Guidance

Academy trust reserves

Updated 24 April 2024

Applies to England

This content was last updated in November 2023.

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1. What trustees and trust leaders need to know

• Academy trusts are required by the Academy Trust Handbook (ATH 2.8) to have in place a reserves policy and to explain it in their annual report and accounts. Trusts will hold reserves for various reasons including: cashflow; minimum trust reserves; building/estates/non-building capital projects; development and growth and future change and uncertainty.
• ESFA does not set a required level of reserves. Trustees decide the level of reserves to hold that is appropriate for the individual circumstances and priorities of their trust (Academies Accounts Direction (AAD) 2.16). The trust should review this regularly to ensure that they continue to meet the needs of pupils. A well-developed reserves policy will help trustees mitigate financial risks – first by encouraging trusts to identify what those risks might be, and then by deciding how much the trust needs to hold to address them and ensure the financial health of their schools.
• For trusts actively choosing to hold low levels of reserves, trustees should ensure there is sufficient contingency in case of anything unforeseen as, for some trusts, low reserves could suggest financial vulnerability. For trusts choosing to hold high levels of reserves, trustees should have a plan and be clear on the purpose for these funds without holding back too much that could otherwise be used to benefit pupils. It is important for academy trusts to find a balance between the two. In both scenarios, ESFA will engage with the trust to understand the trust’s circumstances and discuss potential support if appropriate. ESFA will provide advice to the relevant Regional Director on the financial health of the trust, and the level of reserves will be part of ESFA’s advice to Regional Directors, about commissioning decisions such as where trusts are looking to take on new academies to join their trust.

2. Introduction

This guidance sets out principles for an effective approach to managing academy trust reserves. The guidance aims to complement the Charity Commission’s guidance on reserves, by positioning it in the context of the academy sector, including drawing on the ATH requirements on reserves.

This guidance is intended to support trustees and trust leaders to make the best strategic financial decisions in the interests of their pupils. It makes suggestions for things they should consider as they come to these decisions including identifying their improvement and estates priorities, as well as understanding their area local context and communities, and the potential issues and opportunities these present.

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 and agree a reserves policy and plan to show how they intend to use those funds to meet the needs of their pupils.

However, ESFA does have a role in supporting trusts to manage their reserves and will take the level of reserves into account in its assessment of a trust’s financial health. While some trusts are financially sustainable with reserves below 5% of income, the majority of the agency’s proactive engagement with trusts has been with those with reserves below that level as it might indicate financial vulnerability. Similarly, the majority of our focus on trusts with substantial reserves has focused on those holding more than 20% of total income (as defined in discussion with the National Audit Office and Public Accounts Committee). In these cases, the agency will seek to ensure that appropriate plans are in place for the total funds held.

This guide is primarily aimed at:

• academy trustees
• accounting officers
• chief financial officers
• governance professionals
• external auditors

3. What are academy trust reserves?

The Charities 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) plus the balance of unspent general annual grant (“GAG”). Although GAG is a restricted fund, any unspent GAG is usually considered as reserves on the basis of its permitted use for the general running of the trust’s main activity of delivering education.

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. The table below sets out the three key funding streams.

Carried forward funds remain restricted in accordance with the conditions of funding or grant and trusts must ensure 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 support day-to-day delivery of the trust’s charitable objects – enabling the trust to provide education to pupils and maintain the schools estate and facilities (in addition to available capital funded projects). 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 or grant conditions are set out in the guidance or information attached to the specific funding source.

Funding stream	Description
Restricted fixed asset fund	This represents the total amount carried forward from restricted funding received for fixed assets in use on an ongoing basis (as the carrying or net book value which includes any depreciation). It will predominately be derived from government funds but may include other funds from a sponsor, a local authority or other donations, as well as 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 predominantly be government funds (for example, general annual grant) but may include other funds from sponsors/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.

Source: Academies Accounts Direction 2022/23, 2.116.

It is recommended 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/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

The difference between restricted funds and designated funds is that 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 of 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.

4. Regulatory requirements

As part of financial planning, the ATH (2.8) requires trusts to have a reserves policy in place and to explain their policy in their annual financial reporting. This is an important part of trustees’ financial and strategic responsibilities and forms a vital part of their oversight and risk management of the trust.

