Academies benchmark report – designating reserves

The 12th annual Academies Benchmark report points to an increased number of academy trusts dipping into their reserves to keep up with the costs that have hit the sector. 

Alongside that, an increasing number of trusts are designating reserves for future use. The ESFA also states that designated funds should be excluded from the calculation of the level of free reserves.  

A Trust is effectively an exempt charitable company, per the Charity Statement of Recommended Practice, the definition of free reserves is unrestricted funds, less amounts that are tied up in fixed assets or other liquid assets, and any amounts that have been designated. This therefore makes it possible for a Trust to manage its free reserves, using designated funds.  

The Kreston Reeves research suggests that some 6% of revenue reserves have been designated, or ringfenced, for future projects as of August 2023. The report predicts this will increase in 2024. 

The Education and Skills Funding Agency (ESFA) does not set out in the Academies Handbook what it considers to be an acceptable level of free reserves. It does, however, state that reserves of less than 5% of income or 20% or more of income may be considered too low or high and will result in further ESFA scrutiny.  

Academies with higher reserves can designate a portion of their unrestricted funds for specific purposes. Take, for example, a Trust with an income of £20 million and with free reserves of £5 million. That would push it over the 20% threshold and onto the ESFA’s radar. If it were to allocate £1.1million to a future project, perhaps to improve energy efficiency, unrestricted reserves would fall to £3.9 million, below the 20% threshold and potentially off the ESFA’s radar.  

It is important to note that designating reserves does not always create a legal obligation to spend this ringfenced pot of cash on that stated project. The Board of Trustees can undesignated those funds should they wish to do so or redesignate to a completely different project if there is a new need to do so. 

The key is transparency in reporting these designated reserves is important and must be disclosed correctly and reflected in a Trust’s annual report and accounts. 

Academy trusts that do hold higher levels of unrestricted reserves are recommended to take advice before funds are designated or before amending their reserves policy, to better understand the impact that might have on the amount of reserves held and on reporting requirements. 

The Kreston Reeves Academies team has extensive experience of advising trusts on their Reserves policies and is on hand to help.  Please contact us today to discuss the options available to you and how we can help.