this to academy trusts, it is common to consider reserves as being the balance of unspent:

• unrestricted funds, to the extent that they have not been used for the acquisition of fixed assets
• general annual grant (GAG)

Although GAG is a restricted fund, any unspent GAG is usually considered as reserves. This is because it is permitted to be used for the general running of the trust’s main activity of delivering education.

Brought-forward reserves

The ATH requires trusts to approve a balanced budget which may take into account any brought-forward reserves.

Brought-forward reserves are made up of unspent funds from previous years where income has been greater than expenditure. The reserves may come from several funding streams, some of which are restricted to particular types of spend.

Carried-forward funds

Carried-forward funds are what remains at the end of the year. They remain restricted in accordance with the conditions of funding or grant. Trusts must make sure that they use these funds with propriety and regularity.

For example, funds derived from GAG could be used for a broad range of activity that supports the day-to-day delivery of the trust’s charitable objects. In addition to available capital-funded projects, the funds would enable the trust to provide education to pupils and maintain the schools estate and facilities.

Funds derived from capital or other specific funding will be more restricted to future projects that meet the original purpose and any conditions of the funding. For example, capital grant can only be used for capital expenditure.

Funding streams

Restricted fixed asset fund

This is the total amount carried forward from restricted funding received for fixed assets in use on an ongoing basis. The carrying or net book value includes any depreciation.

It will mainly be derived from government funds, but may include other funds from:

• a sponsor
• a local authority or other donations
• any unspent capital funds

Restricted general fund

The amount included in this fund represents the total amount carried forward from funding received for specific purposes, excluding fixed assets. It would mainly be government funds like the general annual grant, but may include other funds from sponsors or other donors.

Unrestricted general fund

This includes any amounts not included in the above funds and which are available for general use at the discretion of the trustees to further the charity’s purpose.

Find out more in the Academies Accounts Direction (ADD) 2023 to 2024, 2.116 to 2.119.

What is not included as reserves

The Charities SORP recommends that the following are excluded from the amount identified as reserves:

• tangible fixed assets used to carry out the trust’s activities, such as land and buildings
• programme-related investments held solely to further the trust’s purposes
• other restricted funds where the donor or grantor has specified the purpose to which the grant or donation must be applied
• designated funds set aside to meet essential future spending, such as funding a project that could not be met from future income
• commitments that have not been provided for as a liability in the accounts

Difference between restricted and designated funds

The restriction for restricted funds is imposed from outside the academy trust.

For designated funds, the intended use of funds is determined internally by trustees.

Designated funds can be undesignated or redesignated by a decision from the trustees if the needs of the trust change.

Changing the permitted use of restricted funds would require the external agreement of the donor or funding body .

Regulatory requirements

As part of financial planning, section 2.8 to 2.23 of the ATH requires trusts to:

• have a reserves policy in place
• explain their policy in their annual financial report
• include a clear plan for managing the reserves they hold

This is an important part of trustees’ financial and strategic responsibilities and forms a vital part of their overarching oversight and risk management of the trust.

The ADD describes how academy trusts must prepare their annual financial statements, including the:

• audited accounts
• detailed structure for trusts’ annual report

Section 2.116 of the ADD also sets out what information trusts must include about their reserves policy in their annual report. Trusts must include the:

• level of reserves identified by the trustees as being appropriate
• the reason for holding reserves

The disclosure should also contain a review of the academy trust’s reserves and set out the amount of:

• total funds held at the balance sheet date
• any restricted funds that are not available for the general purpose of the trust
• any funds that have been designated and the purpose they have been designated for
• any amount that can only be realised by disposing of a tangible fixed asset
• reserves held after making allowance for any restricted and designated funds

It should also set out:

• what plans are in place for the future use of reserves including a purpose and likely expenditure date
• how the amount of reserves held at the balance sheet date compares to the trust’s reserves policy, explaining any steps being taken to bring the reserves in line with that policy

What academy trusts need reserves for

All academy trusts need to develop a policy on reserves which:

• establishes an appropriate level of reserves
• explains why holding these reserves is necessary

A well-developed policy will help trustees:

• encourage trusts to identify what risks and funding needs there might be
• mitigate financial and other risks
• put aside specific funding for future projects

Academy trusts may hold reserves for a range of reasons, including risk management. Here are some examples.

Cashflow

Making sure sufficient cash is available to pay bills and expenditure items as they fall due helps the trust to manage fluctuations in income.

For example, trusts that are managing sizeable Condition Improvement Fund (CIF) projects may have different payment profiles to those managing School Capital Allocation (SCA) funded work. This may mean they need available cash to pay invoices before CIF income is paid.

Minimum trust reserves

Setting aside a contingency amount can help cover any unforeseen issues or extra costs in-year. This could be to balance budgets where in-year expenditure exceeds income.

Future change and uncertainty

Planning for a period of reduced pupil numbers, or covering unexpected costs can help make sure the trust’s overall budget is balanced.