Academy trusts are required to prepare their financial statements as set out in the AAD, which describes how academy trusts must prepare their annual financial statements, including the audited accounts, and detailed structure for trusts’ annual report. The AAD also sets out what information trusts must include about their reserves policy in their annual report, in particular the level of reserves identified by the trustees as being appropriate, and the reason for holding reserves (2.16). The disclosure should also contain a review of the academy trust’s reserves and set out:

• where funds are restricted and not available for the general purpose of the trust
• any amount designated and the reason why
• any amount that can only be realised by disposing of a tangible fixed asset
• the amount of reserves held after making these allowances, what plans are in place for the future use of these reserves, and a likely expenditure date
• how the amount of reserves held compares to the trust’s reserves policy and explains any steps being taken to bring the level of reserves held into line with that set out in the policy

5. Options for academy trusts

Academy trusts have freedom to establish governance and financial management arrangements that meet the needs and circumstances of their vision, values and the trust’s academy/academies. Within this, there are choices for trustees about how the trust can get the best value from their resources and where multi-academy trusts (MATs) can achieve economies of scale and other efficiencies.

These options include pooling funding (specific exclusions apply such as Private Finance Initiative (PFI) funding – set out in the trust’s master funding agreement) at different levels depending on the trust’s governance structure and financial scheme of delegation. Some trusts take a top slice from the GAG for central services and pass the rest on to the individual academies. Some trusts bring the GAG into a pooled central fund, while others pool reserves in a central fund, expecting each academy to contribute through an in-year surplus each year.

However a trust designs its financial systems, MATs retain the ability to direct funds and resources across the trust in accordance with need, including using reserves to address priority investments across their schools. Trusts need to be transparent in their decision-making and reporting so that parents and other stakeholders are reassured that each school is benefiting from the funds allocated to its pupils.

MAT trustees should consider and agree the treatment of any reserves when a new academy joins the trust, or when one is transferred to a separate trust so that all schools within the trust have a clear understanding of how those arrangements would work if the situation arose.

6. What do trusts need reserves for?

All academy trusts need to develop a policy on reserves which establishes an appropriate level of reserves and explains why holding these reserves is necessary. A well-developed policy will help trustees mitigate financial and other risks and put aside specific funding for future projects – first by encouraging trusts to identify what those risks and funding needs might be, and then by deciding how much the trust needs to hold to address them. For academy trusts, reserves can be held for a range of reasons, including risk management. For example:

• Cashflow – enabling the trust to manage fluctuations in income by ensuring sufficient cash is available to pay bills and expenditure items as they fall due. 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, and so may have more call for available cash to pay invoices before CIF income is paid.
• Minimum trust reserves - setting aside a contingency amount to cover any unforeseen issues or extra costs in-year. This could be to balance budgets where in-year expenditure exceeds income.
• Building/estates/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, but 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, 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.

6.1 Using reserves to support capital investment

The trust may decide to designate reserves for capital investment in accordance with the trust’s capital investment strategy. When considering capital investment, trusts will want to consider the highest priority areas for improvement, using intelligence gathered about the trust’s estate condition to guide its decision.

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.

6.2 Considering the level of reserves to maintain

We know that academy trusts employ a diverse range of operating models to meet their ultimate goal of maximising impact of 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. In making this decision, the trustees may wish to consider the factors below:

• 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 School Financial Benchmarking to compare their revenue reserves position with other schools and trusts by locality or characteristics to 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 and will 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 factoring in realistic income assumptions, or other strategic projects to improve facilities or educational performance at the trust’s school/s.
• Upcoming risks and opportunities – as part of the financial planning for the trust, school leaders may identify a change in pupil numbers that could impact on funding, either an increase in a future year that would draw on resources until lagged pupil funding was received, or a drop in pupil numbers that would reduce future income. Reserves can provide extra support for a trust to see through these challenges while it adjusts to a new pattern of funding. Similarly, there could be bidding opportunities for capital funding (for example, DfE funding rounds, local authority section 106 funds, or sports organisations) that may require a reserves contribution to be made to help secure funding and deliver improvements.

Academy trusts need to strike the right balance between holding sufficient reserves to ensure the financial health of their schools and 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 the interplay between their reserves and wider budget planning, especially where there is particular uncertainty around their underpinning assumptions. For instance, trusts may choose to allocate smaller contingency amounts within each budget line directly, or to 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 a reason for holding its reserves in line with the ATH.  

7. Finalising a policy and role of trustees

The ATH requires trusts to set a policy for holding reserves which must be explained in the trust’s annual report and accounts (ATH 2.8), 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.

The policy could set out:

• the minimum level of reserves the trust expects to hold.
• 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.

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. It should also explain the arrangements the trust will put in place when a new school joins, or if an existing school is transferred to another trust.

