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High level of reserves: understanding the new ESFA guide for academy trusts

The ESFA published a good practice guide on academy reserves in 2023 which sets out principles for an effective approach to managing academy trust reserves and aims to complement the Charity Commission’s guidance on reserves. The new guide was covered by our Insight in December 2023, and the topic of reserves in general has been discussed in previous UHY Insights such as Update for trusts holding significant revenue reserves from April 2022.

Reasons for holding reserves in academy trusts

The good practice guide recognises that academy trusts need to develop and hold reserves for a number of reasons, including:

  • cashflow 
  • contingency funds - a minimum level set aside as an amount to cover any unforeseen issues or extra costs in-year
  • capital projects – building, estates and non-building
  • development and growth – for example, preparing for new schools to join the trust, for existing schools to expand, training for staff or investing in the central services of the trust to improve delivery or increase capacity
  • future change and uncertainty – planning for a period of reduced pupil numbers or covering unexpected costs to ensure the trust’s overall budget is balanced.

Determining the right level of reserves

Section 9 of the guide addresses how boards should decide on the appropriate level of reserves, a question we are often asked. There is no right or wrong answer and the ESFA does not require any specific level of reserves – it is dependent on each individual trust, its financial position, future plans and appetite to risk. 

Common reserve levels among academy trusts

The guide states that around 90% of trusts maintain reserves of at least 5% of total income. Many choose to hold one month’s salary costs or expenditure (around 6-8% of income) as a minimum to protect cashflow. However, many trust, especially larger ones or those without significant growth plans, maintain reserves below this level.

What constitutes high levels of reserves?

Some fortunate trusts hold an elevated level of reserves. But if there is no specified ideal level of reserves, what counts as high? High reserves are defined as 20% or more of total income, according to the ESFA, National Audit Office and Public Accounts Committee. Trusts are encouraged to spend most of the current funds to the benefit of its current pupils, so it can be hard to justify reserves significantly above this level.

ESFA monitoring and communication on high reserves

While trusts do have the flexibility to decide their own appropriate level of reserves, the ESFA understandably monitors reserves. This is partly to identify financially vulnerable trusts, but at the opposite end of the spectrum, they are keen to understand why some trusts are holding high levels of reserves, and to challenge them on this. The guide states that the ESFA are “likely to seek further information from trusts about their plans for these substantial funds, and gain assurance that a policy and clear plans are in place for these funds to meet pupils’ needs and ensure compliance with the ATH.”

This review process would appear to be underway since we have had sight of a letter received by an academy trust client.

See the letter extract here

“We asked for information about your trust’s reserves in the Budget Forecast Return (BFR) 2023. We want to work with trusts to understand more about the levels of reserves held by academy trusts and the plans that trusts have in place for high levels of reserves. 

The ESFA does not set a required level of reserves, but we do have a role in supporting trusts to manage them. Your recent accounts return contains information about your trust’s reserves which we have considered alongside the 2023 BFR. We are writing to you now because the information provided in your 2023 BFR suggests that your trust holds more than 20% of its total income in reserves and a proportion of this has not been allocated to any spend categories. 

The information provided in your 2023 BFR shows £…… total reserves. We have detailed the reserves you allocated to spend categories in Annex A of this letter. We kindly request further details of any plans regarding the £……k of remaining reserves in Annex B, to be sent back in this format by …….. This information will increase the ESFA’s understanding of the reasons why some trusts hold substantial reserves. We will use this to both support trusts in completing reserve details in the 2023/24 BFR submission and to consider the trusts plans and policies for the substantial reserves they hold. 

We recognise that this may be an opportunity to reflect on the data submitted within your 2023 BFR and therefore we welcome clarifications regarding the level of reserves the trust holds and plans for these reserves, if appropriate, including whether any of the circumstances at the trust have changed since your 2023 BFR was submitted.”

Any trusts receiving such a letter will need to ensure they cooperate and return the requested information and explanation to the ESFA by the dates stipulated.

All trusts need to be aware of this when they complete their Budget Forecast Returns in the coming months. It is important that adequate thought is given to clearly explaining why reserves are held if you own trust’s level if around or above the 20% threshold.

The next step

If you would like to discuss your academy trust’s reserves and your reserves policy please contact Allan Hickie on a.hickie@uhy-uk.com or your usual academy trust adviser.

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