Building, estates and non-building capital projects

Growing savings to enable maintenance, development and improvement of the trust’s infrastructure to deliver the trust’s capital and estates strategy. This could include sinking funds that set aside money each year to grow funds for premises projects and building plans. It could also be significant investment in the curriculum, IT or school improvement strategies.

Development and growth

Providing for the trust’s financial health. This could include:

• preparing for new schools to join the trust, or for existing schools to expand
• training for staff
• investing in the central services of the trust to improve delivery or increase capacity

Using reserves to support capital investment 

The trust may decide to designate reserves for capital investment to meet the trust’s capital investment strategy. When considering capital investment, trusts will want to consider the highest priority areas for improvement. They will use intelligence gathered about the trust’s estate condition to guide their decision-making.

The trust’s strategy could include earmarking reserves as a contribution to a prospective CIF bid, where a trust contribution may lead to additional points as part of the bid assessment.

Deciding what level of reserves to hold

DfE does not require any specific level of reserves, either a percentage or monetary amount.

However, trust reserves should not be in deficit. Trustees are best placed to decide on the trust’s priorities. They are responsible for assessing the trust’s individual circumstances to make sure that reserves are used in the best interests of their pupils.

Academy trusts have the freedom to establish governance and financial management arrangements that meet the needs and circumstances of their:

• vision
• values
• academies

There are choices for trustees about how the trust can get the best value from their resources. For multi-academy trusts (MATs), options may include pooling funding.

The level of reserves a trust decides to hold is likely to depend on both short- and long-term factors that may affect the schools and pupils, including:

• the number, type and size of the academies within the trust
• how their needs are reflected in the trust’s estates strategy
• future plans
• upcoming risks or opportunities

Around 90% of trusts hold reserves of at least 5% of total income.

Many choose to hold around one month’s salary costs or expenditure as a minimum to protect cashflow, around 6 to 8% of income. Some trusts, such as larger trusts or those without significant investment or growth plans, may decide to maintain reserves below this level.

We know that academy trusts employ a diverse range of operating models to maximise the impact of their spending for learners. Trusts have the flexibility to maintain a level of reserves that trustees decide is appropriate to the trust’s individual context and circumstances.

Holding a lower level of reserves

When considering a minimum level at the lower end, trustees will need to be assured that:

• there is sufficient contingency should something unforeseen occur
• that there are funds in place to maintain the school estate and infrastructure

For some trusts a lower level of reserves could suggest financial vulnerability and challenge, especially if much below 5%. For other trusts, this will be a deliberate decision in accordance with their financial operating model to provide financial sustainability.

Holding a higher level of reserves

A high level of reserves has been defined, in discussion with the National Audit Office and the Public Accounts Committee, as 20% of income or above.

Trusts choosing to hold a high level of reserves will usually do so because of specific needs – for example, upcoming contributions to capital projects.

It would be unusual and potentially hard for a trust to justify the decision to hold significant reserves at this level for general cashflow contingency, given this funding could be used sooner for the benefit of pupils.

In making the decision regarding how much to hold in reserves, the trustees may wish to consider the following factors.

Size of trust

The size of the trust will affect how much might be needed. For instance, single academy trusts (SATs) tend to hold a higher proportion of income as reserves to cover emergencies or as they save up for significant capital projects.

Large MATs may not need to hold a contingency amount to cover every school, as they may perceive the risk of all their schools experiencing difficulties at the same time as low. Trusts can use Schools financial benchmarking to compare their revenue reserves position with that of other schools and trusts by locality or characteristics or see the level of reserves at other similar trusts.

The trust’s estates strategy

Having plans to manage the estate and premises will help the trust:

• deliver its educational goals
• identify priorities for the trust to ensure its buildings are safe, operationally efficient and enable pupils to succeed

The trust’s future plans

Considering whether sufficient funds are held to support new schools joining the trust. Trusts may factor in realistic income assumptions or other strategic projects to improve facilities or educational performance at their schools.

Upcoming risks and opportunities

As part of the financial planning for the trust, school leaders may identify a change in pupil numbers that could have an impact on funding.

This might be:

• an increase in a future year that would draw on resources until lagged pupil funding was received
• a drop in pupil numbers that would reduce future income

Reserves can provide extra support for a trust to see it through these challenges while it adjusts to a new pattern of funding.

There might also be bidding opportunities for capital funding – for example:

• DfE funding rounds
• local authority section 106 funds
• sports organisations

These opportunities may require a trust to make a reserves contribution in order to secure funding and deliver improvements.

Finding the right balance

Academy trusts need to strike the right balance between:

• holding sufficient reserves to ensure the financial health of their schools
• the ability to fund significant future investment without holding back too much that could otherwise be used to benefit pupils

They will need to decide how to manage their reserves and wider budget planning, especially if there is uncertainty around their underpinning assumptions.

For instance, trusts may choose to:

• allocate smaller contingency amounts within each budget line directly
• hold an overall contingency amount in their reserves

There is no set limit to the level of reserves a trust can build, provided the trust has clear plans for any reserves it holds in line with section 2.8 to 2.23 of the ATH.

