Problems We See: Sustainable Spending Policies

For investors with permanent endowments or long-term investment portfolios, spending policy is one of the most important decisions trustees make.

Yet it is also one of the easiest areas for risks to accumulate quietly over time.

Inflation, market volatility and changing return expectations can gradually undermine a spending policy that once appeared entirely reasonable. Without regular review, boards may find themselves distributing at levels that slowly erode the real value of the endowment.

This is rarely intentional. In many cases, spending policies simply evolve without being tested against updated investment assumptions.

The hidden challenge

In the past decade, asset owners have experienced several distinct market environments: strong equity markets, rising inflation, periods of low interest rates, and more recently increased volatility.

Each of these affects the sustainability of a spending policy.

For example, many asset owners aim to achieve long-term investment returns of inflation plus 3-4% in order to maintain purchasing power while supporting grants. However, actual portfolio returns can vary materially over shorter periods.

When returns are lower than expected, maintaining the same level of spending may gradually reduce the real value of the capital base.

Over long periods, this can significantly weaken a charity’s ability to support future beneficiaries.

Evidence from practice

In our work with institutions, we often see spending policies that have not been formally stress-tested for several years.

In one example, a permanently endowed foundation approached PMCL to review whether its grant distribution levels remained sustainable. The organisation held a diversified portfolio including both listed assets and directly owned property.

Through detailed modelling, we examined how different return scenarios would affect the endowment’s real value over time. The analysis incorporated rental income, dividend flows, capital growth and planned asset sales within a unified total-return framework.

By simulating returns across a wide range of market outcomes, trustees were able to evaluate the probability of maintaining both current grant levels and long-term capital preservation.

This evidence-based approach allowed the board to confirm a sustainable distribution rate and introduce a formal buffer to absorb weaker investment periods.

PMCL publishes the above chart in our monthly information sheet for professional investors. It compares the performance of growth-focused and diversified multi-asset funds against CPI + 4%, a benchmark commonly used by institutional investors, including charities. It is clear from the chart that achieving this benchmark consistently over the long-run is challenging.

Key questions for trustees

When reviewing spending policies, several questions are particularly important:

• What long-term return assumptions underpin the current spending rate?

• What probability exists that the portfolio maintains real capital over time?

• How sensitive is the policy to adverse return sequences?

• How does spending interact with portfolio risk levels?

These questions are rarely straightforward. However, answering them helps ensure that current beneficiaries do not unintentionally compromise future ones.

The role of disciplined planning

A sustainable spending policy is not about restricting charitable activity. Rather, it is about ensuring that giving today does not reduce the ability to give tomorrow.

For permanently endowed organisations in particular, the challenge is balancing two responsibilities:

1. Supporting current programmes and beneficiaries

2. Preserving the long-term purchasing power of the endowment

Careful modelling allows trustees to navigate this balance with greater confidence.

A framework for long-term stewardship

At PMCL, we typically approach spending policy reviews through a combination of:

• Long-term capital market assumptions

• Scenario modelling and stress testing

• Assessment of the probability of capital preservation

• Integration of grant demand forecasts

This provides trustees with a clear view of the trade-offs involved in different spending levels.

This article forms part of our “Problems We See” series, exploring common investment challenges faced by asset owners.

If your organisation has not revisited its spending policy in recent years, it may be worth reviewing the assumptions that underpin it. Market conditions, inflation expectations and portfolio structures evolve over time, and spending frameworks should evolve with them.

PMCL regularly supports trustees in modelling sustainable spending policies that balance current charitable activity with long-term capital preservation.