Peter Fardy is the principal of Northport Philanthropic Advisory Services and a former vice-president for advancement at Dalhousie University.
Endowments are still a relatively common tool used to support charitable causes over the long term, but they may not be the best way for donors to achieve their philanthropic goals. If a donor’s priority is to make a greater impact sooner, they should instead consider creating an annuity or hybrid gift structure that aligns funding with need.
This is particularly, though not exclusively, relevant in the university sector where, over the years, more than $21-billion has been stockpiled in endowments in Canada. Most of this money donated to help people, communities and society will never be spent. That’s because endowments are designed to grow indefinitely (and sometimes in perpetuity), only allowing the income generated to be spent.
That may make sense when donors wish to address needs that are expected to go on indefinitely (e.g. scholarship and bursary support for deserving students), but even then, it is not prudent to leave them open-ended. There should be provisions built into gifts agreement to ensure that the money can be repurposed if needs change or, even better, fully distributed at some future point.
Increasingly, donors are interested in helping address more pressing issues in their communities or in society more broadly. In doing so, they would like to see a greater impact, made sooner – perhaps within their lifetimes. In these cases, an endowment is likely not the right answer.
More specifically, if a donor wishes to help solve a problem within, say, a generation or two, a more creative approach that provides more funding earlier, is called for.
Take, for example, funding research intended to discover better treatments or even a cure for a particular disease. If the researcher and donor believe that this is possible, why invest in an endowment, which is tantamount to admitting that the problem can never be solved? Why not allow money to be spent earlier and faster, thereby showing belief that a solution can be found? There would be no guarantees, of course, but that’s the same as investing in a business. Imagine providing capital to an early-stage venture that you have decided shows promise, but only allowing 5 per cent of that invested capital to be used each year.
Medical research is just one example of how endowments may not be the best approach to philanthropy; there are countless others. They include many issues connected to the existential threats related to climate change (where we may have only a generation or two to come up with real solutions), or addressing food insecurity, access to potable water or anything else that promises dire consequences if not addressed within a reasonable timeframe.
One solution is to set up an annuity-like investment and funding model that enables more spending earlier and spreads the available funding over a targeted period of time. Annuity funds, by design, are spent down fully over that period, instead of spreading spending out over an indefinite timeframe.
Let’s take the example of a $1-million charitable gift intended to make as much difference as possible within 20 years. Based on reasonable assumptions about market performance, management fees, etc., if that money is endowed, it will generate around $1.2-million over that timeframe.
If an annuity model is used, almost $1.9-million will be made available for spending. That is more than $700,000, or 41 per cent, greater than the income an endowment would generate. Perhaps just as importantly, there would be far more money available to spend over the first several years (or even decades) following the donation.
The endowment will start delivering about $50,000 a year, and that figure will steadily grow to around $72,000 by year 20. The annuity will deliver almost $94,000 a year right from the start. It should be noted that, at the end of this term, there would still be significant funds held in the endowment, while the annuity will be exhausted. That’s why it is so important to consider what impact one wants to make over what period. If it’s mainly about building the size of the fund (preferably not simply for bragging rights), then an endowment would be the better approach.
In comparing a wide range of scenarios (different terms, ranging from 10 to 100 years), it appears that, for any “impact horizon” of less than 40 years, an annuity provides a better solution.
There is no limit to the options that can be explored, including hybrid models that combine features of both endowments and annuities.
On a broader level, here is a staggering figure: There is well over $2-trillion in the endowments of non-profit organizations in North America, based on publicly available figures. That is on par with the gross domestic product of Canada. Imagine the effect of putting more of that money to work now, rather than socking it away for a rainy day. Look out the window: It’s raining now.
Ultimately, this is about making an informed decision. If we believe that “you have to spend money to make money,” we should also believe that you must spend money to make an impact.
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