Select Committee on Welsh Affairs Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Welcome before the Committee this afternoon. I am sure you are aware of why we are holding this inquiry. I am not so sure that the Society are aware of the depth of anger that the decision that was made by the Children's Society to withdraw from Wales has engendered in the people of Wales. It is because of this level of anger that we have decided to have a look at the matter and we hope that we can come to some arrangement which will benefit those children who we see within Wales who are losing the benefits of the projects that were being done for them by the Children's Society. Could you first begin by introducing yourselves, perhaps Mr Sparks will start, and can you also say how long you have been involved with the Children's Society and in what capacity.

  (Mr Sparks) My name is Ian Sparks, I am Chief Executive of the Children's Society. I have worked in the Society since 1981, originally as social work director and then from 1986 as Chief Executive.
  (Mr Nall) I am Charles Nall. I am the Director of Finance and Administration of the Children's Society. I joined the Society on October 12th 1998.
  (Lady Toulson) I am Elizabeth Toulson, I am the Chairman of the Children's Society. I joined the Society on 20th October this year.

  2. Can we just clarify that with you, did you become Chairman at that time?
  (Lady Toulson) I had no connection with the Society before 20th October.

  3. Of this year? You went straight in as the Chairman, that is an amazing rise to riches.
  (Revd Mr Glover) I am the Reverend John Glover. I am the vicar of Rhyl. I was nominated by the Archbishop of Wales 15 months ago to become his nominee on the Board of Trustees.

  4. You have provided us with a list of the Society's 12 projects in Wales, grouped into four types, (CS2, Annex 1) for the benefit of my colleagues. Could you give a very brief description of the work undertaken by each type of project, please?
  (Mr Sparks) Yes. The advocacy work is broadly aimed at giving a voice to children and young people in the care system, particularly round the decisions that are made affecting their lives. There are two pilot projects, the Cardiff Family Group Conferencing, who is running a pilot about family group conferences, which is a way of working with families of children in care and those at risk of being in care to try and bring together family resources to resolve the problem. Forward Steps is another advocacy project that was piloting a new model of advocacy, which is why it was listed as a pilot project. The Merthyr Tydfil project is aimed at giving a voice to children and young people in their own neighbourhood, it is about children's participation in the planning and issues that affect them in their own neighbourhood. The three anti-poverty projects were, again, involved with community development and capacity building in local communities. The St David Diocesan Team also includes some Sure Start work, and St Paul's Llanelli does some family support work.

Chris Ruane

  5. The root cause of your decision to close the Society's operations in Wales was lack of funds. You say in your memorandum that in March 1998 you had liquid reserves of £35.8 million and annual expenditure of £29.6 million, you therefore decided to go on a spending spree and spend over £12 million of your reserves, and yet three years later you are in a position that you have to shut down your operations in Wales because of the financial position you are in. To go from such a strong position three years ago to such a weak position three years later does this show signs of mismanagement?
  (Mr Sparks) The only answer I can give to the question itself is the trustees take the view that there has not been mismanagement.

  6. Would the Charity Commission?
  (Mr Sparks) I cannot tell you what they would think, they have not said to us it is mismanagement.

  7. Charity trustees have a general legal duty to apply charity funds within a reasonable time of receiving them, (see Charities' Reserves, Charity Commission publication CC19, June 1999, in particular paragraphs 24-30). You say that much of the excess reserves in 1998 came from investments which performed exceptionally, rather than from donations, does the duty to apply funds within a reasonable time apply to investment income in the same way that it applies to donations?
  (Mr Nall) I am not sure whether you are focussing on the issue. Let me attempt to answer your question. Investment income has always been applied in a timely manner. Capital gains, to which you are referring, which led to the reserves, are a separate matter. Reserves are held by charities for a variety of reasons, the unexpected, development opportunities, and, of course, long term risks. Long term risks would include the resurgence in inflation or a need to meet a changed need in pension provisions, those are two good examples.

  8. Okay. What proportion of £35.8 million available in March 1998 had come from investment income and what proportion was from fund-raising?
  (Mr Nall) My understanding is that given the general break even situation in the decade leading up to this time period there were small surpluses and small deficits. The bulk of that fund would have come from aggregate capital gains rather than from retained surfaces.

  9. Many charities have a reserves policy under which they hold a reasonable amount of money in reserve against future losses in income (Charities' Reserve, paragraph 34-43). Can you give us a brief outline of the main points of the Children's Society's reserve policy in 1998?
  (Mr Nall) Not before October, no. I have to pass that to my predecessor. I can give you a written answer, I will have to delve into our written records. Since 1998, as I referred to it, a major concern of charity trustees is the risk of inflation. If you look back to the 1970s and 1980s you had peaking inflation—I know there are some financially qualified individuals here—26.9 per cent rings a bell. If you think of that, that is three months expenditure, 25 per cent of annual expenditure, three months expenditure. You would expect to see a high level of reserves if you wanted to allow a year or two for the charity to adjust. Quite how high a level is a matter for debate and the trustees have reduced their reserves in policy from 9 to 12 months to 6 to 9 months, and that was in the last annual report and accounts. It was, I think, because of the very high level of reserves we reached the trustees took the decision to spend some of those reserves.


