Why is the amount of money that charitable foundations pay out each year important? The term for this – ‘payout ratio’ – can sound dry and technical. However, questions about payout ratios go to the very heart of what charitable foundations are for. As charitable bodies, foundations attract tax breaks, so it is legitimate for people – as UK politician Lord Rooker did recently – to question whether foundations are paying out enough of their assets, particularly when we see many social problems like homelessness rising rather than falling.
In the December 2016 issue of Alliance, Cathy Pharoah pointed out that, despite calling for a mandatory ratio, little evidence has been produced that mandatory payout would lead to greater effectiveness. In fact, there is plenty of anecdotal evidence from the US that having a mandatory rate leads to foundations just getting money out of the door without much regard to whether it’s put to good use.
Are foundations warehousing assets that could better help people in need?
It is also possible that a mandatory ratio ends up a de facto ceiling rather than floor. Given this, coupled with the need to respect foundations’ independence, we at New Philanthropy Capital do not believe that the UK should have a mandatory payout ratio.