Considerations for the board

To ensure the trust is using its funding adequately for current and future pupils, the board might want to consider:

• what reserves are readily available for use – how much is tied up in other assets and whether there are any future commitments that need to be considered, such as:
  • DfE loan repayments
  • operating leases
  • ongoing capital works
• if funds are not needed now, how the trust might be able to invest them to generate some extra income
• pupil numbers for the next few years and whether there might be:
  • increases that may require additional staffing or facilities
  • decreases that might mean reduced future income
  • opportunities to apply for local growth funding
• premises priorities that may need either maintenance or site improvements
• bidding processes or other funds the trust can apply to and how much of a contribution from reserves they might need, if any
• changes to the curriculum or staffing structure, including:
  • resources and training needed for staff that go beyond day-to-day spending
  • any other investment needed to support educational improvement

Strategic planning

The board should also consider their strategic planning, including:

• whether any of the schools are expanding or changing their age range
• opportunities for expanding the trust to support other schools to improve, or bringing in wider expertise and experience
• actions that may be needed to protect educational performance as well as the financial health of the trust if they are not planning to grow
• whether the trust’s assessment of reserves levels mean that its accounts can be prepared on a ‘going concern’ basis – the guidance on operating an academy trust as a going concern has more information about this

Trustees’ role in managing reserve policies

Section 2.8 to 2.23 of the ATH requires trusts to set a policy for holding reserves that must be explained in the trust’s annual report and accounts. This must include a clear plan for managing reserves, and trustees should look to maintain oversight of this policy over time.

The policy should be part of the regular review of financial plans and policies to ensure it remains fit for purpose, especially if the trust is planning for or experiences a significant change in circumstances.

Trusts should consider including the following in their policy to ensure they present a clear plan for managing reserves:

• the minimum level of reserves the trust expects to hold for contingency reasons
• details of any projects the trust has planned, including dates of spend and estimated spend
• how funds will be managed until project delivery
• the process for confirming the trust’s strategic and investment priorities
• the plan for any long-term projects that will require substantial capital
• the process for using reserves to balance in-year budgets
• what steps the trust will take to manage risks around any pension fund deficit
• plans and timeframes for reviewing the policy, including details to state the period the policy is intended to cover

For MATs, the policy should:

• set out how individual schools within the trust can access funds and arrangements for the treatment of any surplus funds they generate
• explain the arrangements the trust will put in place when a new school joins, or if an existing school is transferred to another trust

We recommend  that reserve policies are:

• reviewed annually to ensure they are up to date and provide DfE with the most relevant details regarding the academy trust’s plans for managing reserves
• include a line in the policy to state the period the policy is expected to cover – for example, 2 academic years

DfE’s role

Trusts have flexibility to decide the appropriate level of reserves they hold. However, DfE reviews academy trusts’ reserve levels to help identify financially vulnerable trusts.

This is part of a programme of proactive engagement to support trusts and build their financial capability.

Some trusts are financially sustainable, with reserves below 5% of income. However, the majority of the proactive engagement with trusts has been with those with reserves below that level, as it might indicate financial vulnerability.

Similarly, the focus around high reserves has been on those trusts holding more than 20% of total income.

In these cases, DfE will seek to ensure that appropriate plans are in place and funds are held in compliance with the ATH.

Whether a trust holds low or high levels of reserves, DfE will:

• engage with the trust to understand the trust’s circumstances and discuss potential support, if appropriate
• not require trusts to spend reserves
• ask trusts to make sure that they are compliant with the ATH and have sufficient plans in place for these funds to meet pupils’ needs

The level of reserves will play an important part in DfE’s advice to the relevant Regional Directors about commissioning decisions, such as where trusts are looking to take on new academies to join their trust. Commissioning high-quality trusts has more information about this.

Reserves will never be the determining factor in any decision. However, holding reserves that are proportionate to the level of financial risk associated with a commissioning decision will help ensure the trust:

• is not destabilised
• has the capacity to focus on the required activity

Support for academy trusts

There are times when a trust will approach DfE for financial support. This could be:

• to manage financial difficulty
• related to a structural change, such as transferring in an underperforming school with significant financial difficulties

DfE will consider a trust’s reserve levels when making any decisions about financial support. We may ask a trust to commit a reasonable level of existing reserves alongside an appropriate level of financial support. This is explained further in our guidance on financial support for academy trusts in financial difficulty.

We are always willing to discuss reserves, financial management and support with academy trusts.

If your academy trust is experiencing financial difficulties, we can help you work through all possible options and suggest practical support. Find out more from our guidance on school resource management.

If your trust would like to discuss its circumstances, contact us through the customer help portal.

Your trust can also get additional guidance and support from:

• Charity reserves: building resilience
• ISBL’s good-practice library
• View my financial insights
• Good estate management for schools
• Charity reserves and defined benefit pension schemes
• Managing public money

Acknowledgements

We are grateful for the support and advice offered by a range of colleagues to help us produce this guide. This includes members of the Academies Finance and Assurance Steering Group Working Groups 1 and 3, and Financial Oversight Simplification advisers.