  10. Would there not be a current spending implication in spending £12 million of your reserves, would you not then be generating a current spending problem? Was that not foreseen?
  (Mr Nall) I can see the point you are alluding to, if you give me a moment I will come to it. The direct point you are alluding to is if you spend your reserves you are reducing the income from those reserves. However, if you are investing for the long term, for long term events like resurgence in inflation, they are very unpredictable, so you would typically invest in the equity market for that proportion of reserves which relates to the long term. Your yield, your income is very low, typically three to four per cent, and in recent years we saw yields as low as 2.5 per cent. You are compensated there by investment growth in terms of the total return, that is why you see those gains arising. Coming to the point you are referring to, if you set in train expenditure funded from reserves that expenditure is finite because the reserves themselves are finite and you are unlikely to get the kind of everlasting capital growth that surprisingly one saw for 20 years from the earlier 1980s, in fact one can go back to the 1970s. You also need to invest in generating fund-raising income growth so that the two match. When you embark on that kind of decision you are taking a risk because you do not know when you are making a fund-raising investment at what time your investment will mature. You can plan and you can hope but if you were to survey the charities sector over the last 20 years or so you would see money going into investment and fund-raising and you would see then returns anywhere between one and four years later, depending on the mix of fund-raising activities invested in the objectives you wanted from those fund-raising streams and similar criteria.

  11. You were taking a risk by making that decision, basically?
  (Mr Nall) The trustees were taking a risk.

Chris Ruane

  12. With the benefit of hindsight was that decision to spend 12 million in 1998 a good decision or a bad decision?
  (Mr Nall) It depends on which criteria you base your evaluation of that judgment.

  13. As a Welsh MP who faces the closure of the Children's Society in Wales?
  (Mr Nall) Then I would say that what you are seeking for is some degree of misjudgment. The difficulty you have is that the growth has now occurred in the first eight months of this financial year. Income growth has been 13 per cent from fund-raising activities, that is above the long term trend of all of the top major charities as an average, which is about 10.5 per cent. The trustees, in a sense, seeking to grow income have succeeded.

  14. If there is income on the growth why are you closing down the Children's Society?
  (Mr Nall) Because that growth has come very late in the day. The years 1997-1998, 1998-1999 and 1999-2000 saw flat fund-raising income in real terms of round £20 million.

  15. Is that because you did not have any fund-raiser?
  (Mr Nall) It is because we did not make early enough investments in fund-raising, probably. As I indicated to you, it is not always possible to know with great reliability when your fund-raising investment will pay off, it depends on the state of awareness in your potential donors minds, whether they think of you. It depends on the kind of products you invest in. Legacies can take four years, or so, before you tend to see an uplift, it is a relatively low cost means of fund-raising.

  Mr Wiggin: To a great extent you asked my question a moment ago.

  Chairman: Are you happy with the answer?

  Mr Wiggin: It has been completely answered.

Mr Caton

  16. You tell us in your memorandum how you developed a new strategy to raise additional funds, including face-to-face approaches to people in the street and international adventure treks and this raised net fund-raising income by 7.5 per cent, but you say this was far short of the target which was set. What was the fund-raising target you failed to meet?
  (Mr Nall) The trustees objectives, as I understand them to have been originally set up, were to lift the Society's income growth rate up beyond 10 per cent, the 10.5 per cent average of the last 15 years, or so. The precise comparable period is 1986 to 1998. Your difficulty is that that is an average figure 7.5 per cent and that takes you through to the end of the financial year 2001, it is the average of three relatively flat years and one growth year. As far as the Society is concerned whilst that growth has come late it has arrived and that is important.

  17. Why did you not meet the target?
  (Mr Nall) Because, as I already indicated, the investment in fund-raising was, perhaps, later than intended. We grew investment in fund-raising sharply in 1999-2000 and in 2001 and we are reaping the benefits of that.

  18. You set an ambitious target before you invested in the fund-raising to achieve that?
  (Mr Sparks) What happened that was the team who were there at the time set ambitious targets and believed that they had made the investment. Over time it became clear there was not sufficient investment to bring in the income that they were expecting. What has happened later in the period is there has been more investment in fund-raising, particularly in new forms of fund-raising, like door-to-door and face-to-face in order to generate new donors and more income.

  19. How did that 10.5 per cent fund-raising target compare with the targets of previous years?
  (Mr Nall) I am afraid I cannot answer that question, I was not there at the time. If you would like me to answer that question I can seek out the information for you.

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