8. Questions that the trust board may wish to consider

Trustees should consider both short-term and longer-term factors that may affect the schools and pupils within their academies. In thinking about why they might want to hold reserves beyond providing cashflow contingency, some questions they might want to consider to ensure the trust is using its funding adequately for current and future pupils include:

• What reserves are readily available for use and how much is tied up in other assets? Are there any future commitments that need to be considered (for example, DfE loan repayments, operating leases, or ongoing capital works).
• If funds are not needed now, how can they be invested to generate some extra income for the trust?
• What are the projected pupil numbers for the next few years? Are there increases coming that may require additional staffing, or facilities? Are there any decreases that might mean reduced future income? Are there opportunities to apply for local growth funding?
• Are there any premises priorities that need to be addressed – either maintenance or site improvement? Are there bidding processes or other funds that are available for application – how much of a contribution from reserves might they need, if any?
• Are there likely to be changes to the curriculum or staffing structure? What resources/training will staff need to deliver this that go beyond day-to-day spending? What other investment might be needed to support this educational improvement?
• What strategic plans are there – are any of the schools expanding or changing their age range? Are there opportunities for expanding the trust to support other schools to improve, or bring in wider expertise and experience? If the plan is not to grow, are there actions that are needed to protect the educational performance as well as the financial health of the trust?
• Does the trust’s assessment of reserves levels mean that the trust’s accounts can be prepared on a ‘going concern’? basis (see operating an academy trust as a going concern guidance).

9. Deciding what level of reserves to hold

ESFA does not require any specific level of reserves (either percentage or monetary amount) as trustees are best placed to decide on the trust’s priorities and are responsible for assessing the trust’s individual circumstances to ensure that reserves are used in ways that deliver best outcomes for pupils.

The level of reserves a trust decides to hold is likely to depend on the number, type, and size of the academies within the trust, and how their needs are reflected in the trust’s estates strategy, future plans, and upcoming risks or opportunities. Around 90% of trusts hold reserves of at least 5% of total income and many choose to hold around one month’s salary costs or expenditure as a minimum to protect cashflow (around 6-8% of income), but some trusts may decide to maintain reserves below this level, such as larger trusts or trusts without significant investment or growth plans.

When considering a minimum level of reserves, trustees will need to be assured that there is sufficient contingency should something unforeseen occur and 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%); but for other trusts, this will be a deliberate decision in accordance with their financial operating model to provide financial sustainability.

At the other end of the spectrum, trusts choosing to build a high level of reserves – defined in discussion with National Audit Office and the Public Accounts Committee as 20% of income or above - will generally 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 contingency, given this funding could be used sooner for the benefit of pupils.

10. ESFA’s role in looking at academy trust reserves

Trusts have flexibility to decide the appropriate level of reserves they hold, however ESFA reviews academy trust reserve levels to help identify financially vulnerable trusts as part of a programme of proactive engagement to support trusts and build their financial stability. ESFA works closely with Regional Directors to find the most appropriate way forward for the academy trust and its pupils. Where trusts have low, or persistently declining levels of reserves heading towards a forecast of low reserves, ESFA will contact the trust to understand its position and discuss any potential support that may be appropriate. Most recently, the threshold for those conversations is reserves of 5% of total income or less.

Where trusts have reserves of 20% of total income or above, ESFA will consider this position alongside the trust’s specific context (e.g. capital and school improvement needs, opportunities for trust growth or academy transfers). ESFA are likely to seek further information from trusts about their plans for these substantial funds, gain assurance that a policy and clear plans are in place for these funds to meet pupils’ needs and ensure compliance with the ATH.   

The level of reserves will also play an important part in ESFA’s advice to Regional Directors about commissioning decisions such as where trusts are considering taking on new academies to join their trust (see the Commissioning high-quality trusts). ESFA will provide advice to the relevant Regional Director on the financial health of the trust, which is a key factor alongside others. While reserves will never be the single determining factor in any decision, holding reserves that are proportionate to the level of financial risk associated with a commissioning decision will help ensure the trust is not destabilised and has the capacity to focus on the required activity.

Finally, there are times when a trust will approach ESFA for financial support, either to manage through financial difficulty or related to a structural change such as transferring in an underperforming school with significant financial difficulties. In working through any decisions about financial support, ESFA will consider a trust’s reserve levels, and may ask a trust to commit a reasonable level of existing reserves alongside an appropriate level of financial support (which is explained further in our financial support for academy trusts in financial difficulty guidance).

11. Further advice/support

• Charity reserves: building resilience
• ISBL Good practice library: Good Practice Library - ISBL
• School resource management
• Schools Financial Benchmarking
• View my financial insights
• Good estate management for schools
• School resource management: top 10 planning checks for governors
• Charity reserves and defined benefit pension schemes
• Managing public money

ESFA are always willing to discuss reserves, financial management and support with academy trusts. If your academy trust is experiencing financial difficulties, we can help your trust work through all possible options and suggest practical support, including our schools resource management offer to schools. If the trust would like to discuss its circumstances, please contact ESFA through the online form.

11.1 Acknowledgements

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