Charity sector faces £10bn funding shortfall and 60,000 job losses

Restrictions on Remembrance Sunday services due to lockdown measures have disrupted one of the UK’s most sacred traditions, preventing many ex-servicemen and women from gathering to mark the sacrifice of fallen comrades in times of war.

Many volunteers have also been unable to help at this year’s Poppy Appeal, the Royal British Legion’s largest fundraising event. The charity is only one of the 166,000 charities and voluntary organisations across Britain that have seen vital income streams shrink at a time when demand for their services has surged due to the pandemic.

The scale of the problems confronting the charity sector was daunting, even before the government announced last weekend a second lockdown that will curtail vital fundraising efforts in the few weeks before Christmas.

The funding gap between income and expenditure across the sector could reach £10bn due to the closure of charity shops and the cancellation of fundraising events, according to Pro Bono Economics, a consultancy. It has also estimated that 60,000 jobs could be lost.

The UK charity sector owns a relatively modest pool of investment assets worth about £111bn, which it draws on to fund front line services. Demands on the capital pool have increased as the charitable endowments and foundations that provide grants to support smaller charities face pressure to boost spending as coronavirus ravages the economy.

Severe financial difficulties mean that one in 10 charities and community organisations believe they will be forced to close within a year, according to research by Nottingham Trent University, the National Council for Voluntary Organisations and Sheffield Hallam University.

Eight out of 10 charities and community organisations say the pandemic will damage their ability to deliver on their objectives over the next 12 months.

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“Charities are under pressure like never before,” says Karl Wilding, NCVO chief executive.

In response, the government announced a £750m package of direct grants for charities in April and has promised more help.

But Diana Barran, charities minister, warned last month that the government would be unable to save every charity from closing.

“We have provided support to about 12,700 charities. But the sector is huge with more than 160,00O charities. The sad truth is that we can’t help everyone. We are trying to focus in a way that helps communities to the maximum extent,” Ms Barran told the BBC.

Charitable endowments and foundations that provide grants to support front-line services have responded by increasing their spending.

“We realised that domestic abuse problems were going to be worse after lockdown began in March. We therefore decided to sell some of our gold holdings at a profit in order to increase provision for domestic abuse,” says Caroline Butler, chair of the investment committee at the Pilgrim Trust, which provides more than £3m annually in grants to charities including projects to support vulnerable women and girls.

Esmée Fairbairn Foundation spends about 4 per cent each year of its £1.1bn endowment to support other charities. It increased its £45m spending planned for 2020 by £16m to provide additional help for more than 500 partner charities.

Matthew Cox, investment director at Esmée Fairbairn, says the pandemic has magnified inequalities across society.

“While it is key for us to have sufficient liquidity to support our beneficiaries through these difficult times, we can also give away capital from the endowment [unlike some other charities]. We have made more of our funding unrestricted, which allows beneficiaries to spend money where they think is most useful.”

UK charity sector income breakdown

Richard Hebditch, director of external affairs at the Association of Charitable Foundations, says that not all of its members have sufficient liquid assets to allow them to increase their spending without altering their investment strategy.

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“Some have taken the decision to draw down on their endowments in a time of considerable volatility to deliver on their charitable mission,” says Mr Hebditch.

Widespread dividends cuts and suspensions in the corporate sector have contributed to the funding difficulties for charities, says Kate Rogers, co-head of charities at Cazenove Capital.

“Although the declines in equity markets have not been an issue for charities if they do not need to sell assets, the drop in income because of cuts in dividend payments has been a real worry as it feeds into discussions about spending plans,” says Ms Rogers.

Some grant giving foundations and endowments, which have made multiyear funding pledges are “exceptionally uncomfortable” at the prospect of cutting back on their spending. As a result they have increased their exposure to riskier assets to find better yields, says James Bevan, chief investment officer at CCLA, which runs £11.3bn on behalf of charities and religious organisations.

For some charitable foundations, the sale of rural land holdings for new housing projects has delivered windfall gains, allowing them to spend more.

“Others have been forced to cut spending or to rejig their portfolios because their usual sources of income from dividends, rents and interest rates have suffered,” says Mr Bevan.

The heightened volatility across financial markets this year has led to a marked increase in the dispersion of returns earned by charitable foundations and endowments.

“The gap between the best and worst performers is particularly large this year. Many charities will want to assess the levels of risk in their portfolios because the market downturn in March was so savage. Reductions in investment income will be a challenge that many charities will struggle with,” says Mr Bevan.

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Ms Rogers warns that the funding problems facing the charitable sector will increase thanks to new lockdown restrictions.

“Some charities that are regarded as national treasures are at risk of going bust. Grants from foundations cannot make up the entire funding shortfall for front line charities,” says Ms Rogers.



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