A different approach to risk could shift reserves from survival capital to strategic capital

The charity sector is often criticised for holding large reserves while social need continues to grow.

Trustees are questioned about why they are fundraising when money appears to be sitting idle, and charities are forced to justify prudence in an environment that quietly depends on it. Conversations otherwise typically focus on declining reserves, which are increasingly being used by charities to remain financially viable.

While precise figures are difficult to establish, and use of reserves as short-term survival mechanisms is increasing, charities still collectively hold tens of billions of pounds in free reserves. This is mission-locked capital that, in practice, is largely used as insurance against risk rather than being deliberately deployed to drive impact.

We see this tension play out daily. Charities are facing a collapsing public donor base, intense competition for grant funding, reduced government grants, increasing operating costs and rising demand for services. What were intended as strategic reserves to invest in capacity, drive growth or support innovation are now being used as permanent protection against systemic instability, reflecting a sector where risk is managed through caution rather than shared responsibility.

Organisations that could be investing in systems, scaling proven work or responding quickly to emerging need are instead forced to hold back because one poor year could threaten their survival. In the absence of credible risk sharing mechanisms, reserves are repurposed from strategic capital into survival capital.

This is not a governance failure, but rational behaviour in a system that pushes risk downwards and offers little protection in return.

The result is a major opportunity cost, with large amounts of mission-intended capital sitting in low-risk, low-return cash arrangements not because trustees lack ambition, but because they lack viable alternatives.

Part of the challenge lies in how reserves are held. Most charities keep free reserves in highly liquid, low-yield accounts so funds can be accessed quickly if income shocks occur. From a risk perspective, this makes sense. From an impact perspective, it is deeply inefficient.

One idea to consider could be a dedicated, government-backed bond fund for charities to help bridge this gap. This could offer security, high liquidity and modestly improved returns, with interest explicitly restricted to charitable purposes.

Even where reserves cannot be spent, they would at least be working harder to generate social value. National Savings & Investments (NS&I) could provide a credible route for this by offering a sovereign backed, trustee friendly fund that avoids speculation while delivering both financial and social return.

More fundamentally, though, the sector needs better ways to manage risk itself.

With appropriate safeguards, robust charities should be able to deploy a limited, time bound proportion of reserves for defined purposes such as capital investment, service expansion or systems change, while retaining overall financial resilience.

What currently prevents this is not lack of discipline, but fear of catastrophic downside, heightened by the Covid-19 pandemic and reinforced by ongoing economic and geopolitical uncertainty.

A state-backed, time-limited reserve underwriting scheme could offer a way through this impasse. Under such a model, a capped proportion of a charity’s reserves would be underwritten for a defined period, with guarantees triggered only in genuine financial stress. In normal circumstances, no money would change hands. Participation would require trustee approval, clear outcomes, proportionate reporting and a credible plan to rebuild reserves.

This approach does not weaken trustee responsibility. It strengthens it by making risk explicit, intentional and managed rather than implicit and paralysing. The UK already uses guarantee-based models in other parts of the economy such as the Coronavirus Business Interruption Loan Scheme. Applying similar thinking to the charity sector would recognise a simple reality: charities are being asked to deliver more in a more volatile environment without access to the basic risk management tools other sectors take for granted.

Policymakers and regulators also have a crucial role to play. In a sector shaped by strong institutional norms, regulatory signals matter. While Charity Commission guidance permits the use of reserves in pursuit of charitable purposes, the prevailing culture still encourages caution over intentional deployment. Clearer reinforcement that time limited, evidence-based use of reserves is compatible with good governance would help unlock impact without lowering standards.

The final piece of this puzzle is that grant makers, particularly those with endowments or long-term investment assets, are well placed to act independently. The UK’s largest foundations collectively hold tens of billions of pounds in assets, accumulated to support long term charitable purpose and stability across economic cycles. That capital is rightly protected, but it also represents substantial potential leverage.

Many funders accept that innovation, systems change and early intervention involve risk. But the balance sheet consequences of that risk are almost always borne entirely by delivery charities.

One practical response could be to complement grants with time limited reserve guarantees. Rather than funding activity alone, funders could underwrite a defined portion of a charity’s reserves for a specific purpose and period. For funders, this unlocks impact without increasing grant spend. For charities, it provides something often more valuable than additional funding: confidence to invest when it matters most.

The charity sector holds one of the largest pools of mission locked capital in the country. If even a modest proportion of this could be deployed responsibly, with safeguards and shared risk, the social return would be substantial. Charities could act earlier, plan more strategically and focus on long term impact rather than short term survival.

Reserves are not the problem. The absence of credible risk sharing tools is.

This article was first published on ThirdSector on Friday 3 July 2026. Link to the article here: Graeme Marsh: A different approach to risk could shift reserves from survival capital to strategic capital | Third Sector